Oxford Lane Capital Corp. 6.75% Notes due 2031 (OXLCL) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Oxford Lane Capital Corporation Second Fiscal Quarter 2018 Conference Call. [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.

Good morning. And welcome, everyone, to the Oxford Lane Capital Corp. Second Fiscal Quarter 2018 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 audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released 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 strictly prohibited. I'd also like to call your attention to the customary disclosure in our press release this morning 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 at the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website at www.oxlc.com. With that, I'll turn the presentation back to Jonathan.

Thanks, Bruce. At September 30, 2017, our net asset value per share stood at $9.71 compared with a net asset value per share at June 30, 2017 of $10.18. We generated a total return of approximately negative 1% for shareholders during the quarter ended September 30. This return reflects the change in net asset value per share for the quarter as well as the impact of a $0.40 distribution. For the quarter-ended September 30, 2017, we recorded GAAP total investment income of approximately $17.5 million, representing a decrease of approximately $400,000 when compared to the quarter ended June 30, 2017. The September quarter's GAAP investment income from our portfolio was produced as follows, approximately $16.4 million from our CLO equity investments, and approximately $1.1 million from our CLO debt investments and from other income. Oxford Lane also reported GAAP net investment income of approximately $9.1 million or $0.37 per share for the quarter ended September 30, 2017, compared with $9.8 million or $0.42 per share for the prior quarter. Our core net investment income was approximately $11.2 million or $0.46 per share for the quarter ended September 30, 2017, compared to $12.1 million or $0.52 per share for the prior quarter. Please see the earnings release we issued today for a reconciliation of net investment income with core net investment income. During the quarter, we issued a total of approximately 1.1 million shares of our common stock pursuant to an aftermarket offering resulted in net proceeds of approximately $11.3 million. On July 14, 2017, we redeemed all of the issued and outstanding shares, and an aggregate of approximately 2 million shares of our 8.125% Series 2024 Term Preferred Stock. For the quarter ended September 30, 2017, we recorded net realized losses of approximately $2.9 million or $0.12 per share, of which $1.7 million or $0.07 per share represented the acceleration cost associated with the optional redemption of our Series 2024 Term Preferred Stock. We recorded net unrealized depreciation of approximately $8.2 million or $0.34 per share. We had a net decrease in net assets resulting from operations of approximately $2 million or $0.08 per share for the quarter. As of September 30, 2017, the following weighted average yields were calculated. The weighted average GAAP effective yield of our CLO equity investments at current cost was approximately 16.4% compared with 18.7% as of June 30, 2017. The weighted average yield of our CLO debt investments at current cost was approximately 9.3% compared to 9.4% as of June 30, 2017. The weighted average cash yield of our CLO equity investments at current cost was approximately 20% compared with 26.4% as of June 30, 2017. The lower yield as of September 30 was principally related to certain onetime expenses associated with CLO refinancing transactions as well as lower weighted average spreads on loan assets within CLOs generally. We know that the cash yields calculated on our CLO equity investments are based on the cash distributions we received or we're entitled to receive at each respective period end. During the quarter ended September 30, we made additional CLO investments of approximately $54.3 million. Also during the quarter, we received cash proceeds of approximately $24 million from sales and repayments of our CLO investments. I would now like to turn the call over to Deep Maji for a discussion on the CFO more broadly and those names within our portfolio. Shall we?

Thank you. For the quarter ended September 2017, we continue to see tighter leveraged loan credit spreads, which reduced the weighted average spreads of assets within our CLO investments. At the same time, we also saw tighter CLO liabilities spreads, which presented us with certain opportunity. During the quarter, we -- 1 refinancing and 3 reset transactions priced on CLOs within our portfolio. We believe that these transactions will add long-term values to our CLO equity investments in the CLOs, and ultimately, result in better risk-adjusted returns. Since September 30, 2017, 4 additional refinancings and 2 additional reset transactions have priced within our investment portfolio. During the quarter, we continued our active rotation of the CLO portfolio with opportunistic purchases and sales. We made some purchases in CLO debt, which we found attractive given the current market environment, where liabilities have generally continued to tighten. While we continue to generally focus on CLO equity with longer reinvestment periods that should have additional time to build par values and to invest in wider credit spreads compared to today's corporate loan environment. We continue to evaluate a variety of different CLO equity and debt profiles that we believe may provide us with attractive risk-adjusted returns, especially in light of the tightening -- in both asset spreads and CLO liability costs. We believe that the CLO market continues to present us with compelling investment opportunities, especially as we continue to see a broad dispersion in pricing across vintages and profiles.

