Oxford Square Capital Corp (OXSQ) 2010 Q4 法說會逐字稿

And welcome to the TICC Capital Corp. year-end 2010 earnings release conference call. All participants will be in a listen-only mode. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jonathan Cohen, CEO. Mr. Cohen, the floor is yours, sir.

Thanks very much. Good morning, and welcome, everyone, to the TICC Capital Corp. fourth quarter 2010 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 would also like to call your attention to the customary disclosure in our press release today, 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 those 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 presentation back over to Jonathan.

Thanks, Bruce.

As we noted in our press release this morning, TICC reported total investment income of approximately $9.1 million for the fourth quarter of 2010. Our net investment income was approximately $6.7 million or $0.24 per share, compared with approximately $6.6 million or $0.25 per share in the prior quarter. We note that we completed an equity capital raise during the fourth quarter, which served to increase our share count on a quarter-over-quarter basis.

We had a strong fourth quarter. Those elements that we focused on most intently -- credit quality, net investment income, and portfolio activity, all showed notable strength during the quarter. Our weighted average credit rating on a fair-value basis moved from 2.2 at the end of the third quarter to 2.1 at the end of the fourth quarter, lower being -- representing stronger credits. We note that a year ago, at the end of the fourth quarter of 2009, that metric stood at a 2.5. Our portfolio credit quality has benefited from the improved financial performance of the companies in which we are invested, as well from those new investments we made during 2010.

Turning to our fourth quarter 2010 portfolio realizations, we continue to believe that the terms of those realizations provide an accurate long-term reflection of the quality of our debt portfolio. We're pleased to note that portfolio realizations amounted to $39.9 million during the fourth quarter. That $39.9 million of realizations had previously been carried at an aggregate book value of $38.4 million. The fourth quarter realization's figure represented 16.8% of our third quarter ended portfolio base. We continue to think that these portfolio realization numbers are strong. Moreover, the fact that these realizations have produced results broadly in line with or above our carrying book values provide us with continued comfort regarding our valuation processes.

During the fourth quarter, we deployed approximately $30.8 million in eight investments in addition to the prior three quarters' deployment of approximately $99 million. The weighted average yield on our debt portfolio as of December 31, 2009, was approximately 9.0%, while the weighted average yield as of December 31, 2010, was approximately 14.1%. At the end of the fourth quarter, the CLO asset class represented approximately 24% of our total assets on a fair-value basis. While we remain structurally limited with respect to the percentage of assets we can allocate to this strategy, by virtue of the 30% BDC limitation on unqualified investments, we're very pleased with the performance of our investments in this sector thus far.

As far as the state of our capital structure is concerned, firstly, we note that while we continue to operate quite well without any leverage on our balance sheet, we intend to continue to pursue opportunities to add leverage to our capital structure, so long as we're able to do so on commercially desirable terms. We've noted previously that we continue to explore solutions to provide the Company with some appropriate degree of financial leverage, including through either a direct borrowing and/or a collateralized structured finance vehicle. Secondly, with our strong recent financial performance and improved share price, we've considered the prospect of raising additional equity, and we've filed a shelf registration with the SEC to raise the additional equity capital from time to time at the discretion of the Board. At the same time, I note that we've always taken what I view as a more deliberate and circumspect approach to raising either equity or debt. We're not willing to raise new capital if we don't believe that we can generate a positive spread on that money, meaning that any new capital raise should be expected to be accretive to existing shareholders.

I believe that we had a strong fourth quarter, as reflected by our stable and consistent net investment income, even with the current absence of leverage on our balance sheet. Our continued and strong level of asset repayments at or near book values, our continued high level of new investments at attractive risk-adjusted return structures, and the continued close matching of our taxable net investment income to our dividends payments.

With that, I would like to turn the call over to Patrick, who will describe our fourth quarter investment activities and go through some financial highlights from the fourth quarter.

Thanks, Jonathan.

During the fourth quarter, we completed eight new investments, one of which was a draw on an existing commitment with a total cost of approximately $30.8 million. At December 31, the net asset value per share was $9.85, compared with net asset value at the end of the prior quarter of $9.27 and at the 2009 year end of $8.36. At December 31, the weighted average yield of our debt investments was approximately 14.1%, which is up from 13.8% at September 30. Additionally, as of December 31, there are no loans on non-accrual status. For the quarter ended December 31, we recorded net unrealized appreciation of approximately $30.3 million, comprised of $19.3 million in write-ups, $3 million in write-downs, and approximately $14 million related to reversal of prior period net unrealized depreciation, based on realization events associated with those investments. For the year ended December 31, we were underdistributed for tax purposes by approximately $0.03 per share. And on March 3, the Board of Directors recorded a distribution of $0.24 per share for the first quarter, payable March 31, to shareholders of record as of March 21.

