Oxford Square Capital Corp. (OXSQH) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the TICC Capital Corp First Quarter 2016 Earnings Call. All participants will be in a 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 Mr. Jonathan Cohen. Please go ahead.

Thanks very much. Good morning, and welcome everyone to the TICC Capital Corp first quarter 2016 earnings conference call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; and Bruce Rubin, our Chief Financial Officer. 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. The 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 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 or 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. And with that I'll turn the presentation back over to Jonathan.

Thanks, Bruce. For the first quarter of 2016, TICC reported GAAP total investment income of approximately $15.3 million representing a decrease of approximately 3.5 million from the fourth quarter 2015, $18.8 million figure. First quarter GAAP income from our portfolio was earned as follows, approximately $8.9 million from our debt investment, approximately $5.9 million from CLO equity investments and approximately $500,000 from all other sources. Income from our debt investments was down $1.1 million, income from our CLO equity investments was down 2.6 million and all other income was up slightly from the prior quarter. The decrease in our income from our debt investments was due largely to the timing impact of sales of loan initiated by us during the fourth quarter of 2015 in order to fund the December 2015 repayment of the Company's credit facility of $150 million and the repurchase of approximately 8.5 million shares of common stock for approximately $49.3 million. Of that amount, we repurchased $4.9 million of common stock at a weighted average price of approximately $5.2 for a total price of approximately $25.6 million that was in the first quarter of 2016. TICC also reported GAAP net investment income of approximately $4 million or $0.08 per share for the first quarter of 2016, which remained the same from the fourth quarter’s $0.08 per share GAAP net investment income figure. Note that in the first quarter of 2016, we recognized approximately $1.6 million of expenses related to engagement of legal and financial advisors to the Company's special committee. During the first quarter of 2016, our core NII was substantially higher than our GAAP NII due to the accounting for CLO equity investments of the GAAP. Core NII for the quarter was $15.5 million or $0.29 per share. That core NII represents net investment income adjusted for additional cash distributions we received or were entitled to receive from our CLO equity investments if either in any case -- if any in either case. For the reconciliation of core NII which is a non-GAAP number to NII calculated in accordance with GAAP, we refer you to the earnings release we issued earlier today. The Company's Board of Directors had declared a second quarter distribution of $0.29 per share payable on June 30, 2016 to shareholders of record as of June 16. For the quarter ended March 31, 2016, we also record net realized capital losses of approximately $600,000 and net unrealized depreciation of approximately $20.6 million. Our CLO positions experienced significant price declines during the quarter with 9.5 million of that net unrealized depreciation associated with our CLO investments. We note that the CLO equity market was significantly weak on a quarter-over-quarter basis but that we have seen a significant increase in prices within that market since quarters end. As a result of these realized and unrealized losses, we had a net decrease in net assets resulting from operations of approximately $17.1 million or $0.32 per share for the quarter. Our weighted average credit rating on a fair value basis stood at 2.2 at end of the first quarter of 2016, it also stood at 2.2 at the end of the fourth quarter of 2015. As a reminder, our credit ratings system is based on one-to five-scale with a lower number representing a stronger credit quality. At March 31, 2016, our net asset value per share stood at $5.89 compared with a net asset value at the end of the fourth quarter of $6.40. During the first quarter of 2016, we made additional investments totaling approximately $12.8 million consisting primarily of 9.7 million in corporate securities and 2.7 million in CLO debt. Also we invested approximately $400,000 in CLO equity during the period. Also for the fourth quarter, we received proceeds of approximately $17.2 million from repayments, sales and amortization payments on our debt investments. As of March 31, 2016, the following weighted averages yields were calculated. The weighted average yield of our debt investments at current cost stood at approximately 7.1% it also stood at 7.1% as of December 31, 2015. The weighted effective yield of our CLO equity investments at current cost stood at approximately 8.5% at quarter's end compared with 11.3% as of December 31, 2015. We note that that decline in the effective yield calculation which is primarily attributable to changes in our GAAP effective yield assumption as a function of first quarter market conditions in the syndicated corporate loan market. The weighted average yield of our cash income producing CLO equity investments at current cost was approximately 24.7% compared with 27.4% as of December 31, 2015. That is a cash effective of average yield calculation. We note that the cash yield calculated on our CLO investments -- equity investments which is based on the cash distributions we received or were entitled to receive at each respective period end and excludes the CLO equity investments if any, we have not yet made their inaugural payments. I would note that at March 31st, we had one investment on non-accrual with a cost base of approximately $15.5 million and a fair value of approximately $10.4 million. This investment was purchased for a total of approximately $10.7 million and separate purchases in 2011 and 2013, this was the same investment that with on non-accrual status in the prior December quarter. Additional information of that TICC's first quarter performance has been posted to our website at www.ticc.com. And with that operator, we are happy to open the line for any questions.

Thank you. We will now begin the question-and-answer session. [Operator Instruction] And our first question comes from Mickey Schleien of Ladenburg. Please go ahead.

