Oxford Square Capital Corp. (OXSQ) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the TICC Capital Corp. Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Jonathan Cohen, the Chief Executive Officer. Please go ahead.

Thank you. Good morning, and welcome, everyone, to the TICC Capital Corp. Fourth Quarter 2014 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; Patrick Conroy, our Chief Financial Officer; and Bruce Rubin, our Controller and Treasurer. Bruce, could you open the call today with a 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 TICC 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.ticc.com. With that, I'll turn the call over back to Jonathan.

Thanks, Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.21 per share for the fourth quarter of 2014, including the effect of a onetime acceleration of expenses of approximately $0.05 per share. We reported total investment income of approximately $28.6 million for the quarter compared with approximately $30.2 million for the third quarter of 2014 and approximately $30.5 million for the fourth quarter of 2013. For the quarter ended December 31, 2014, TICC recorded income from our investment portfolio as follows: approximately $12.9 million from our debt investments; approximately $14.5 million from our CLO equity investments; and approximately $1.2 million from all other income. Our fourth quarter net investment income was approximately $12.8 million or $0.21 per share. During the fourth quarter, we accelerated expenses of approximately $3.1 million of discount and deferred amortization costs, equal to approximately $0.05 per share for the quarter in connection with the October 27, 2014, redemption of the secured notes issued by TICC CLO LLC. As mentioned during our third quarter conference call, TICC Funding LLC, a special purpose vehicle and newly formed subsidiary entered into a revolving credit facility with Citibank NA. Subject to certain exceptions, pricing under the facility is based on 3-month LIBOR plus the spread of 1.5%. The secured notes previously issued under TICC CLO LLC were based on 3-month LIBOR plus the spread of 2.25%. For the quarter ended December 31, 2014, we also recorded net realized capital losses of approximately $7.3 million and net unrealized depreciation of approximately $33.9 million. As a result of those unrealized and realized losses, we had a net decrease in net assets resulting from operations of approximately $28.4 million for the quarter. Our weighted average credit rating on a fair value basis stood at 2.1 at the end of the fourth quarter of 2014, compared to 2.1 at the end of the third quarter of 2014. As a reminder, our credit rating system is based on a 1 to 5 scale with a lower number representing a stronger credit quality. At December 31, 2014, our net asset value per share stood at $8.64, compared with a net asset value at the end of the third quarter of $9.40. During the fourth quarter of 2014, we made additional investments totaling approximately $193.8 million. The additional investments consisted of approximately $166.6 million in corporate security and $27.2 million in CLO equity. For the fourth quarter, we received proceeds of approximately $112 million from repayments, sales and amortization payments on our debt investments. At December 31, 2014, the weighted average yield of our income-producing investments on a cost basis was approximately 11.4% compared with 12.6% at September 30, 2014. I’d note that at December 31, we had one investment on non-accrual status with a cost value of approximately $11.6 million and a fair value of approximately $6.7 million. The company's Board of Directors has declared a distribution of $0.27 per share for the first quarter of this year payable on March 31, 2015, to stockholders of record as of March 17. This additional information about TICC's fourth quarter performance has been posted to our website at www.ticc.com. And operator, with that, we'll now begin polling for questions please.

[Operator Instructions] Our first question comes from Jonathan Bock of Wells Fargo Securities.

Gentlemen, quick question on the share repurchases. I understand that there is a buyback authorized in place, can you give us some -- a sense of the parameters and whether it's a 10b5-1, et cetera, and whether or not shares have been purchased? What amount of shares has been purchased since the announcement of that stock repurchase program?

Sure, Jon. Yes, shares have been repurchased under the share repurchase program. The number will be disclosed in the K, which should be out very shortly.

Well so, what I see is a $0.01 positive impact to NAV. So Jon, if I'm looking at that, would that be a relatively small amount of shares repurchased or not?

It was a limited quantum of shares, yes.

So if that's the case, with the share price where it is relative to NAV or prior NAV, I guess I'm understanding why that buyback was not used in larger force considering that, that is a very, very shareholder-friendly use of capital, better than anything else one could buy in the market today?

Well, the share repurchase program, Jon, takes into account the factors that you have just noted plus other factors such as our leverage or other use of proceeds and the conditions in the market that allow us to repurchase a certain number of shares at a certain price. The program remains authorized and ongoing.

