Oxford Square Capital Corp (OXSQ) 2011 Q3 法說會逐字稿

Welcome to the TICC Capital Corp. third-quarter 2011 earnings release and conference call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. (Operator Instructions). Please also note that today's event is being recorded. At this time I would like to turn the conference call over to Mr. Jonathan Cohen, CEO. Mr. Cohen, please go ahead.

Good morning. Thank you. And welcome, everyone, to the TICC Capital Corp. third-quarter 2011 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 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 the 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 website at www.TICC.com.

With that, I will turn the presentation back to Jonathan.

Thanks, Bruce. During the third quarter of 2011, we announced that we closed a $225 million debt securitization transaction in which a wholly-owned subsidiary of TICC holds the equity. The senior notes issued in that transaction have an initial face amount of $101.25 million and were rated AAA by both S&P and Moody's. They bear interest at -- those AAA notes bear interest at three-month LIBOR plus 225 basis points.

The senior notes have a stated maturity date of July 25, 2021 and are subject to a three-year non-call period. The debt securitization vehicle has a three-year reinvestment period. This financing structure provides TICC with long-term financing at what we believe is an attractive cost of capital.

Consistent with obtaining this financing, during the third quarter, we deployed approximately $81 million in 21 investments the significant majority of which were made within the securitization vehicle.

As of September 30, 2011, we had approximately $35 million of uncommitted funds remaining in the securitization vehicle. As of today, we have approximately $6 million remaining uncommitted in that vehicle.

TICC also reported total investment income of approximately $11.1 million for the third quarter of 2011. Consistent with prior quarters, our revenue components included the continuation of distributions from our investments in the equity tranches of our CLO investments, as well as the continuation of strong cash flows from our syndicated and bilateral loans.

Our net investment income was approximately $11.6 million or $0.36 per share, which includes the impact of a capital gains incentive fee accrual reduction of approximately $4.1 million.

Excluding the impact of that accrual reduction, our core net investment income was approximately $7.5 million or $0.23 per share.

We also recorded net unrealized depreciation of approximately $20.1 million for the quarter. As a result of those write-downs, we had a net decrease in net assets resulting from operations of approximately $8.4 million or about $0.26 per share.

We would note that the fair value decline this quarter consistent with broader market declines. However, we believe that the credit quality of our portfolio remains strong.

Our weighted average credit rating on a fair value basis was 2.2% at the end of the third quarter of 2011 compared to 2.2% also at the end of the second quarter of 2011. Those elements that we focused on most intently, credit quality, net investment income and portfolio activity all showed stability during the quarter.

Our Board of Directors has declared a $0.25 dividend for the fourth quarter of this year payable on December 30, 2011 to stockholders of record as of December 16. I believe that we saw a good third quarter as reflected by our having raised approximately $100 million of low-cost long-term capital and having deployed about $81 million of capital consistent with our investment strategy and the continued very close matching of our taxable net investment income to our dividend payments.

Our core net investment income during the third quarter was lower than it would have otherwise been due to the time it necessarily takes to deploy significant new capital, i.e., the $100 million in leverage we raised.

As we now have invested virtually all of that capital, we expect to receive the full benefit of this low-cost leverage going forward. We believe that the market is currently very favorable for our type of investing.

Opportunities across a wide range of debt investments are available to us at what we believe are attractive risk/return characteristics. Those opportunities include middle-market and lower middle-market syndicated corporate loans, self originated bilateral loans and CLO BB and equity investments.

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

Thanks, Jonathan. At September 30, the net asset value per share was $9.34 compared with the NAV at the end of 2010 of $9.85 and compared to 2009 year end of $8.36.

As mentioned previously, during the third quarter, we deployed approximately $81 million and 21 investments. During the first three quarters of 2011, we have deployed approximately $212 million and 49 new investments.

With respect to our CLO investments for the third quarter, we recorded approximately $1 million in interest payments and approximately $3.1 million in CLO equity distributions. In total, since we began investing in this asset class through September 30, we have recorded approximately $6 million in interest payments, $2.7 million in principal payments at par, and $12.4 million in CLO equity distributions.

At the end of the third quarter, this asset class represented approximately 20.5% of our total assets on a fair value basis.