Now let me give you back to Jonathan for Q&A.

Thanks very much, Patrick.

With that, operator, we'll open the call for any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) At this time, we will pause momentarily to assemble our roster. The first question we have comes from John Hecht of JMP Securities. Please go ahead.

Good morning, guys. Thanks for taking my questions.

Good morning, John.

Good morning and it looked like a great quarter.

Thanks. Very much.

I'm wondering if -- can you guys provide a little bit of composition of unrealized depreciation and how much came from it -- from some of the -- I guess, the market -- remarket pricing on the CLO portfolio and how much of it was from the investment portfolio?

Absolutely, John. Patrick is going to take that question.

Well John, for the fourth quarter, I would say there was fair amount related to the CLO mark-ups. Scanning through our list here, if I have to give you an estimate of around $10 million or so looks like it's related to the CLOs that we recently purchased.

Okay. And can you give us a sense for what's going on in the marketplace since the end of the year? Not asking for any specifics to your net asset value, but did the momentum and the CLO paper persist through the beginning of this year, and what's going on with --

Sure. Absolutely, John. Without saying anything specific to our portfolio or the assets that we hold, I think it would be generally the case that people would consider the CLO markets to have been strong year-to-date. In other words, for the first few months of 2011, asset prices for the asset class have generally been rising.

Okay. And then, I wonder -- Jonathan, you did mention leverage -- obtaining leverage in a smart fashion is a priority. Can you kind of refresh us on what different strategies you could pursue there, what's going on in the new issue CLO market? What other alternatives are you considering, and based on that, what is getting to the -- getting closer to the finish line for you guys, based on the trends and the optionality out there?

Absolutely, John. For really the last year or, so we've been watching as the market has been moving closer in our direction. In other words, six months, nine months ago, we were primarily looking at a term loan in terms of a mechanism through which to leverage our capital structure. That, I think, has changed over the course of the last maybe three or four months, and we're seeing collateralized vehicles begin to get done in this market at an increasing pace. So, we're really running a dual track process right now.

We're continuing to talk about a term loan structure, a typical, hopefully, multi-year term loan structure, but we're also pursuing -- actively pursuing the idea of a securitization structure, which would allow us a longer term, and all things being equal, a lower cost of capital. The covenants are a bit different, and that's something we have to factor for, but it's a new opportunity that we think is potentially very exciting.

Okay. And the last question I'd have is, can you give us a sense for -- you guys have a pretty strong liquidity position right now. Maybe give us a sense for the pipeline and the investment opportunities out there in the next three to six months and what you feel good about in that regard.

Sure. Now obviously, we did a capital raise towards the end of last year, early December. There doesn't tend to be an awful lot of activity right around the end of the year, so we ended up with a fairly sizable cash balance at the end of the year. We've obviously been working to put capital to work year-to-date thus far. But you're right. We are, I believe, in a good position overall in terms of availability of capital and our access to deal flow.

The deal flow for us is really split into three buckets right now. We're looking on a sort of more aggressive basis at bilateral deals than we have over the last few quarters, because we think that on a relative value basis, bilateral transactions, transactions that we originate structure and consummate on our own, are incrementally more interesting right now, compared to other markets that we've watched and participated in. The second basket is really kind of the middle market and lower middle market ends of the syndicated corporate loan market that we've been an active participant in historically. And the third basket is the securitization vehicles that constitute a minority portion of our balance sheet but nonetheless have been important over the last few quarters. I think that there are interesting opportunities in each one of those baskets right now. If anything, I would say we're probably most interested in the bilateral practice and growing that on a relative basis.

And what -- I guess, if you decompose the potential yields and that, what are contractual coupon rates? What kind of pick income -- or pick opportunities -- the pick component of that are you seeing? What kind of fee income are you seeing, just to give us a sense for where incremental yields are coming in?

Sure, John. I mean, the interesting thing about the bilateral practice is that deal terms tend to be all over the map. You've got companies that have very good cash flow characteristics and have the ability and the willingness to pay a very high current coupon, on one hand. On the other hand, you have companies that are looking to do a strategic acquisition. They're looking for acquisition finance. They're growing perhaps a bit faster. Those companies are less able or less willing to pay high current coupons, but we can get perhaps equity in some of those transactions, and we don't tend to like pick income very much, but it's something that we're, at the margin, sometimes willing to look at.

But John, historically, if you look over the last eight or nine years, the number of deals that we've done that's had a pick component, very small percent.

Very few. Very, very few. Yes.

And the percent of our net -- our total income in that investment conduit is attributable to pick income. On any quarterly or annual basis, it is a very small, single-digit percentage of the total interest.

Right, if anything.