Deep, thanks very much. We note that additional information about Oxford Lane's second fiscal quarter performance has been posted to our website at www.oxlc.com. And with that, operator, we're happy to open the call up for any questions.

[Operator Instructions]. The first question comes from Mickey Schleien from Ladenburg.

Jonathan, I wanted to ask some follow-up questions about the decline in the cash yield on CLO equity. I do appreciate the comments you made, but I wanted to understand a little bit more how things broke down, because I see that the weighted average spread from June to September declined very modestly only 9 basis points, so that would imply that spread compression was fairly modest for the third calendar quarter. And it would imply that the other factors, which I think you mentioned in terms of onetime expenses and also holding perhaps CLOs that are beyond the reinvestment period were more dominant. Could you sort of break that down for us in terms of the impact on the cash yields from the second quarter to third quarter?

Sure, Mickey. It was as you say, a combination of elements. Firstly, it was in to significant degree of function tightening credit spreads, tightening spreads within our syndicated corporate loans collateral pools, so that was a significant driver. The other significant driver is, as you mentioned, the various costs associated with -- onetime costs associated with CLO resets and refinancing. I should note that from a timing perspective some of the activity that took place in the second quarter actually steeps through into the third quarter from an economic impact point of view.

In terms of the expenses you're referring to?

Precisely, yes. And a slight compression as well, yes.

And in terms of the trajectory, Jonathan, we're almost half way through the fourth calendar quarter. I think, in the prepared remarks you mentioned that there were additional refinancings and resets this quarter. Will cash yields or could cash yields this quarter remain, I would call it "depressed" relative to what we've seen historically in the mid-20s?

It's really making a function of timing. Obviously, we are very enthusiastic and very desirous of resets and refinancings throughout our portfolios because they generally are meant to produce better economic returns and expansion of the arbitrage between the cost of capital and use of proceeds within these various CLO structures, and an increase, again, in our experience in the market value and economic worth of the CLO equity tranches. So they're already desirable outcome. But just as you say, there is a timing issue associated with these refinancings and resets by virtue of the fact that their costs are lumped into typically a short period of time, usually, a single quarter. So all of those things are kind of running on a combined basis. We are principally focused on the risk-adjusted total return within our CLO equity and junior debt portfolio at Oxford Lane. So to the extent that we are able to participate in transaction, it may have the effect of temporarily reducing our cash yield, but has the concurrent effect of the increase in the economic value of that holding, the terminal value and the market value that is obviously a transaction we would be willing and desirous of participating it, certainly.

Okay, I understand, that's helpful. Just a couple of quick questions on valuation. If I could ask you what were the main changes in your assumptions for future cash flows that cause the effective yield on the CLO equity portfolio to decline?

Sure, Mickey. It somewhat complex calculation. I would say the most important element though of the series of assumptions we make in order to arrive at, in fact, yield calculation for any period of time. In this case, it was probably putting greater stress on stressed assets in the out-year. So making the assumption that the effective and economic downturn over the time with the effective economic stress on particular credits could be more severe. That was the principal adjustment to our assumptions for the quarter.

You're referring specifically then to default rate assumptions?

Specific assets, Mickey, returning smaller principal values over the time as a result of the possibility for stress against those assets. That would be assumption change.

All right. And is that what drove the unrealized depreciation for the CLO equity portfolio?

Mickey, this is Deep. So the depreciation, I think, stemmed from 2 factors. One was just spread compression in general, and given the vintages that we have in our portfolio, we have a lot of 2014 vintage equity. Again, we saw some of the stress names in those pools trade down a little bit, which reduced the certain names, so we marked those appropriately. It was the combination of that as well as the spread compression reducing the forward arbitrage. Obviously, we were able to affect a few refinancings and resets during the quarter to kind of offset that, and we've done more of that this quarter already that hopefully further offset that decline in that.

There are no further questions at this time.

All right. Well, I'd like to thank everyone who's participated in this call and everyone who's listening to the replay for their time and for their interest in Oxford Lane Capital Corp. We look forward to speaking to everyone, again, shortly. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.