Oxford Lane Capital Corp (OXLC) 2021 Q3 法說會逐字稿

Good morning, and welcome to the Oxford Lane Capital Corp. Third Fiscal Quarter Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jonathan H. Cohen, Chief Executive Officer. Please go ahead.

Thanks very much. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. Third Fiscal Quarter 2021 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 open the call today with our disclosure regarding forward-looking statements.

Sure, Jonathan. Thank you. 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 could 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.

During this call, we will use terms defined in the earnings release and also refer to non-GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted to -- on our website at www.oxfordlanecapital.com.

With that, I'll turn the presentation over to Jonathan.

Thanks, Bruce. On December 31, 2020, our net asset value per share stood at $5.44 compared to a net asset value per share of $3.88 per share as of September 30, 2020. For the quarter ended December 31, we recorded GAAP total investment income of approximately $31.4 million representing an increase of approximately $1.3 million from the prior quarter.

The quarter's GAAP total investment income from our portfolio consisted of $29.2 million from our CLO equity investments and $2.2 million from our CLO debt investments and from other income. Oxford Lane also reported GAAP net investment income of approximately $18.9 million or $0.21 per share for the quarter ended December 31 compared to approximately $18.2 million or $0.21 per share for the quarter ended September 30.

Our core net Investment income was approximately $33.5 million or $0.37 per share for the quarter ended December 31, compared with approximately $20.3 million or $0.24 per share for the quarter ended September 30. During the quarter ended December 31, we issued a total of approximately 4.5 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $23.6 million.

For the quarter ended December 31, we recorded net realized losses of approximately $6.5 million or $0.07 per share. We recorded net unrealized appreciation of approximately $144.1 million or $1.61 per share. We had a net increase in net assets resulting from operations of approximately $156.5 million or $1.75 per share for the third fiscal quarter.

As of December 31, the following metrics applied. We note that none of these metrics represented a total return to shareholder. The weighted average yield of our CLO debt investments at current cost was 10.5%, down from 11% as of September 30. The weighted average GAAP effective yield of our CLO equity investments at current cost was 14.5%, which was unchanged from the number as of September 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 22.2%, up from 14.9% as of December -- as of September 30.

We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we received or which we were entitled to receive at each respective period end.

During the quarter ended December 31, we made additional CLO Investments of approximately $133 million, and we received approximately $83.5 million from sales and repayments.

On January 29, our Board of Directors declared monthly common stock distributions of $0.0675 per share for the months -- for each of the months of April, May and June of 2021.

With that, I'll turn the call over to our portfolio manager, Deep Maji.

Thank you, Jonathan. During the quarter ended December 31, the U.S. loan market continued to strengthen U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index increased from 93.2% of par as of September 30 to approximately 96.2% of par as of December 31. As of January 29, 2021, the loan index stood at approximately 97.35% of par. Given the rally in U.S. loan prices, the percentage of the loan index that traded at a price of par or higher increased approximately 13% as of December 31, 2020.

As of January 29, the percentage of the loan index that traded at prices of par or higher is approximately 40%. In addition, the percentage of the loan index that trades at prices of 80% of par or below, which is a common measure of distress, improved approximately 2% as of December 31, 2020, from 5% at the end of September.

During the quarter, the increase in the U.S. loan market pricing led to an increase in U.S. CLO equity net asset values, which became broadly positive, again. According to Wells Fargo, as of December 30, 2020, the median U.S. CLO equity NAV improved to approximately 40% of par. During the fourth quarter of 2020, the percentage of U.S. CLO transactions failing one of their cash flow diversion tests continued to show improvement quarter-over-quarter.

According to Bank of America, approximately 17% of outstanding U.S. CLOs were failing one of their cash flow diversion tests during the fourth quarter of 2020, which improved from approximately 25% as of the previous quarter. We have continued to see an improvement in cash flow diversion tests over the past several months due to the proactive portfolio management by CLO managers, certain CCC issuers being upgraded and the self-healing cash flow diversion mechanisms of the CLOs themselves.