Yes. Okay. And then where would you go -- I know there's a limitation, I think, of 30% where you go in the CLO or non-traditional assets. Where are you now with that and how much would you be willing to go higher?

Well, I mean, we would be willing to go higher than we were at the end of the fourth quarter, although again there's an absolute cap at 30%, so we can't go very much higher.

Yes, and that 30% includes all non-qualified assets, of which these are a type of their other non-qualifying --

Precisely. Assets issued by -- securities issued by foreign issuers and things like that are included as well. So, I'm not expecting we're going to do a great deal more activity in that sector going forward, but we're certainly very happy with the portfolio as it stands today.

Okay. Good. Well I'll get back into queue. I'll have more questions, but appreciate the answers, and again, congratulations. It looks like a good quarter.

Thanks, John. Very much.

The next question we have comes from Vernon Plack of BB&T Capital Markets.

Thanks very much. Jonathan, I was hoping to get a little more color on portfolio activity for the fourth quarter, in terms of -- for your new investments. Can you give us a sense for -- I think you mentioned there were eight new investments. What investments were bilateral, what investments were middle market, and what investments were structured products, as well as with your exits? How did that sort of break down?

Sure, Vernon. Thanks very much. During the fourth quarter, we actually made no new investments in CLO vehicles, in structured finance credits. We did have an increase in the overall size of that basket, but that was due to increases in value of the existing portfolio. We didn't actually buy any new paper. We took a very careful look at a significant number of deals, but at the end of the day, we were not a buyer in the fourth quarter. So far as the remaining deals -- or I should say, the eight deals are concerned, these are all fairly consistent transactions.

One of them was a delayed draw commitment on an existing deal, which is sort of a lower middle market, not a bilateral deal, but certainly towards the smaller end of the lower middle market syndicated transaction work that we do. The rest were all sort of fairly typical lower middle market small-scale syndicated transactions. We worked on a few new bilaterals during the fourth quarter. We didn't close any bilaterals during the fourth quarter, but we are, I think, making hopefully some progress on a few. Those tend to have, as you know, longer lead times.

Right. Right. And what about your exits? Were -- was it mostly in syndicated loans?

It was, Vernon, primarily in syndicated loans. We did have some equity distributions on the CLO equity that we held. That's -- a portion of that is characterized as a return of principal. The remainder were primarily payoffs of middle market syndicateds.

Yes, yes. And given the fact that you didn't do any new CLOs in the fourth quarter, is that the result of just where pricing is or are the deals you evaluated, you just -- the risk/reward wasn't where you had hoped that it would be?

Yes. I think we entered the fourth quarter with a very strong position in that asset class, and we were pretty happy with the assets that we held. So we, I think, just raised the bar a bit in terms of new deal flow, which isn't to say that we're out of the market. I would say we've been in the market in terms of looking and evaluating new deals, but it just happened we didn't do any transactions during the fourth quarter in that segment. It wasn't a philosophical decision; it was really just sort of a day-by-day, what we thought was the most efficient and best deployment of capital.

Okay. And given your comments earlier, Jonathan, on -- you're most interested right now in bilateral deals. Can we expect a majority of your new investment activity to be in bilateral deals for this quarter and coming quarters, or is that just too difficult to predict at this point?

I think, Vernon, it's probably too difficult to predict. I mean, our corporate history, as you know, is really one of being opportunistic, taking advantage of opportunities as we find them, and being willing to be flexible in looking at a range of things. So at the end of the day, we invest in corporate credit, but the form that those investments have taken have ranged from very small bilateral deals, more traditional middle market bilateral deals, lower middle market and traditional middle market syndicated transactions, and over the course of the last year, a portion of our book has been held in CLO paper, structured finance paper. So, we're going to continue to kind of apply that same level of flexibility. I think that as the bilateral market has kind of come back to life in the aftermath of the credit crisis, that sector is now at the margin providing us with some potentially more interesting opportunities, but we'll wait and see.

Okay. Thanks very much.

Thanks, Vernon.

Thanks, Vernon.

(Operator Instructions) We will pause momentarily to assemble our roster.

Great. I think, as a follow-on to John Hecht's earlier question, we have one additional point that Patrick would like to make. Patrick.

Yes. John, to your question, I just wanted to say we that look at the CLO equity as well. There was additional pickup there. So, I think you're going to find that our overall pickup is closer to $15 million all and not just the junior debt pieces, but for the equity in as well. It's going to be higher than $10 million, so --

Right.

I just want to clarify that.

Great. Well, if there are no more questions, I would like to thank everybody on the call for their interest and their participation. And please feel free to call us directly if you have any further follow-on questions. In the meantime, we look forward to talking to you all next quarter. Thanks very much.

Thank you.

And we thank you, gentlemen, for your time. The conference has now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you.