At September 30, 2011, the weighted average yield of our debt investments was approximately 11.4%, just down from 12.9% at June 30. This change is consistent with our expectations as investments within the debt securitization portfolio will likely generate lower yields than those investments outside the portfolio.

Our goal for those investments within the new debt securitization vehicle is to generate a positive spread based upon their cost of capital and those investment opportunities.

I would note that we currently have no investments on non-accrual status.

And again, the Board of Directors has declared a distribution of $0.25 per share for the fourth quarter this year which will be payable on December 30 to stockholders of record as of December 16. Now let me give it back to Jonathan.

Thanks, Patrick very much. Operator, we can now begin taking questions.

(Operator Instructions). John Hecht, JMP Securities.

Good morning. Thanks to taking my questions. Jonathan, I'm wondering if you could just maybe characterize in more detail the capital deployment during the quarter. What are the -- how much of it was bilateral versus syndicated? Can you give us a sense of spreads on both of those types of investments?

Sure, John. Thanks very much for the question. The vast majority of the new activity in the quarter was within the CLO because that's where we have the capital to deploy. And consistent with the constraints and the limitations of the indenture for the CLO, those investments consist entirely of the syndicated loans. We really don't have the practical ability to do a bilateral deal inside of the CLO. Those deals going forward will be done outside the CLO structure.

It was a mix, John, of secondary and primary deals. I would say the significant weighting was towards the secondary opportunities. Given the fact that we saw a lot of deals in the pipeline this quarter, particularly in the secondary market that we thought were attractive, that fit the parameters of the CLO that provided us with a positive spread opportunity relative to the vehicle's cost of capital, that is really the direction we went.

And it sounds like about 21 investments, so $4 million each. Is there a wide range around that? Where are these in the capital structure and can you give us a sense for the typical spread to LIBOR on those?

Sure. Where they are in the capital structure, fairly uniformly, John, is that they are senior secured firstly and top of the capital structure deals. In terms of spreads over LIBOR, I'm not sure that we've --

We haven't announced that.

We haven't announced that yet, John.

It will be in the schedule of investments, but since that's not published yet, we can't say it on this call.

Right. But as a practical matter, John, I mean, our objective, which we are focused on achieving and I think we are -- we have done good work on thus far -- is to generate a positive risk-adjusted return relative to the cost of capital. In this market, based upon where we price the CLO, that is an achievable objective in our view.

Yes.

Okay. I look forward to getting the investment summary from the 10-Q to get a flavor for that.

Second follow-up question, Jonathan, how do you view your liquidity now? It sounds like you were somewhat active subsequent to the quarter and you've almost fully deployed the CLO at this point.

Going forward, would we look to just you being more focused on recycling assets as they pay off and trying to maximize returns in that regard? Or what else would you seek to in terms of potentially increasing leverage?

Sure, John. Firstly I think it's important to say that we are very, very happy with this transaction, with the CLO transaction and the $101 million of leverage that we raised during the quarter, it sort of checked all the boxes for us. As you know, it took us an awful long time to find the right leverage structure. And we certainly feel like this is it.

In terms of additional leverage on our balance sheet, I think we're looking at the market opportunistically. So if there are opportunities to raise some additional capital, and again, we're not looking to raise vast quantities of it, but more limited amounts, on attractive return terms, we would look to do that. This, as you know, is a very volatile market right now both in terms of the assets and the liabilities for our balance sheet. So, it's really sort of as simple as that.

We don't have a plan or a strategy to raise a significant amount of additional leverage anytime in the near future. The equity parameters, you are familiar with. We've always been a fairly circumspect issuer of equity. And with our stock currently trading below book, that's not anything that we are particularly focused on at this minute, although that could change going forward.

So, we don't have any near-term plans to raise either debt or equity in any sort of significant volume. But depending on where the market is for use of proceeds and depending on where the market is for cost of capital and the various terms that surround raising additional capital for us, we plan to be opportunistic, but nothing concrete at the moment.

Great, Jonathan. Thanks very much.

Troy Ward, Stifel Nicolaus.

Good morning, guys. Just to follow up a little bit on John's question. First of all, when is the 10-Q going to be filed?

Tomorrow.

Probably tomorrow.

And why can't you answer questions on this call if you have the information?

I believe there are restrictions on our ability to provide information verbally that hasn't been disseminated in a written public format. Is that correct, Patrick?