We saw the similar dynamic during the 2008 global financial crisis, when approximately 50% of outstanding CLO transactions failed cash flow diversion tests for an average of 2 to 4 quarterly payment dates before resuming full CLO equity cash repayments over time.

During the fourth quarter of 2020, U.S. CLO debt spreads, particularly at the top of the CLO capital structure, continues to tighten. As such, we have seen an increase in U.S. CLO new issue and refinancing activity to start the new year and expect this trend to continue.

In the current market environment, we continue to utilize an opportunistic and unconstrained U.S. CLO investment strategy across the U.S. CLO debt and equity tranches, looking to maximize our long-term total return. And as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy.

With that, I will turn the call back over to Jonathan.

Thanks very much, Deep. We note that additional information about Oxford Lane's third fiscal quarter performance has now been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we're happy to poll for any questions.

(Operator Instructions) The first question comes from Mickey Schleien of Ladenburg.

Can you hear me, Jonathan?

Yes, Mickey.

Yes, Jonathan, a couple of high-level questions. How do you feel about the loan markets equilibrium when you think about the market having from, what I've read, over 100 CLO warehouses in place versus the current level of M&A and LBO activity?

Do you mean, Mickey, how do we feel about the demand for U.S. syndicated corporate loans in light of the current base of CLOs and formation?

Yes. Supply and demand is essentially what I'm asking about and potentially the impact on spreads?

Sure. Deep, do you want to see if you can address Mickey's question?

Sure, of course. I think we see, as you mentioned, there are a lot of warehouses open. And I think that's a result of the healthy demand for CLO liabilities in the marketplace. AAA spreads continue to tighten at the top of the capital structure, and we've seen demand for AAs through BBs continue to be strong over the course of the first month of the year. And that is with the backdrop of new issue loan supply being relatively robust and healthy at the current moment. So we think the CLO market is very strong right now, and we expect that trend to continue.

And last year -- I want to ask about the outlook for this year. Last year, we saw CLO equity cash returns supported by wider spreads helping offset credit deterioration. Now we're -- later in the cycle, downgrades are certainly dropping very sharply from what we saw in the spring of last year. And now defaults are expected to peak very soon. With that in mind, how do you see CLO equity cash and effective yields progressing this year?

Sure, Mickey. We haven't published any kind of a specific set of estimates, but certainly, we've seen LIBOR floors helping cash -- equity cash flows from U.S. CLO structures. That's a fairly persistent trend. Trend defaults, as you know, tend to be somewhat backward looking. Again, we don't have a specific set of projections for the U.S. CLO debt or equity markets for the remainder of this year, but certainly, to Deep's comment, the new issue market seems fairly healthy right now. As Deep referenced the statistic, there's quite a lot of new issues in formation.

Jonathan, looking ahead, what -- broadly speaking, what do you believe are the key developments needed in the loan and CLO market for OXLC's portfolio to be valued at pre-pandemic sort of levels?

Well, the key thing, I think, Mickey, for that question is that OXLC's portfolio is quite different from where it stood a year or two or even 6 or 9 months ago. So the portfolio continues to change. And one of the defining characteristics of our portfolio management strategy is to rotate the portfolio to be active in the secondary market, to be a participant as appropriate in the primary market and in warehousing market. So we're not sort of targeting any specific level of valuation for any asset that we hold. We are continuously rotating and rebuilding the portfolio in order to maximize its value at any moment in time.

And in terms of capital, Jonathan, your debt-to-equity now is around 0.4, which is historically at the low end or quite low end for Oxford Lane. Are you -- and with the backdrop of a strong loan and CLO market, you could argue that, that number could even go down some more, if you don't do anything. Are you considering adding some additional debt to the balance sheet to grow going forward?

Sure, Mickey. We're always looking at our capital structure. We're always looking to optimize the type of debt, the duration of the debt and the price that we pay for that debt, the interest rate cost of capital associated with that. That said, I think, generally speaking, we are happy to stay well below our statutory maximum so far as leverage on the book is concerned, just given the prospects for volatility in the markets generally.

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

Operator, thanks very much. I'd like to thank everyone for their participation and their interest in Oxford Lane Capital Corp. We look forward to speaking to you again soon. Thanks very much.

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