Okay. So is it a 10b5-1 plan or not, I guess is the question.

There's a 10b5 plan filed, correct.

Okay, so I just want to make sure, what are the windows that you're subjected to, is it only 2 weeks after earnings or can this be ongoing and programmatic throughout the quarter?

It can be ongoing throughout the quarter based upon the judgment of the broker that's executed the program for us and based on the parameters as required by the SEC.

Okay. And then Jonathan, another question. So there is ability -- you obviously fair value mark your book, which is very unique relative to some other folks in on CLO equity. And I'm curious, you don't need to leverage to buy back stock. You can easily sell assets, not get in trouble with your leverage profile and repurchase shares. Is that a consideration and do you think that's a shareholder-friendly action?

I'm sorry, Jon, you're saying, is it shareholder-friendly to sell CLO equity to repurchase shares?

So you have both CLO equity and broadly syndicated loans, right, because it's -- so you actually can sell both to the extent, perhaps, sell even more easily and then slowly de-leverage, pay down your debt line, so you're not going to increase leverage, but use the remaining equity that you would have to buy back shares in. I'm just curious if you've considered that as an option given where the shares are at such a deep discount to NAV?

We have indeed considered it Jon, yes.

Well, we look forward to seeing it. Then the next question is, when we look at the accounting policy Jonathan for TICC, where we book all the CLO distributions into income as they're earned. I'm wondering -- and I'm sure other very smart folks have asked this question, I'm trying to understand, why one would want to do that given the CLO equity return profile has a downward slope as either credit losses enter in or the amortization of the AAA notes increases the weighted average interest costs. So it seems that what's happening is investors are fair valuing the stock based on what they believe to be a set run rate of earnings, but they don't know that the CLO equity return profile is downward sloping. Can you explain why you choose to put the distributions into income as earned, instead of using a level yield method, which takes into account the interest expense as well as credit losses in modeling CLO equity returns?

Sure. Jon. So the accounting election that TICC operates under can be more or less accurate than a level yield accounting election depending on a variety of factors to the extent that we're holding newly issued CLO equities that doesn't, for example, pay any interest income for their first 6 months after the primary transaction. The level yield assumption would result in higher GAAP income recognition than with the cash recognition basis that we are operating under. At different points in the market, at different assumptions about default rates and for different holding periods, we historically have held very little CLO equity to maturity. We've held relatively little CLO equity past the end of their respective reinvestment periods. And the inflection that you're referring to is certainly something that's visible in the market, but something that we've historically been less affected by, by virtue of our shorter weighted average holding periods than a hold to maturity strategy would reflect.

Okay. Well, then I guess I'm also trying to understand that you do have another fund that you operate that holds CLO equity, yet they choose to make a level yield accounting election, which takes into account the items aforementioned. So explain to me why you would do one in one fund and not in the other?

The accounting elections Jon, were taken at different moments in time, different points in history with different market assumptions being made at the point that the elections were taken.

Okay. So I guess, and if we're going to circle back to investor experience, where now from the first quarter of 2013 went from $10, now we sit at $8.64 with lower dividends and a stock price going well into the $7 range. Would it make sense that you might want to reboot and go and recalibrate to go ahead and realign the accounting election in conjunction with Oxford Lane or in similar to Oxford Lane just because right now, Jonathan, I mean your shareholders looking at the stock price that's down significantly, and they're kind of understanding if there's an opportunity to perhaps clean up the accounting books a bit to allow them to better understand the return of the CLO equity that you guys are investing in?

Sure. Jon. Implicit in your question is the assumption that the level yield calculation is a superior and therefore more accurate one to the cash basis that TICC has historically operated under. It's an assumption, however, that I would take issue with by virtue of the fact that I think our true economic returns at TICC and the CLO equity strategy have more accurately mapped to the accounting recognition that we've been operating under.

Appreciate that. Appreciate your thoughts. And again, it's just a -- it's an item of discussion given where the stock is and given the fact that the dividend has been reduced.

Our next question comes from Ryan Lynch of KBW. Ryan Lynch - Keefe, Bruyette, & Woods, Inc., Research Division: The first one, of the approximately $0.70 of portfolio depreciation you guys experienced in the quarter, can you give us a kind of an estimated split of how much of that depreciation was recognized from write-downs in the CLO equity book versus write-downs in your overall loan book?

