Oxford Square Capital Corp (OXSQ) 2013 Q2 法說會逐字稿

Good morning, and welcome to the TICC Capital Corp Second Quarter 2013 Earnings Conference Call. (Operator instructions.) Please also note, this event is being recorded.

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

Thanks very much. Good morning. Welcome, everyone, to the TICC Capital Corp Second Quarter 2013 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and COO, Patrick Conroy, our CFO, 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'd also like to call your attention the customary disclosure in our press release this morning 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 with the SEC for important factors that can 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, www.ticc.com.

With that, I'll turn the call back to Jonathan.

Thanks, Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.25 per share for the second quarter. We reported total investment income of approximately $25.4 million for the second quarter of 2013, representing an increase of approximately $3.7 million over the first quarter. That increase was largely due to greater interest income and distributions from our CLO equity investments during the second quarter.

Our second quarter net investment income was approximately $16 million, or $0.30 per share, which includes the impact of a capital gains incentive fee accrual reduction of approximately $2.9 million. Excluding the impact of that accrual reduction, our core net investment income was approximately $13.1 million, or $0.25 per share.

We also recorded net unrealized appreciation of approximately $16.4 million, and net realized capital gains of approximately $1.9 million for the quarter. As a result of those realized and unrealized gains and losses, we had a net increase in net assets resulting from operations of approximately $1.5 million for the quarter. 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 stood at 2.2 at the end of the second quarter of 2013 compared to 2.1 at the end of the first quarter of 2013. At June 30, 2013, net asset value per share stood at $9.75 compared with the net asset value at the end of the first quarter of $10.02 per share.

During the second quarter of 2013, we made additional investments of approximately $190.8 million. The additional investments consisted of approximately $165.4 million in corporate securities, $19.1 million in CLO equity, and $6.3 million in CLO debt. It's worth noting that this quarter's activities follow a very active first quarter during which we invested approximately $216.5 million consisting of $123.6 million in corporate securities, $87.8 million in CLO equity, and $5.1 million in CLO debt. For the second quarter, we received proceeds of approximately $103.5 million from repayments, sales and amortization payments on our debt investments.

For the quarter ended June 30, 2013, TICC recorded earned income from our investment portfolio as follows - approximately $11.7 million from our syndicated and bilateral investments, approximately $10.7 million from our CLO equity investments, approximately $1.0 million from our CLO debt investments, and approximately $2.0 million from fee income.

At June 30, 2013, the weighted average yield of our debt investments was approximately 8.5% compared with 9.2% at March 31, 2013. We note that much of that reduction yield was attributable to the significantly lower cost of capital we are now enjoying by virtue of the recent expansion of our CLO debt financings. Those financing vehicles require us, in order to maintain compliance with their respective indenture structures, to hold debt securities that meet certain characteristics and which typically carry lower yields.

I'd note that we currently have a single investment on non-accrual status with a par value of approximately $22.7 million, a fair value of approximately $8.0 million, and a cost value of $10.3 million. The majority of this investment was purchased during the first quarter of 2013 at a price of 32% of par. While we do not generally focus on distressed debt investments, we have been, and remain open to those opportunities where the potential for highly attractive, risk-adjusted returns exist.

On May 28, 2013, we completed the sale of $60 million of incremental secured debt in connection with the collateralized loan obligation transaction that originally closed on August 23, 2012. The issuance of additional notes was proportional across all existing classes of notes originally issued. Our Board of Directors has declared a distribution of $0.29 per share for the third quarter of this year, payable on September 30, 2013 to stockholders of record as of September 16.

With that, Operator, we're happy to begin to poll for questions.

Thank you, sir. (Operator instructions.) Mickey Schleien of Ladenburg.

Good morning, Jonathan.

Good morning.

Morning, Mickey.

Morning.

Hi. Taking into account, Jonathan, the securities payable of, I think, $49 million, how long -- or when do you expect to finish investing your remaining cash, or by when?

