Oxford Lane Capital Corp. (OXLCO) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Oxford Lane’s Third 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. Please go ahead.

Thanks very much, good morning and welcome everyone to the Oxford Lane Capital Corp third fiscal quarter 2017 earnings conference call. I’m joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer and Treasurer. And Bruce, could you please open the call with the discussion regarding forward-looking statements?

Of course, 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 would 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 over to Jonathan.

Thanks, Bruce. At December 31, 2016, our net asset value per share stood at $10.74 compared with a net asset value per share at September 30 of $9.94. For the quarter ended December 31, we recorded GAAP total investment income of approximately $14.7 million representing an increase of approximately $1.2 million compared to the quarter ended September 30, 2016. That increase in GAAP investment income for the quarter was primarily driven by continued strong performance within our CLO equity portfolio during the quarter. The December quarter’s GAAP income from our portfolio was produced as follows: approximately $14 million from our CLO equity investments and approximately $700,000 from our CLO debt investments and from other income. Oxford Lane also recorded GAAP net investment income of approximately $7.7 million, or $0.38 per share, for the quarter ended December 31, 2016 compared to the prior quarter’s $7 million, or $0.37 per share. For the quarter ended December 31, we recorded net realized losses of approximately $900,000, or $0.04 per share, and net unrealized appreciation of approximately $21million, or $1.04 per share. We had a net increase in net assets resulting from operations of approximately $27.8 million, or $1.38 per share for the quarter. As of December 31, 2016, the following weighted average yields were calculated. The weighted average yield of our CLO debt investment at current cost was approximately 9.1% compared with 8.9% at September 30, 2016. The weighted average GAAP effective yield of our CLO equity investments of current cost was approximately 17.6% compared to 17.2% as of September 30. The weighted average cash yield of our CLO equity investments of current cost was approximately 23.8% compared with 26.1% as of September 30, 2016. We note that the cash yields calculated on our CLO equity investments is based on the cash distributions we received or were entitled to receive at each respective period end. Our core net investment income was approximately $11.7 million or $0.58 per share for the quarter ended December 31. Core NII represents GAAP net investment income adjusted for additional cash distributions received or entitled to be received if either, in either case, on our CLO equity investments. Please see our earnings release for a reconciliation of core NII to GAAP NII. Following the Company’s strong total return performance for the fourth calendar quarter and for the full year 2016 and with the continuation of strength in the syndicated loan market into the first quarter of calendar 2017. The Company’s Board of Directors has declared a $0.60 per share common stock distribution for the quarter ending March 31, 2017 payable to shareholders of record as of March 15, 2017. The Board has additionally declared two additional distributions of $0.40 per share each, payable to shareholders of record as of June 16, 2017 and September 15, 2017 with respect to the quarters ending June 30 and September 30, 2017 respectively. With the recent rise in three-month LIBOR and the corresponding loss of benefit from the LIBOR floors and with the recent compression in corporate loan spreads leading lower projected taxable income, we believe that this change will allow us to retain and compound returns on our capital over longer timeframes, and potentially, to lower our overall cost of capital. We note that this change is not related to any current or projected cash flow diversions from our CLO equity portfolio, and that all of our CLO equity positions made full distributions in the December 2016 quarter. Going forward, we intend to declare and pay special distributions to our shareholders on an as-needed basis, in order to comply with our income distribution requirements as a regulated investment company, if necessary. As a reminder, we are required to distribute at least 90% of our taxable income to our shareholders in the form of annual cash distributions. During the quarter ended December 31, 2016 we made additional CLO equity investments of approximately $96.2 million. Also, during the same quarter, we received cash proceeds of approximately $69 million from the sales of CLO equity investments. And with that, I’d like to turn the call briefly over to Deep Maji to talk about our view of the market and what we saw during the December quarter.

Thank you, Jonathan. During the quarter ended December 31, 2016, we saw continued strength in the syndicated corporate loan prices with S&P/LSTA leverage loan index increasing from 95.12% as of September 30, 2016 to 98.06% as of December 30, 2016. Correspondingly, we saw an improvement in CLO equity and debt prices from September of 2016 as NAVs of our CLO equity tranches generally increased. As of February 3, 2017, the S&P/LSTA leverage loan index stood at 98.14%. Additionally, during the quarter, we saw a continued focus on CLO refinancing activity as CLO liability spreads generally tightened. CLO liability spreads continue to tighten as there has been an increase in demand for floating-rate assets as three-month LIBOR has increased over the past few months. Additionally, we have seen a corresponding meaningful tightening in corporate loan spreads as issuers seek to reduce the borrowing costs and take advantage of current market conditions in the corporate loan market. We continue to monitor the market for refinancing opportunities on the CLO liabilities of our CLO equity positions. This option will help mitigate some of the spread compression we are seeing on the asset side and improved cash flows to our CLO equity positions over their respective lives. We believe that the CLO market continues to present us with a compelling investment opportunity set, especially as we continue to see a broad dispersion in pricing across vintages and profiles. Since we began investing in the CLO market, we are focused on both the primary and secondary markets and have varied our emphasis according to which offered better relative value at various times. We continue to make investments in CLO warehouses, which allow collateral managers to purchase assets patiently in the primary market and opportunistically in the secondary market. We continue to pursue our CLO investment strategy, where we see opportunities to generate attractive current cash flows and/or the potential for capital appreciation. Additionally, we continue to actively manage our portfolio as we see attractive sales opportunities in the secondary market. While we continue to generally focus on longer dated CLO equity with longer reinvestment periods that should have additional time to build par value and invested in wider credit spreads compared to today’s corporate loan environment. We continue to invest in a wide – we continue to evaluate a variety of different CLO equity and debt profiles that we believe may provide us with attractive risk-adjusted returns.

Thanks very much Deep. We note that additional information about Oxford Lane’s third fiscal quarter performance has been posted to our website at www.oxlc.com. With that, operator, we’re happy to open the lines for any questions.

Thank you. [Operator Instructions] The first question is from Mickey Schleien of Ladenburg.

Yes. Good morning everyone. Jonathan, we saw this amazing rally in the leverage loan markets last year. This year, at least in terms of first-lien leverage loans, we are actually starting to see a little bit of widening. So I’m curious how the CLO markets have behaved so far this year?

Generally speaking, Mickey, the market year-to-date and even towards the end of last year – last calendar year 2016, the defining characteristic has probably been this wave of refinancing’s. So, the ability for CLO managers to get tighter liability pricing has been the defining trend in our view.

Very well, Jonathan, one follow-up question. I’d like to understand what the rationale was for the Board to declare dividends all the way out to September as opposed to going out perhaps to June and then re-evaluating the market at that point?

Sure, Mickey. The Board considered our financial projections, they considered the state of the market, they considered the impact of various dividend levels on our cash flow, and decided upon this alternative.

All right, thank you. Those are all my questions today.

Thanks very much. Operator, any other questions?

[Operator Instructions] There are no other questions at this time.

All right. We like to thank everybody very much for their interest and their participation in this conference call. We look forward to speaking to you again soon. Thanks very much.