Oxford Lane Capital Corp. (OXLCO) Q3 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Oxford Lane Capital Corp Third Fiscal Quarter and Earnings Release 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.

Good morning everyone and welcome to the Oxford Lane Capital Corp third quarter fiscal 2019 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 please open our call this morning with the disclosure regarding forward-looking statements?

Sure, Johnson. Today's conference 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 strictly 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. To obtain copies of our latest SEC filings, please visit our website at www.oxfordlanecapital.com. With that, I'll turn the presentation back over to Jonathan.

Thanks, Bruce. We know that the fourth quarter of calendar year 2018 was characterized by significant volatility in global equity and debt markets. The S&P/LSTA leveraged loan index fell from 98.6% of par on September 30th to 93.8% of par on December 31st. Against that backdrop, CLO junior debt and equity prices fell substantially during that period. While Oxford Lane saw meaningful mark-to-market based fall in our net asset value in the December quarter, we believe that we were able to affect opportunistic purchases and sales during the quarter and we remained comfortable with the performance of the CLO junior debt and equity positions in the portfolio. Moreover, we know that the S&P/LSTA leveraged loan index has rebounded significantly since December 31st from 93.8% of par to 96% of par as of February 5, 2019. According to the Wells Fargo CLO research team, the median US CLO equity net asset value has recovered with the increase in loan prices. After bottoming on January 2, 2019 at 24.5%, the Wells Fargo CLO research team estimates the median US CLO equity net asset value currently stands at approximately 43.3% as of February 1, 2018. We believe that recent performance has been reflected in the CLO markets that we participate in with greater liquidity and higher price of incentive of last year. On December 31, 2018 our net asset value per share stood at $7.56, compared to a net asset value per share of $9.93 as of September 30th. Our total return generated during the quarter ended December 31st equaled to negative 19.8%. That return reflected the change in net asset value per share for the period as well as the impact of a 40.5 cent distribution. For the quarter ended December 31st, we recorded GAAP total investment income of approximately $22.8 million, representing an increase of $900,000 from the prior quarter. Third fiscal quarter's GAAP total investment income from our portfolio was approximately $22.1 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 $12.3 million or $0.33 per share for the quarter ended December 31st, compared to $11.7 million or $0.35 per share for the quarter ended September 30th. Our core net investment income was approximately $17.7 million or $0.47 per share for the quarter ended December 31st compared with $15.2 million or $0.46 per share for the quarter ended September 30th. During the quarter ended December 31st, we issued a total of approximately 1.8 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $18.2 million. For the quarter ended December 31st, we recorded a net realized gain of approximately $400,000 or $0.01 per share and net unrealized depreciation of $88.5 million or $2.37 per share. We had a net decrease in net assets resulting from operations of approximately $75.8 million or $2.03 per share for the third fiscal quarter. As of December 31st, the following metrics applied. We note that none of these items represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 11.2%, up from 11% as of September 30th. The weighted average GAAP effective yield of our CLO equity investments at current cost was 15.8%, up from 15.6% as of September 30th. The weighted average cash yield of our CLO equity investments at current cost was 19.8%, down from 20.7% as of September 30th. We note that the cash yields calculated on our CLO equity investments are based on the cash distributions we received or we were entitled to receive at each respective period end. During quarter ended December 31st, we made additional CLO investments of approximately $74.1 million and we received approximately $72 million from sales and repayments of our CLO investments. With that, I will turn the call over to our Senior Portfolio Manager, Deep Maji.

Thank you, Jonathan. The quarter ending December 31st presented the first meaningful period of volatility in the loan market since 2016. We believe that the move lower in US loan prices during the fourth quarter of 2018 was principally driven by large outflows out of the US loan mutual funds and ETFs. According to Leveraged Commentary & Data also known as LCD a service provided by S&P Global, from the middle of November to the end of 2018, US loan mutual funds and ETF experienced approximately $16 billion of outflows. We believe that fundamentals across the US loan market continue to be stable. The US loans default rate remains low. According to LCD the default rate on the S&P/LSTA leveraged loan index is 1.42% by principal amount. This is the lowest of default rate has been over the past 17 months and remains below its historical average of 2.96% according to LCD. Additionally, the loan maturity wall continues to be termed out and there are limited near term maturities as a percentage of the overall S&P/LSTA leveraged loan index. According to LCD there are 33 billion of loans coming due before year 2020. In 2021, there are approximately 70 billion of loans scheduled to be repaid. This aggregate amount represents less than 10% of the overall size of the S&P leveraged loan index according to LCD. Third, corporate interest coverage ratios continue to be strong. According to LCD interest coverage on a weighted average basis across the constituents of S&P/LSTA leveraged loan index was 4.6 times in the third quarter of 2018. According to analysis by Nomura Securities a 100 basis point rise in three month LIBOR would cut interest coverage for typical [uninsurer] by approximately half a turn, all else healthy pool. Lastly, the current corporate loan market continues to be stable. The share of performing loans in the S&P/LSTA leveraged loan index priced below $0.80 on the dollar was 2.68% in December 2018 according to LCD. Into January 2019 the trigger has decreased to 2.48% with the increase in US loan prices. This remains well below the post crisis high of 12.05% in February of 2016. We believe that this is an attractive environment for CLO equities. At the present time according to LCD only approximately 1% of S&P/LSTA leveraged loan index trades at a price of par or above. This environment may allow CLO managers to buy performing loans in secondary markets at prices at discounts to par which may build CLO asset value and spread over time, ultimately accruing to the benefit of CLO equity holders. In general, we seek to position our CLO portfolio with longer reinvestment periods equity positions to allow our CLO managers to take advantage of market environments like we have today. With that, I will turn the call back over to Jonathan Cohen.

