Oxford Lane Capital Corp (OXLC) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Oxford Lane Capital's second fiscal quarter earnings conference call.

(Operator Instructions)

Please note this event is being recorded. Now I'd like to turn the conference over to Jonathan Cohen, CEO. Please go ahead, sir.

Thanks very much. Good morning and welcome, everyone, to the Oxford Lane Capital Corp's second fiscal quarter 2017 earnings conference call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer and Treasurer; and Deep Maji, our Senior Portfolio Manager. 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 Oxford Lane 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. We ask you to refer to our most recent filings at the SEC for important factors that can 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 our latest SEC filings please head to our website at www.oxlc.com. With that, I'll turn the presentation over to Jonathan.

Thanks, Bruce. At September 30, 2016, our net asset value per share stood at $9.94, compared with a net asset value per share at June 30 of $8.78. For the quarter ended September 30, we recorded GAAP total investment income of approximately $13.6 million, representing an increase of approximately $1.1 million when compared to the quarter ended June 30.

That increase in GAAP investment income for the quarter was primarily driven by rotation within our CLO equity portfolio during the quarter. The September quarter's GAAP income from our portfolio was primarily produced as follows: approximately $13 million from our CLO equity investments and approximately $600,000 from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $7 million, or $0.37 per share for the quarter ended September 30, compared with the prior quarter's $5.7 million, or $0.30 per share. For the quarter ended September 30, we recorded net realized gains of approximately $900,000, or $0.05 per share, and net unrealized depreciation of approximately $24.7 million, or $1.30 per share.

As a result of those net realized gains and our unrealized appreciation, we had a net increase in net assets from operations of approximately $32.6 million, or $1.72 per share for the quarter. As of September 30, the following weighted average yields were calculated. The weighted average yield of our CLO debt investments at current cost was approximately 8.9% which remained unchanged when compared to June 30, 2016.

The weighted average GAAP effective yield of our CLO equity investments at current cost was approximately 17.2%, compared to 15.4% as of June 30, 2016. And the weighted average cash yield of our CLO equity investments at current cost was approximately 26.1%, compared with 33.9% as of June 30, 2016.

We note that the cash yield calculated on our CLO equity investments is based on the cash distribution to be received or we're entitled to receive at each respective period end. Our core net investment income, or core NII, was approximately $13.6 million, or $0.71 per share for the quarter ended September 30.

Core NII represents GAAP net investment income adjusted for additional cash distributions received or entitled to be received if any in either case on our CLO equity investments. Our Board of Directors has declared a distribution of $0.60 per share for the quarter ended September 30, 2016, payable on December 30 to stockholders of record as of December 16, 2016.

During the quarter ended September 30, we made additional CLO equity investments of approximately $52.7 million. Also during that same quarter we received proceeds of approximately $38 million from sales of CLO equity investments. And with that, I'd like to turn the call over to Deep Maji.

Thank you, Jonathan. During the quarter ended September 30, 2016, we saw continued strength in the syndicated corporate loan prices, with the S&P LSTA leveraged loan index increasing from 93.2% as of June 30, 2016 to 95.12% as of September 30, 2016. A rebound in loans in the commodity-related sectors and continued CLO pricings in the primary market drove an increase in prices in the syndicated loan market through September 30.

Correspondingly, we saw an improvement in CLO equity and debt prices from June 30, 2016, as the naps of our CLO equity tranches generally increased. As of November 14, 2016, the S&P LSTA leveraged loan index stood at 96.84%.

Additionally during the quarter we saw an increase in CLO refinancing activity as CLO liability spread generally tightened especially for older vintage CLOs. We believe that the CLO market continues to present us with a compelling investment opportunity that, especially as we continue to see a broad dispersion in underlying portfolio quality, vintages, and pricing.

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. As an example of that, this quarter we made our first recent purchase in the primary CLO market and our first recent investment in a CLO warehouse in several quarters as we started to see attractive opportunities in those markets relative to the secondary market where most of our activity had been focused on recently.