Well, Mickey, on a $1.025 billion portfolio, the $50 million or so of effective cash, which is the cash position at the end of the June quarter less the unsettled trades pending of approximately $50 million, represents just about 5% of our assets. That would typically be absorbed in the ordinary course. That's not a large enough cash position for us to worry too much about putting that amount to work. Again, we're sort of averaging over the last several quarters about $200 million per quarter of investment. So, we don't regard the cash position as overly onerous at the moment.

And the payable is primarily in the CLOs?

You mean the unsettled trades, Mickey?

Yes, yes.

Oh, they can be inside and outside the CLO. So, they can be on balance sheet, they can be within the CLOs.

Those are just timing issues, just depending on when the trades are.

Right. Sometimes trades settle very quickly. Sometimes trades take a little longer to settle.

No, no, I understand the nature of the payable. I was just asking whether most of those payables are within the CLOs, meaning (inaudible) more leverage syndicated, leveraged loans, or is it something else?

Mickey, I was jumping up. I thought -- this is Patrick -- if you were asking if these were CLO investments, per se, and they're generally not, that $49 million of pending investments. They are, as Jonathan said, investments when -- corporate loans inside the various CLOs, the two CLOs that we run.

Okay, fair enough. Now, I understand your explanation of the impact of way of having to invest in the CLOs, but there's this countervailing force of equity distributions from your new CLO investments. And I assume that had some positive impact this quarter. Can you give us a sense of, at least in broad brushstrokes, what that impact might be in the coming quarter?

Well, I can give you some general guidance, Mickey. Our CLO equity holdings at the end of the June quarter amounted to $195.5 million. Of that amount, $73.3 million of fair value investments were reflected by positions that we have purchased recently enough such that they had not yet begun making payments at the end of the June quarter.

So, about 37.5% of our CLO equity book was nonproductive on a cash distribution basis with respect to the June quarter. And as you know, typically it's a two-quarter lag between purchase and initial distributions.

Fair enough. Can you talk a little bit, Jonathan, about the markdown? It was relatively significant, and we haven't seen the Q. So, what was markdown, or what were the primary drivers of the markdown during the quarter?

I'd want to wait for the Q, Mickey. I mean, it was different positions in different asset classes. We did see some weakness in the market in the quarter, but not dramatic. So, we had markups. We had markdowns. The Q should be out fairly soon, though.

Okay. And then, last couple questions, and then I'll hop off. Some color on the fee income, which was meaningful this quarter. And do you still expect to cover your dividend on a taxable basis this year?

The fee income was a great number of relatively small payments, so I wouldn't say that was driven by one or two payments that represented the majority of that $2 million figure.

With respect to our coverage of the dividend, the Board's philosophy, I believe, is to distribute out constructively 100%, or very nearly 100%, of our taxable net income on an annual basis. So, my belief is that their actions will be consistent over time with that philosophy.

Okay. And lastly, can you give us your current view on the tone of the CLO markets, given all the volatility in interest rates over the last couple of months? And is it more appealing or less appealing to you than it was a quarter ago when we last spoke on your earnings call?

Sure, Mickey. We continue to see, as you can tell by the fact that we've remained active in this space -- with $10.7 million of new CLO investments at TICC in the second quarter, we continue to see opportunities within the CLO market broadly defined. Sorry, I apologize, Mickey. That number was the amount of distributions. It was $19.1 million of new investments and $10.7 million of distribution that we have received.

So, clearly, we continue to see opportunities in this space. Volatility has created opportunities. It's created challenges within that market. The pace of new CLO issuance has diminished relative to six months ago, or nine months ago when the market was probably more active than it is at the moment.

That said, we've made purchases in the primary market. We've made purchases in the secondary market, and we continue to see opportunities there.

Okay, thanks, Jonathan and Patrick, for your time this morning.

Thanks, Mickey.

John Hecht of Stephens.

