Oxford Square Capital Corp (OXSQ) 2011 Q4 法說會逐字稿

Good morning and welcome to the TICC Capital Corp. fourth-quarter 2011 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions, and instructions will follow at that time. Please note this event is being recorded.

I now would like to turn the conference over to Jonathan Cohen. Mr. Cohen, please go ahead.

Thanks very much. Good morning and welcome, everyone, to the TICC Capital Corp.'s fourth-quarter 2011 earnings conference call. I am joined today by Saul Rosenthal, our President and Chief Operating Officer, and Bruce Rubin, our Controller and Treasurer. Bruce, could you open the call today with the 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 the 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 $13.2 million for the fourth quarter of 2011, representing an increase of approximately $2.1 million over the third quarter of 2011. Consistent with recent quarters, our revenue components included the continuation of strong cash flows from our syndicated and bilateral loans, as well as from distributions from our investments in the equity tranches of our CLO investments.

Additionally our increase in total investment income was consistent with having largely deployed the capital within our CLO subsidiary, as well as making additional investments in CLO equity tranches.

Our fourth-quarter net investment income was approximately $8.3 million or $0.25 per share, which includes the impact of a capital gains incentive fee accrual of approximately $235,000. Excluding the impact of that accrual, our core net investment income was approximately $8.5 million or $0.26 per share.

We also recorded net unrealized depreciation of approximately $2.3 million and net realized capital gains of proximally $900,000 for the quarter. As a result of those net write-downs, we had a net increase in net assets resulting from our operations of approximately $6.9 million or approximately $0.21 per share.

At the same time, we believe that the credit quality of our portfolio remains stable. Our weighted average credit rating on a fair value basis was 2.2 at the end of the fourth quarter of 2011, which compares to 2.2 at the end of the third quarter of 2011.

Our Board of Directors has declared a $0.27 distribution for the first quarter this year payable on March 30, 2012 to shareholders of record as of March 21. I believe that we saw a strong fourth quarter as reflected by our having deployed approximately $60.3 million -- $60.3 million of capital consistent with our investment strategy and by the continued very close matching of our taxable income to our dividend distributions.

As previously mentioned, our increase in total investment income over our third-quarter results was largely attributable to the deployment of our capital within our CLO subsidiary, as well as continued strong performance of our CLO debt and equity investments.

With regard to our CLO subsidiary, we note that we remained in full compliance with all of the various covenant tasks and that the CLO's monthly trustee reports are available on our website.

We believe that the market is currently favorably positioned for our type of investing. Opportunities across a wide range of debt investments are available to us with 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 Saul who will describe our fourth-quarter investment activities and go through some financial highlights from the fourth quarter.

Thanks, Jonathan. At December 31, 2011, net asset value per share was $9.30 compared with the NAV at the end of the third quarter of 2011 of $9.34.

As mentioned previously, during the fourth quarter, we deployed approximately $60.3 million in new investments, and during the full-year 2011, we deployed approximately $272.5 million.

With respect to our CLO debt and equity investments for the fourth quarter, we recorded approximately $1 million in interest payments, $56,000 in principal payments at par and approximately $3.9 million in CLO equity distributions.

In total, since we began investing in this asset class through December 31, 2011, we have recorded approximately $7 million in interest payments, $2.8 million in principal repayments at par and $16.3 million in CLO equity distributions. At the end of the fourth quarter of 2011, this asset class represented approximately 21.3% of our total assets on a fair value basis.

At December 31, 2011, the weighted average yield of our debt investments was approximately 11.3% compared with 11.4% at September 30, 2011. This change was consistent with our expectations as investments within the debt securitization portfolio are projected to generate lower yield returns than our other investments. Given the very attractive cost of capital within our debt securitization vehicle, we have and continue to generate positive spreads on those investments.

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

As Jonathan mentioned, the Board of Directors has declared a distribution of $0.27 per share for the first quarter this year, payable on March 30, 2012, to stockholders of record as of March 21, 2012, and now I will turn the call back to Jonathan.

Thanks very much, Saul. With that, operator, we are happy to open the call if there are questions.

(Operator Instructions). Mickey Schleien, Ladenburg.

My first question regards underlying trends of your borrowers. Can you give a sense -- can you give us a sense now that the year is over and you have reported the year, you know what sort of trends did you see in their revenues and in their margins, and what is your outlook for those metrics in 2012 and how might that affect your asset allocation?

I think, Mickey, we would characterize 2011 as sort of a consolidating year for many of the companies within our portfolio and many of the sorts of companies that we tend to look at as prospective investments after the volatility of 2009 and there was still, I think, quite a bit of depressed pricing and depressed operating activity in through 2010. 2011 was sort of again a consolidating year of relatively stable performance on an operating basis so far as revenues and margin structures were concerned to the best of our perception.

So far as our projections going forward, we are generally projecting -- and, again, this varies certainly by industry segment, by operating business and quite a bit, frankly, company to company -- but we are generally projecting a continuation of generally stable environment from an operating perspective through 2012. More or less a general continuation of 2011, although we are not necessarily presupposing a continuation of the very, very low corporate default rates on syndicated loans that we have been seeing. Those are extraordinarily low right now. We are not necessarily predicting a continuation of that figure.