Thanks very much, Deep. Additional information about Oxford Lane's third fiscal quarter performance has been posted to our website at www.oxfordlanecapital.com. And with that, operator, we're happy to open the call for any questions.

[Operator Instructions] And our first question comes from Mickey Schlein of Ladenburg. Please go ahead.

Good morning, everyone. And thanks for taking my questions. Jonathan, given the movement in the leverage loan market this quarter, this calendar quarter, if I'm doing the math correctly, it would seem that CLO equity could be up perhaps 25% versus the end of last year. I know that it's not a perfect correlation because CLO equity is somewhat fragmented, but am I in the ballpark with that estimate?

Mickey, given the nature of the asset class and given the difference between different profiles across that asset class, longer reinvestment period, shorter reinvestment periods, new issues, secondary market positions, different collateral pools, certainly the overall market we believe is up meaningfully since December 31st, but I wouldn't want to put a specific target number on the broad market.

Well, how about your portfolio? Would you give us at least a range of what you think it might be up so far?

Well, Mickey, we only strike NAV's quarterly at Oxford Lane. And we haven't -- it's a lengthy process, as you know, we have third-party evaluation work that gets done. We have indicative bid asks that we go into the markets we seek out. We look at actual trades that have occurred for any respective time period within the names and within similar profiles. We really wouldn't want to throw out any kind of an indicative NAV as of today, just given the nature of our evaluation process.

Okay, I understand. Jonathan, looking at the core NII calculation for the quarter the add back of 5.4 million is quite meaningful relative to the GAAP NII. Can you give us a sense of what the main components are over the equity adjustments that you made for that quarter?

It really Mickey is just a reflection of the cash flows that we receive during the quarter. So we had no names that diverted any income during the quarter, none of our CLO equity tranches diverted income to the senior tranches during the fourth quarter of calendar 2018. And our positions continue to cash flow very strongly. I think we've been helped recently, as you saw, we did a considerable amount of opportunistic trading in the fourth quarter. And I think that has and continues to help our cash flows and our overall profiles across the portfolio.

Okay, a couple more questions, if I may, Jonathan. Given that the financials came out just before the call, I haven't had a chance to look at them very carefully. Can you give us a sense of how much of a refinance or reset opportunity remains in the portfolio looking at the non-call periods in the AAA spreads that are in the portfolio at present?

For sure. Mickey, this is Deep. We continue to position our portfolio to take advantage of that. Clearly with the market widening for CLO liabilities during the fourth quarter and into the first quarter we are going to be very opportunistic and only do refinancing and resets where it makes sense and where it’s additive to the equity. We did affect a handful of refis reissues as well as a couple of resets during the fourth quarter. We think those are going to be additive and over the long-term to the Oxford Lane shareholders. And there are a handful positions that continue to be in the money even with the widening in liabilities. And we are going to take those as they roll off their non-call periods over the next three to six months.

So a handful would be a quarter of the portfolio, 10% of the portfolio?

Again we are going to look opportunistically as we approach those but we wouldn’t want to give any guidance in terms of what percentage of the portfolio and the money.

And additionally Mickey keep in mind that just given the way that we trade our portfolio at Oxford Lane the hope and expectation is that this portfolio could look very different a year from now or 18 months from now than it does at the moment, as it has in the past.

And in terms of trading Jonathan -- this is my final question. Can you give us a sense of the CLO managers that are in your portfolio? How active were they in that brief window that existed at the end of last year in terms of taking advantage of the volatility? And also what did Oxford Lane specifically do in those last few trading sessions to take advantage of that volatility?

Sure, Mickey. We believe that many of our portfolio managers and certainly the best of our collateral managers were active in the fourth quarter, availing themselves of opportunities to build and overbuild par with dislocations in the syndicated corporate loan market. In terms of the specific trading that we undertook, other than the numbers that we've already put out there in terms of the amount of the volume of sales and purchases that we affected, we wouldn't want to disclose anything on a line-by-line basis until the next -- until the appropriate time.

So if I understand correctly, that volatility was very compressed into just a handful of days and my understanding is that some of the bids that were out there really didn't have much volume behind them. So was there really enough liquidity in the markets for managers to take meaningful advantage of what was going on?

I think Mickey that the -- I mean our view is that the volatility that we saw in the fourth quarter was not so compressed, it was really the most of -- if not the entirety of the month of December, a decent amount of November as well. So we're generally pleased with the amount of trading activity, the volume of trading activity and the opportunities that some of our managers were able to undertake.

Mickey in addition to building par we also have seen our managers increase spread on these pools, so this is all going to eventually flow through the kind of longer-term income for us as spreads increase. That increases the value of equity positions but also increases the cash flow that we will receive on a go forward basis.

So the portfolio’s weighted average spread was relatively stable for the three months versus the previous three months. Do you think it could actually improve in the first calendar quarter?

We will wait and see Mickey I mean, obviously -- and anything we see today should be taken in the context of all of the various risk factors that we have talked about and published previously.

[Operator Instructions]. I show no further questions at this time.

Alright, well I would like to thank everybody very much for participating in this conference call and for their interest in Oxford Lane Capital Corp. We look forward to speaking to you again soon. Thanks again.

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