Sure, Ryan. So for the quarter, the diminishment in loan value was approximately $7.0 million. The diminishment in CLO investments, which were essentially CLO equity investments represented approximately $25 million. So to your point, or to your question, the disproportionate majority of the write-downs were the marks-to-markets took place on the CLO equity side of the book. Ryan Lynch - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And of that $25 million write-down in CLO equity, what was that really -- what was really driving that? Was it a combination of mark-to-market, were there any credit losses or were there some of the kind of normal pay-downs from cash flows from those write-downs in the CLO equity portion?

Understood. So Ryan, the answer is that the substantial majority of that or essentially the entirety of that was represented by marks-to-market on the CLO equity side of the book. The CLO equity market was weak on a price basis in the fourth quarter of 2014 reflecting the diminishment in value in the syndicated corporate loan market in the market broadly. Ryan Lynch - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then moving to the dividend for a minute, you reduced the dividend from $0.29 per share to $0.27 per share this quarter, and I guess will be actually paid in Q1. We saw a few other market participants reduce their dividends this quarter and they were typically reduced to a level that was, in our opinion, easily obtainable and easily earned by earnings per share. This quarter, in the fourth quarter, take earned $0.21 per share plus the $0.05 of onetime expenses gets you to kind of a core earnings rate of $0.26 per share, which is $0.01 less than your newly reduced dividend of $0.27 per share. So can you just give me a little more color of why you chose the $0.20 level of a dividend and how you anticipate earning that?

Sure, Ryan. As you know, we don't give a specific guidance with respect to earnings or forward dividends. That said, we spent a portion of the fourth quarter ramping the new debt facility with Citi that we will enjoy the benefit of in a more complete way in the first quarter of 2015, that's the current March quarter. Beyond that, I can't give you much specific guidance, but I think if you refer to the investor presentation for the quarter ended December 31, which is up on our website, there's a great deal of additional information in there that can be extrapolated, both on the syndicated corporate loans side of our approach and also on the CLO equity side. Ryan Lynch - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. I'll take a look at that. And then, just one last one, given kind of the mark-to-market disruption we've seen in levered loans and the effect that, that has on the CLO equity market, can you just kind of talk about the opportunity right now of deploying additional capital into the new CLO investments?

Sure. We think that this is a particularly good market in which to be making new investments in either the primary or the secondary market for CLO equity. The diminishment in loan values in the latter part of 2014 represented an opportunity, I think, for a series of newly issued primary CLOs that were ramping their collateral pools during that period and were able to ramp up at lower prices than they otherwise might have been 6 or 9 or 12 months ago. So that was an interesting dynamic. The primary market has been less strong over the course of the last few weeks or few months than many had anticipated. That has created, I think, some very interesting opportunities in the secondary market, which is, as you know, where we started in our CLO investing activities back in 2009. So our view is that this is an interesting and relevant market, where we think we have ongoing competitive advantage by virtue of our history and/or range of activities.

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

Sure. Operator, thank you very much. I'd like to make one correction. I had read previously that the weighted average yield of our -- income-producing investments on a cost basis stood at approximately 11.4%. That number is actually 11.8%, I misread that number. And then, Patrick Conroy wanted to provide some follow-up to an earlier question.

Yes. I'm sorry I couldn't jump in during the time when Jon Bock was asking this question, but just 2 points. First of all, both accounting methodologies are acceptable. The TICC methodology looks towards the end of their -- after ending the investment cycle when we think there has been a loss in real value that could obviously -- could not be recaptured. We do take a portion of proceeds at that time and apply against cost, which is not the effective yield method. It's not a springhead over time, but it's a more of an -- a one-off analysis that's done in every equity investment that we have. Secondly, one virtue of the TICC methodology, which we did discuss many years ago when we did adopt it, is that it's much more closely akin to the tax treatment. You don't have any kind of a -- or any serious disconnect between, call it the cash proceeds and the ultimate tax treatment, which is going to drive the dividend in either case. So the advantage to this methodology, in addition to being acceptable, is that it does more closely match the dividend distribution to the GAAP income you have less both tax differences.

Thank you, Pat, for that clarification. And if there are no further questions, I would like to thank everybody very much for their ongoing interest and their participation in this call, and do invite you to call us directly with any follow-up questions that you might have, and we look forward to seeing people soon or speaking with them again on the next conference call. Thank you very much.

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