Morning, guys, and thanks for taking my questions. Well, a couple questions. First of all, on the unrealized losses, I know it sounded like it came from a number of different kind of contributors. But, can you give us sort of -- was it derived primarily from the CLO assets, or did the corporate securities in [CLO as] well contributed, or is one type of asset class more pressure, given the volatility and the interest rate environment during the quarter?

Sure, John. In terms of the preponderance of the markdowns, it was in the CLO equity holdings that we had most of the markdowns, or the bulk of the markdowns during the quarter.

Okay. And you mentioned that about 37.5% of the CLO assets, or I guess the CLO equities that you hold, are not cash flowing right now. Do you have a sense for the timing of that, or [what's] your effective yield you'd expect on that would be?

John, just to be clear, it's not that they're not cash flowing.

The vehicles are cash flowing, John. They're just not -- they haven't, by contract, started their distributions to the equity tranches yet. That's all.

And the typical new CLO, the vehicle doesn't distribute. It doesn't make its first distribution for two quarters. And we've bought a bunch of primaries relatively recently, and so a bunch of those don't just sort of come online till the third quarter as opposed to the second quarter. That's what John was saying. That's very, very different than saying that they're not cash flowing, which is not the case at all.

Yes, that's -- to clarify what I was asking, is at what point do you think the cash flows to equities would occur, and what kind of effective yield do you think you would get on that?

Well, I mean, we're buying CLO equity in the market right now, primary and secondary markets, with the objective of obtaining teens returns, low teens, mid-teens returns, typically highly dependent upon the assumptions that we're basing those models on. Some reasonable percentage of our CLO holdings, the $73.3 million of holdings that hadn't distributed cash to us, to the equity in the second quarter should begin to distribute cash in the third quarter.

Okay. And then, final question is the distressed investment, can you talk about has there been any progress in restructuring the capital structure there, or it's just generally progress in healing that situation?

Sure, John. I mean, we're obviously under non-disclosure with respect to our direct corporate investments, so there's not a great deal we can say about that, but there'll be some disclosure in the Q.

Okay, thanks very much, guys.

Sure.

Thanks, John.

Greg Mason of KBW.

Great, thank you. Good morning, gentlemen. I wanted to talk a little bit more on the dividend coverage. I appreciate the comments that you expect to cover it from taxable income for the full year. Is there a meaningful difference in the GAAP versus the tax treatment of the CLO income? Essentially the bottom line of my question is wondering if and when we're going to see kind of core GAAP net operating income covering the $0.29 dividend.

Greg, this is Patrick. With regard to the proximity of the ultimate tax basis of net investment income versus the way we record income currently, there always will be a delta. There'll be some differential, but our belief is that the cash -- effectively the cash -- dividend-style accounting. When we receive a dividend on record [and] we record it, we believe that's the best proxy for the ultimate tax basis net investment income they're required to recognize and distribute.

As we've said before on these calls, the problem -- the issue with these investments is the so-called [PFIC] statement process is very, very long in coming, and we're currently in receipt of most of the PFIC statements we're required to receive. We are in the process of finalizing our tax return, won't be done for another six weeks, or roughly five weeks from now. And at that point, we'll get a very clear idea of the impact of each individual PFIC and, in terms of pass-through, what it means to us in our net investment income.

And obviously, we do internally have a feel for the third quarter and the fourth quarter, but when we see the results of the PFIC statements, we'll get a much clearer picture of where we think the year's going to wind up. And as you know, if we think there's going to be a return on capital, we'll be required to disclose that with the dividend notices to the best of our knowledge at the time that we make those distributions.

So, we think that our current method of accounting is the best proxy for the ultimate tax basis accounting that we're required to do for distribution purposes and recording purposes, and that's the best we can tell you right now, frankly.

Okay, so, to put that in layman's terms, it sounds like there shouldn't be a ton of difference between the GAAP method you're using and the tax. So, would that imply that you ultimately do expect the NOI, the GAAP NOI core to cover the $0.29 dividend?

I don't think there's any implication one way or the other to be drawn from Patrick's comments.