We continue to push through 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 invest in wider credit spreads compared to today's corporate loan environment, we continue to evaluate a variety of different CLO equity and debt profiles that we believe may provide us with attractive risk-adjusted returns. Jonathan?

Thanks very much. I would note that additional information about Oxford Lane's second fiscal quarter performance has been posted to our website at oxlc.com. And with that, operator, we're happy to open the line for any questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Good morning, Jonathan.

Good morning, Mickey.

A few questions. So, Jonathan, three-month LIBOR is now at 88 basis points, and it looks increasingly likely that the Fed will raise rates given that the new administration seems to be intent on adopting a pro-growth stimulus strategy. So can you walk us through how the cash flows to the CLO equity tranches could behave as the Fed does the first raise let's assume 25 basis points? And then how things would look if it raises rates further in 25-basis point increments?

Sure, Mickey. We have information about the effect of LIBOR on a [sederis cargis] basis on our cash flows or our earnings anyways in our public disclosure documents. But essentially we have exposure up to the level of the LIBOR floors that exist in the underlying collateral pools within each of our CLO equity positions.

So to the extent that LIBOR floors are set typically at 100 basis points and we're now in the 80s or in the mid-80s on LIBOR up from much lower levels over the last year and a half or so, certainly most of the effect of an increase in LIBOR has already been felt in the cash flow characteristics of our underlying investments. That said, there's circa an additional 15 basis points of additional LIBOR increase before the LIBOR floors are generally met, and then there's a matched book affect.

Beyond that?

Beyond that, there are myriad variables that are possibly affected by increases in rates. Generally it's going to be interesting to see if corporate loan spreads widen to the extent that corporate loan spreads do widen. That obviously benefits our use of proceeds on the asset side of the balance sheet of these underlying CLO structures.

Given that we have essentially fixed price expressed as a percent over LIBOR financing on the liability side of the balance sheet, there is at least a potential to the extent that we have meaningful reinvestment period left within our portfolio to benefit from a rising rate or widening spread environment. But as you know these are complex instruments in which we invest, and we'd certainly direct investors, existing investors and prospective investors, to our public disclosure.

Jonathan, in light of what you just said, it actually segue into my next question. As we've seen yields in the corporate debt markets rise pretty meaningfully since the election for the reasons we've already talked about, can you give us a sense of where Oxford Lane's NAV is now, or at least directionally? Or just give us some sense of scope of how much NAV might be down if you were to mark the book today?

Sure, Mickey. It's an interesting exercise you propose, unfortunately not one we're really able to speculate on given the formal nature of our NAV process and the fact that it's set by the Company's Board of Directors. I wouldn't want to speculate on where a newly struck NAV today would lie. What I can say is that the market for investments of the type that we hold in Oxford Lane has been stable since the election. Maybe up slightly.

You're referring to prices of CLO equity?

I am, yes.

Okay. That's good news. A couple more questions. So the new administration is discussing the potential to repeal Dodd-Frank or at least make changes within Dodd-Frank. How do you think that would affect the CLO market? I know it's a difficult question and a lot of moving pieces, but we're all struggling with this so I think we'd appreciate your insight.

I mean, Mickey, it's very difficult for us to speculate on the repeal of a cornerstone piece of financial regulation that dictates and governs the behavior of a very large number of actors in our market. What I can say is that the market has already undergone significant change with respect to Dodd-Frank and risk retention.

The risk retention rules, as you know, kick in, in just over a month, and there's been a massive amount of work done by sponsors, by issuers to comply with those regulations with respect to new structures. I think a general statement would be that with respect to the CLO market broadly, less regulation would probably represent an economic benefit over a long period of time. But that's a very general statement and we're not really able to speak much more specifically than that.

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

I would like to thank very much everyone who is dialed into this call and everyone who's listening to it on the replay. Thank you for your interest in Oxford Lane Capital Corp and we look forward to speaking again soon. Thanks very much.

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