Oxford Square Capital Corp. (OXSQH) Q3 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentleman, and welcome to the TICC Capital’s Third Quarter 2016 Earnings Release and Conference Call. All participants are currently in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. Please also note, this call is being recorded. I would now like to turn the conference over to the CEO, Mr. Jonathan Cohen. Please go ahead sir.

Thank you very much. Good morning, and welcome everyone to the TICC Capital Corp Third 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. Replay information is included in our press release that was released earlier this morning. Please note that this call is a 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 Web site at www.ticc.com. With that, I'll turn the call over to Jonathan.

Bruce, thanks very much. We're pleased to report that we had a very strong third quarter. Our book value per share rose from $6.54 at the end of the June 2016 quarter to $7.08 at September 30th. We note that our book value per share is now $0.68 higher than it was at the end of 2015, and that we have thus far paid distributions to our shareholders during 2016 of $0.87 per share. In other words for the period year-to-date 2016, we’ve produced an increase in our per share combined with distributions paid, equal to a 24% increase in overall book value per share as of year-end 2015. For the quarter ended September 30th, we recorded net investment income of approximately $5.9 million or approximately $0.11 per share on a GAAP basis. In the third quarter, we also recorded net unrealized depreciation of $42.3 million and net realized capital losses of $5.3 million. Our collateralized loan obligation positions saw -- accounted for approximately $25.8 million of that net unrealized depreciation. In total, we had a net increase in net assets from operations of approximately $42.9 million or $0.83 per share. Our core net investment income or core NII for the quarter ended September 30, 2016 was approximately $15.3 million or approximately $0.30 per share. We believe that the various initiatives, including the large share repurchase program we completed earlier this year and the portfolio rotation strategy we continue to implement, contributed to our strong results in the third quarter. We had no investments on non-accrual status as of September 30th. Looking at our corporate loan portfolio, during the third quarter, we exited through sales and repayments, excluding amortization payments, $67.2 million of first and second lien corporate loans for cash at an average price of 100.6% or 0.6% and with a weighted average yield of 6.7%. Proceeds from those sales were we used for combination of debt repayment in new investment, consistent with our corporate loan rotation strategy. During the third quarter, we purchased approximately $24 million of first and second lien corporate loans at a weighted average price of 97.7% in par and with a weighted average yield of 11.1%. As a result of our continued rotation of our corporate loan portfolio into higher yielding loans, which we expect to hold on a less levered basis, the weighted average yield of our corporate loan portfolio went from 7.4% as of the end of the second quarter of 2016 to 7.9% at the end of the third quarter. We continue to believe that our portfolio rotation strategy provides us with an attractive risk adjusted opportunity in the current market environment. We’re pleased with the progress we made during the third quarter. We emphasize that the work here is ongoing and that we look forward to providing an update when we report our December quarter financial results. Lastly, and building on several years of portfolio construction history, we have continued to avoid companies operating in markets characterized by high levels of commodity price exposure. Specifically, we ended the third quarter with no non-CLO investments in the energy sector. A position we have maintained over the past several years. Addressing the CLO part of our portfolio, we note that the market saw continued strength in prices for CLO equity in junior debt tranches during the third quarter. Our CLO portfolio produced a strong total return during the quarter. While we continue to monitor our CLO portfolio for sale opportunities, that asset class has and continues to provide us with a very compelling risk adjusted return opportunity in our view. The fact that TICC has never experienced in event of default at any of the CLOs it owns. Since the inception of this investment strategy in 2009, and in fact that none of the CLOs we have owned experienced any diversion of cash from their equity tranches, during the third quarter, is we believe evidence of the continued and significant resilience of this asset class in generating attractive risk adjusted returns. In summary, the progress we have made over the past year, including, most significantly, the realized and unrealized depreciation of our investment portfolio and the repayment of $150 million of our corporate debt in 2015, and $36 million CLO debt repayment in August of 2016, the 25% reduction in base management fees payable to our investment advisor through its ongoing fee waiver, the repurchase of $49 million of our common stock in the open market and the rotation of our portfolio into higher yielding corporate loan, all contributed to the total return we generated during the third quarter. We note that additional information about our third quarter performance has been posted to our Web site at www.ticc.com. And with that, operator we're happy to open the line for any questions.

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions]. Our first question is from Mickey Schleien of Ladenburg. Please go ahead.

Jonathan, since we don’t have the queue some of my questions are related to just little bit more disclosure on the quarter. Could you update us on what happened to the non-accrual, you’re showing no non-accrual now. Was that resolved, was it sold, what would happen there?

The single loan that we held on non-accrual status as of the June quarter 2016 was restructured during the September quarter. And we continued to hold that investment. That was an investment that on a weighted average basis we purchased at below par.

Jonathan, did that generate the realized loss or was it something else?

That’s an exactly Mickey, yes.

Just a couple of more questions little bit more strategic. Any update you can provide us on your move toward more direct originations or bilateral loan business? And lastly, are you considering potentially re-pricing your own balance sheet CLO? We’ve seen a lot of demand for that paper and I am wondering if you could capture some spread there to offset some of the compression we’re seeing in the loan market?

With regard to our rotation strategy, whereby we are moving investment into less liquid typically more proprietary transactions, smaller transaction in some cases, that continues to pay. And certainly you saw a fair bit of that in the September quarter. So, so far making is the balance issue is concerned in the 2012-1 CLO is concerned. The answer is we are continuing, together with our Board, to look at our balance sheet and the liability side of our balance on a holistic basis. So we are looking into 2012-1 CLO. We’re looking at the assets within that special purpose vehicle. We’re looking at other assets on the asset side of our balance sheet. And we are very much focused on optimizing the cost of our capital and the flexibility of our debt. So, thank you.

Thank you. Our next question is from Christopher Testa of National Securities Corp. Please go ahead.

Just touching a bit on what Mickey has asked. So with the CLO cash yields up quarter-over-quarter despite the declining volatility in the loan markets. Is it safe to say that a lot of that incremental boost was from refinancing those debt tranches, or was there something else going on there?

I would say the greater part of it was actually from rotation. We rotated a fair amount of our CLO book at TICC during the quarter. We sold approximately roughly $45 million on a cash basis of CLO investments during the quarter. And we redeployed a portion of that, about roughly $22.4 million on a cash basis in new transaction. So, the rotation of the CLO book, which I think stands in contrast to the way that others have historically viewed this asset class, has and continues to serve us well.

And also, just wondering, if you could give us a break-down on, how much of the CLO equity book you have control positions versus more minority positions. And whether you’re looking to change that to have more controlled positions in the portfolio going forward?

I think our CLO investment strategy has historically been characterized by a fairly substantial degree of flexibility. We are willing to look at control. We’re willing to look at minority position. We’ve been active, very active in the primary market, historically, but we’ve also been very active in the secondary market. We were active in 1.0, BB and equity, several years ago. We’ve been much more active obviously in 2.0 CLO paper more recently so. We really do look at this market as a market of individual assets and individual structures. And to that end I think it’s reasonable to conclude that we will likely be participating on both the majority and a minority basis going forward.

Thank you very much sir. So we have no further questions in the queue. Would you like to make any closing remarks?

Yes. I'd like to thank everybody for their continued interest in TICC, to invite them to contact us separately, if you have any further questions. And we look forward to talking to you about our December quarter results. Thank you very much, everyone.

Thank you very much sir. Ladies and gentleman, the conference call has now concluded. Thank you for attending the presentation. You may now disconnect your lines.