Okay. And then, can you talk a little bit about your appetite for raising additional equity capital, given that your balance of what you're seeing in the market versus where the stock price is and the current yield on the stock?

Well, we're I think adhering to the same philosophy that we've embraced historically, which is that we seek to raise additional capital when we feel we can put it to productive use and generate a positive return on a risk-adjusted basis to the common equity. We don't have any immediate plans to raise a substantial amount of additional capital. We've raised a fair amount of capital over the last 12 months. We've, I think, deployed it well. We're happy with the current state of the portfolio. So, it's an opportunistic approach, I think, more than anything else.

Great. Thank you, guys.

Thank you very much.

Chris York of JMP [Security].

Good morning, guys. Most of my questions on the dividend and additional equities have been asked, so I guess I'll just switch to some housekeeping items. What were non-qualified assets as a percentage of the investment portfolio?

I don't think it's going to be radically different from the prior quarter. It will be in the Q. But, it wouldn't have moved too very much from last quarter, I don't believe.

Okay. And then, it looks like G&A jumped somewhat meaningfully in the quarter. Could you provide a little insight on that line item?

On G&A, that holds a lot of various expenses, some of which are very ordinary, Director's fees, custodian fees, accounting fees, transfer agent fees. The significant uptake this year goes to printing and to proxy solicitation. You may have seen, if you followed our filings, that there were issues or anomalies around the voting requirements, and we reconvened our Annual Meeting twice, in addition to the initial holding of the meeting, before we could get enough votes in. So, there was a substantial expense, unfortunately, incurred.

The only unusual expense in there really was proxy and printing, proxy solicitation and printing. But, that line item holds a whole host of other market data fees, and that was significant relative to -- [shouldn't have been an] expense to us, as I said, Director fees, transfer agent, custodian fees. And even some of those, frankly, are increasing as we increase the size of the Company. Custodian fees are up. Even accounting fees are up because we have two CLOs which are effectively accounted for as separate funds, if you will, within the consolidated group. So, there's some increment over the past couple of years, certainly, but as I said, the big outlier is the proxy solicitation.

Sure. Okay, that's helpful. I guess I'll just follow up real quickly here on equity with growth as our context. How are you guys thinking about the portfolio and your views for growth over the next couple quarters?

Well, I'd give the same answer, I think, Chris, that I gave to the prior question, the prior questioner's question, which is our views on raising equity capital, which again have always been I think opportunistic and have changed according to both the opportunity set that we see in the market on any given moment, and also the cost of capital that we're incurring by raising equity. So, it's an ongoing discussion. It's an ongoing analysis. And I don't think our thinking or our philosophy on the issue has really changed meaningfully over the last several years.

Sure, it makes sense. All right, that's it for me. Thanks.

All right, Chris. Thanks very much.

Boris Pialloux of National Securities.

Hi, thanks for taking my question. Just a brief question about the lending environment. Do you think the competition of all the [level] (inaudible)? I assume that they have raised over $40 billion this year, [so] if that doesn't have an impact on the CLOs or direct lending?

Yes, it does. The market, Boris, as you say has certainly become more competitive. There are more assets chasing, admittedly, probably more details, but the ratio I don't think is particularly favorable on a trending basis.

That said, we tend to focus more on middle market transactions, smaller, broadly syndicated deals, and middle market transactions. And we try to pick our spots and pick good deals that make sense on a risk-adjusted basis.

That said, from a macro perspective, the absolute number of dollars looking to deploy themselves within these markets represents an ongoing competitive challenge that we have to be sensitive too.

Okay, thank you.

Thank you, Boris, very much.

That concludes our question and answer session. I'd like to turn the conference back over to our leaders for any final remarks.

We'd just like to thank everybody very much for their ongoing interest in TICC Capital Corp, and for your interest in this call. Thank you all very much. We appreciate it.

Thank you very much for your time, gentlemen, and this concludes today's conference. We thank you all for attending today's presentation. You may now disconnect your lines.