That's generally the guidance that we have, yes. Arguably you could cure it within a number of days, but our position has always been that it's not in the press release, we won't take it on the call.

Okay. Well, let's just ask it a different way then. What is your expected return -- if -- you don't have to give the LIBOR exact spreads, but what is your expected margin over your cost of capital in the CLO?

I don't think we've really spoken to that, Troy. We don't have a specific targeted return. The expectation is that that's going to be positive, obviously, but the degree, it's a long-term credit facility. So to the extent that spreads widen, that we have higher return opportunities going forward, it could be a higher number. We priced the deal, the CLO transaction, the leverage raised at a very opportune moment over the summer given that the market sort of widened out very considerably right after we did the deal.

So I think it's reasonable to expect that whatever the target was, it got better than that shortly after we did this raise. But we haven't come out publicly and said well, we think we're going to make 200 or 300 or 400 basis points on this spread over a four, five, or six-year period. A, I think it would be a little bit presumptuous of us to say that. And B, it's not the kind of guidance that we typically want to give.

Okay, fair enough. And as we think about kind of your CLO equity strategy that has worked really well over the last couple years, clearly now with the larger balance sheet, the 30% bucket per say is bigger. I think it's only 20% of your assets now.

How do you view that, the amount of CLO equity investments that you have given that I think the way it was described early on in the process was it was a way to kind of synthetically leverage the balance sheet. Clearly you have real leverage now. So just kind of talk to us about how you view the CLO equity as part of your investment strategy going forward.

Sure, Troy. I mean it's certainly an integral part at this point. As you say, the level has come down from about 30% to about 20%, consistent with raising the new debt capital over the summer. We are not racing to replicate that additional 10%, but we're looking at that market closely.

We don't have a lot of excess cash outside the CLO, and the CLO itself can't buy CLO paper. That's not a qualified asset for that purpose. So, we're looking at it opportunistically. We are continuing to see deal flow. We are continuing to look at CLO related transactions. We may make some small purchases over the next few months. But absent some additional capital outside the CLO structure, we don't have a great deal of dry powder right now to be buying more CLO paper, both BB paper or equity.

So again, we're taking an opportunistic view. Spreads have widened out a little bit in the CLO market over the course of the last several months. We think there's some attractive opportunities in BB turbo paper and on the equity side, as well, certainly. Selectively there's some remarkable opportunities, but again, we're not taking the view that it needs to be replicated immediately in terms of replacing that additional 10%. But we're also not taking the perspective that because we have this proper leverage, this real leverage on our balance sheet now, we ought not to buy any more CLO paper. We're going to look at it on a risk/return basis in the same way that we look at syndicated leverage loans or bilateral transactions. It's just another piece of the portfolio.

Okay, great. And then a couple more quick ones -- on the cost of debt, on the securitization, or on the CLO, I know it's -- is there any fees that you are going to amortize over the life of it to make the cost of securitization slightly higher than the 2.25% that is outstanding?

Sure, Troy. Absolutely.

Troy, there are fees that are deferred as a debt issuance cost on the balance sheet. It's about $2.9 million that is on the balance sheet now. That will be amortized over the life of the debt. And in addition, there was a discount on the original issuance of $1.6 million which will also be amortized over the life of the debt.

I will tell you that for the stub period and you can derive this, there is about $50,000 of the total interest cost is represented by amortization. And the rest is just the cost of capital. (multiple speakers) Right.

So if we gross up that stub period, that $50,000 for a full quarter, that would be a good run rate?

That would be a good reference, yes.

Okay. And then do you have shareholder permission to raise equity below book value?

We do not, Troy. At the moment we have shareholder permission to issue a convertible security which would be convertible below book value, but we don't have shareholder permission to raise equity proper below book value.

Okay. Other than I applaud you for putting that monthly trustee report on your website, that's very good information, and we really appreciate that transparency, but that's all I got. Thanks, guys.

(Operator Instructions). In showing no additional questions, I would like to turn the conference call back over to Mr. Cohen for any closing remarks.

Thanks very much. I would like to thank everyone for their interest and for participating in the call this quarter. As always, we appreciate it and we'll look forward to talking to you next quarter. Thanks very much.

And with that, we will conclude today's teleconference. We thank you for attending. You may now disconnect your telephone lines.