So, Jonathan, given what you just said, in terms of industry exposure, it sounds like you won't be making any meaningful changes in your asset allocation; is that correct?

We are not planning to or projecting to. Again, we sort of think of ourselves as somewhat opportunistic investors, and to the extent we see an industry segment that is trending stronger and we can take advantage of attractive pricing for assets within that sector, corporate assets within that sector, obviously we seek to take advantage of that. But, yes, that is a fundamentally true statement.

Okay. A couple of simpler questions. I was a little disappointed that quarter to quarter NAV was down, and we haven't seen the 10-K yet. So I don't know exactly what drove that. So perhaps you could give us some color on what happened in the fourth quarter, considering that generally your markets were pretty stable, and directionally is NAV today higher or lower than it was at 12/31?

Well, we don't strike a NAV on a daily basis. We strike our NAV on a quarterly basis. So I can -- again, we only really sort of know as of the last quarter.

The $0.04 diminishment in per share NAV that you speak of was really due, Mickey, to nothing more than a number of relatively minor markups and markdowns that netted to $0.04. Again, none of those do we view as particularly material. We view that as well within the boundaries of sort of our normal quarter to quarter variation in a stable market with a stable portfolio.

But, Jonathan, was it within the CLO investments or the non-CLO investments, or was that a mixture?

It was spread out. Again, I mean every asset we own gets marked-to-market on a quarterly basis. Both inside and outside of the CLO, we are the economic beneficiary of all of those assets, and we don't really differentiate too markedly between assets inside or outside of the CLO subsidiary.

Okay and just a housekeeping question. When can we expect you to file the K?

As soon as humanly possible. I would think likely -- (multiple speakers)

Within the next couple of business days.

Tomorrow or Monday sort of thing.

Tomorrow or Monday, okay.

Lastly, Jonathan, gross capital, you know, we saw that CLO issued last year, and that limits your ability to raise additional debt capital. Any thoughts on when or in what manner we might see you raise some capital to grow the Company some more?

Sure. I mean it doesn't limit us too historically with respect to raising additional debt capital, if you are speaking of the one-to-one BDC/RIC leverage test. You know we have got in excess of $300 million of equity, and we have approximately $100 million of leverage as defined from a statutory perspective. So we still have a very considerable amount of prospective runway with regard to that metric.

In terms of the form that future capital raises may take, we have always taken the position that we want to raise the most efficient and most useful lowest-cost capital that we can when it is appropriate to, whether that is debt or equity, and we continue to look at those opportunities in a real-time basis. But there is nothing we are ready to announce at the moment.

Thanks for your time.

Greg Mason, Stifel Nicolaus.

Good morning, gentlemen. Could you talk a little bit -- I was kind of surprised about the jump in the equity distributions from the CLOs. You had, call it, $3.2 million last quarter in income from CLOs jump to $4 million this quarter, higher than our expectations. Can you talk about what caused that jump and, more importantly, how we should be thinking about that number going forward? Is there any seasonality or lumpiness in that?

There really, Greg, were sort of two elements to that. The first is that we purchased during the quarter two new CLO positions, two new CLO equity positions -- one that was a larger position for us, one that was a smaller position. But they were both highly cash generative right out of the gate essentially.

There is no real seasonality per se within CLO equity distributions that we have discerned historically. There are variations that are attributable to simply the waxing and the waning of the performance of these various CLO structures whether the underlying investments and, therefore, the structure in total is producing more or less income at the bottom of the waterfall with respect to equity during a given quarter, and these distributions have, as you say, been strong recently.

Great. So, as we think about that going forward, you know kind of depending on when you purchase those in the quarter, should we be thinking about continued distributions close to this $4 million level, or should it go up on a full quarter run rate basis, or how should we be thinking about that going forward?

Well, Greg, I mean, as you know, we don't provide projections with respect to our forward financial performance, and this obviously is a component of our forward financial performance. So I can't give you a great deal of guidance.

What I can say is that the overall market, not our position specifically, but the overall CLO equity market has been performing very well recently and seems to be continuing to work very well in terms of the performance of these underlying vehicles in terms of the cash flows to their various equity tranches and in terms of the internal operations of these vehicles themselves when you look at things like warp scores, weighted average weighting factors, when you look at their diversity scores, whether you look at the populations of their CCC baskets, their over-collateralization tests, so all of the various factors and elements that define the behavior of these vehicles and ultimately flip the cash flows to the beholders. Those all, again, from the industry's perspective or from the sector's perspective seem to be doing very well.

Okay. Great. And then can you talk about also on the revenue line the commitment and amendment fee income looks like it was up very big this quarter. Almost half of the full year was in this fourth-quarter. Any one-time items in there that we should be aware of?

I don't think that is sort of an area that we would continue to think is going to be a producing line item for us. That is something that is sort of more of an (multiple speakers) might have been an occasional event, yeah, exactly.