Jonathan, could you explain little bit on the decline of the cash yield of the CLO equity investments, what caused that? And also what cause of deterioration in the CLO equity average WARF?

Sure Mickey, it primarily was due in our view to be increase in three month LIBOR that we have been seeing over the course of the last sort of six months or so. That as you know is an element that interacts with LIBOR floors that are embedded inside of these various loans that represent the collateral pools for U.S. CLOs. So more than anything else the diminishment in the cash was probably a function of the increase in LIBOR.

And how about the deterioration in WARF on average?

Sure Mickey, probably a function primarily of increase numbers of CCC rated assets, as syndicated corporate loans saw downgrades into the tail end of last year and the first part of this year.

Okay. One follow up Jonathan, any additional comments you can give us on restarting your direct origination business, how that’s going and to what extend -- how many investment professions are involved at this point?

Sure Mickey, as we talked about last quarter, we have taken steps to reinitiate our less liquid corporate loan participations. We have seen some initial progress in those in that direction but I want to wait until we see more of that progress before we speak about it publically.

Okay, I understand. I appreciate your time. I do have one more question, I’ll back in the queue thank you.

Our next question comes from Jonathan Bock of Wells Fargo Securities. Please go ahead.

Jonathan, just as I listening to Mickey's question, it kind of popped into my mind, in light of the potential decline for cash income of the CLOs, so we kind of look at the core NII measure historically in the 30’s and now kind of at 29 or at the dividend with cash flows potentially going lower because of LIBOR increasing. Can you give us a sense as to why one would want to keep the dividend where it is? Well, it if your earnings because it causes the NAV bleed as well as continuous to keep leverage above one to one. So thoughts on why one would keep the dividend policy intact if it continues to lead to a book value decline today?

As you know our dividend policy is based primarily on our ongoing estimates of our taxable income which we're required to distribute through to our common shareholders, at least the vast majority of it on an ongoing basis. So when the Board convenes to consider setting of the dividend the factors that they consider are projections for future income, future GAAP income, future taxable income and the likely trajectory of those cash flows over the next several quarters. So the Board essentially matched $0.29 core NII figure this quarter with the dividend payment that they’ve just declared.

Got it.

Certainly to the extent of that -- those projections or those figures change overtime. The Board will consider those changes in the establishment of dividend.

Okay so to the extent cash flow declines more it's entirely possible that the dividend may or may not fallow with it. And then the only follow-up question I have is the NAV impact to CLO security, so clearly level [ph] loan bids have come up that is beneficial to CLO NAV and I am curious as to its impact on CLO equity prices because, can value for CLO equity increase in light of the potential for declining cash flow because we understand there is both the NAV and a cash flow component to a CLO's value, where does CLO equity kind of move in terms of pricing or how you seen it move since December 31 and maybe to subsequent this time today, where is CLO equity pricing moving today?

Sure Jon it's a great question. CLO equity pricing probably hit its low point mid-to-late February. March was in up month, the end of March was particularly strong for the CLO market, CLO equity market broadly defined and the month of April has been particularly strong in terms of CLO equity prices in the secondary market, we're actually beginning to see some primarily market activity. So to answer your question, CLO equity investors as you know consider interest payments, interest cash flows, principal recovering and the timing of both of those elements which is particularly critical aspect in the determination of an appropriate net present value for these future cash flows. With all of that in mind, we continue to see significant strength across the CLO equity market concurrent with and partially as a function of the strength in the syndicated corporate loan market.

Our next question comes from Christopher Testa of National Securities Corp. Please go ahead.

Just kind of speaking more about the CLO cash and effective yields going down given the LABOR picking u, what would it take to bring those yields back up even if LIBOR remains stubbornly high where it's been, essentially would you need to see reinvestment prices go lower than what you assumed, would have to see defaults tick down and I guess just the follow-up to that, would you -- how much cyclical exposure is in the CLOs and would be able to bring that down given your OC cushion is well above 4%?

Sure Christopher, appreciate the question. What we've seen recently is rotation within the collateral pools of these various CLO vehicles, as managers are seeking to build spread and to build PAR and the market -- syndicated corporate loan market sort of January, February, March the early of March anyway allowed them some ability to do that. We hope to see the economic benefit of those rotations in the fullness of time as an increased spread or the potential for an increase spread within certain of this CLO entities begins to actually flow through to the equity.

Okay got it. And I just noticed the debt levels were pretty constant when you knew marks were going to be pretty negative, given a spread widening in the market. So why not shared more assets during the March 31st, quarter to bring down that debt equity under one-to-one?

Sure, I mean what we have seen Chris during the March quarter was really the low point in asset valuations and so we certainly didn’t want to sell either corporate loan assets or CLO equity assets that we expected would experience some price rebound over the course of the coming month which is so far what's been happening. So the 1.15 or the 115% ratio that we are referring to is obviously something that we expect to bring down overtime. But we don’t want to bring it down by selling assets at discounts to what we believe their true economic values to be.

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

Thank you very much operator. We would like to thank everybody who participated in this call and everyone for their interest in TICC Capital. Thank you all very much.

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