Okay. Great. Can you talk about -- your CLO equity has actually come down as a percentage of your portfolio. You are up almost near that 30% threshold. At one point now at 21%, you know what is your view on adding more CLO equity to the portfolio, and is that, I guess, even possible with your available capital today?

We are cash constrained at the moment. We are essentially fully invested. So the cash that we have available for investment is essentially recycled capital at this moment. That is a good position to be in, I think. We don't want to have cash lying fallow. We do want to be fully invested.

Just one point of clarification, Greg. I don't think that our CLO equity position was ever anywhere around 30%, nor is it 21% today. That is the combined figure associated with both our CLO equity and BB debt positions. Our CLO equity position is substantially smaller than those figures you referenced.

Okay. Got it. Great.

The larger point, though, is that both of those numbers, the CLO equity position and the combination of the CLO equity and debt position, have been -- have diminished fairly substantially as a percentage of total assets consistent with the CLO debt financing that we did last summer and the deployment of those of that capital base into syndicated corporate loans as opposed to securitization vehicles.

So, if we think about -- as you just said, you're essentially going to fully invest it right now. It feels like maybe we have got a full run rate from, you know, the amendment fees and the CLO distribution. I am just kind of wondering why you decided to ramp the dividend up to $0.27 when this kind of $0.26 quarterly number kind of feels like full earnings power. Can you address that question?

Well, I mean we didn't have the full benefit of being fully invested for the December quarter with respect to the CLO, nor do I think we have the benefit of the full cash flows from these two two securitization vehicles that we purchased during the quarter. Again, we're not making projections on this call.

The Board of Directors who ultimately are responsible for establishing the dividend have access to all of our internal projections, all of the cash flows associated with these underlying investments, etc., and they have struck the dividend at this level on that basis.

But it would be safe to assume you're not setting a dividend at a level where it would have any type of return of capital; would that be correct?

A well-phrased question, Greg. I give you full credit for the phrasing of your question. Again, we don't make forward-looking projections on net investment income.

What I can say is that as a general matter our corporate philosophy has always been to distribute out essentially all of our net investment income --

No more and no less. And historically that has been the case. We have had very little return of capital.

And not to return capital to shareholders under the theory that they are not giving us money for us to give it back to them as a general rule. That has been our operating principle at TICC, again, over a long period of time.

All right. Great. And then a couple of little housekeeping questions.

I've got your originations in the fourth quarter. What was your repayments in the fourth quarter for kind of your net growth?

(multiple speakers) Let me see. Hold on one second. It was [107.965] for the full year. I haven't teased out just the quarter, though, yet, Greg.

That's fine. I can back into that number. And then if I remember correctly, your net investment income hurdle rate locks once per year at 10-year treasury plus 5%. Can you tell us what the new lock rate is for 2012?

It is 10-year treasury plus 5% --

No, it is for five years.

Five year, sorry. (multiple speakers) Right. Sorry. The answer to your earlier questions about fourth-quarter repayments was approximately $30 million. But, again, you can back into that number.

With respect to the establishment of the new hurdle rate, Greg, we can get back to you on that.

Okay. Fine. And then one last thing. It's not really that meaningful, but you had the cap gain fee accrual this quarter kind of at the same time where we had a $1.4 million decline in portfolio values. I was kind of -- can you talk about the mechanics of why you would accrue a cap gains incentive fee when the mark-to-market was actually slightly negative this quarter?

Sure. The accrual of the cap gains incentive fee, Greg, is, frankly, something that we just don't focus on that intently under the theory that the numbers have always been very, very different from any cap gains incentive fees that have ever been paid. And we view it as I suppose an important GAAP statistic, but not a statistic that is ever footed back to any cash payment that has been made from the Company.

So, in terms of the accounting machinations that led to that roughly $250,000 figure, we can get back to you on the accounting GAAP-based specifics of the calculation of that number, but I don't have an instant answer for you on that answer.

[Boris Spalou], [Rational Securities].

Hi, thank you for taking my question. Actually I had like two quick questions.

The first thing is you mentioned that you invested in two new new CLOs. Whether that is new, new CLOs or pre-2008 CLOs?

And second question is, regarding the equity distributions, is that fair to say that if we look at Oxford Lane and what you are saying about cash yield being -- quarterly cash yield being like 10% annualized would be that 40%, is that something that we could extrapolate that we're looking at what you are saying for Oxford Lane, we could extrapolate that for the CLO position in TICC?

Sure, Boris. With respect to the first part of the question, that was -- was the first part of the question? The two new CLOs were both vintage 2007 or earliers. We have yet to do a new principal deal.

With respect to your second question about extrapolating information that has been disclosed or publicly disseminated with respect to an affiliate fund, I wouldn't want to do that. In other words, I wouldn't want to sort of take some information that may have been or may be disclosed or disseminated and make extrapolations or comparisons to a separate portfolio to separate fund.

Thank you. At this time, I would like to turn the call back over to management for any closing remarks.

We would like to thank everyone once again for their interest and for their participation on this call, and we look forward to keeping you updated and speaking to you again in the future. Thanks very much, everyone.

Thank you and that concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating, and have a nice day.