Oxford Square Capital Corp (OXSQ) 2013 Q3 法說會逐字稿

Good morning and welcome to the TICC Capital Corp conference call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation there will be an opportunity to ask questions. (Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Jonathan Cohen. Please go ahead.

Thank you. Good morning. Welcome everyone to the TICC Capital Corp third quarter 2013 earnings conference call.

I am 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 with a replay of the conference to be available for 30 days. Replay information is included in our press release released earlier this morning.

Please note that this call is the property of TICC Capital Corp. Any authorized 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 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 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 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 over to Jonathan.

Thanks, Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.28 per share for the third quarter of 2013. We reported total investment income of approximately $27.4 million for the quarter, representing an increase of approximately $2.0 million over the second quarter.

That increase was largely due to greater interest income and distributions from our CLO equity investments during the third quarter.

Our third quarter net investment income was approximately $12.2 million or $0.23 per share which includes the impact of the capital gains incentive fee accrual of approximately $2.3 million. Excluding the impact of that fee accrual, our core net investment income was approximately $14.5 million or $0.28 per share. We also recorded net unrealized appreciation of approximately $12.7 million and net realized capital losses of approximately $1.3 million for the quarter.

As a result of those unrealized and realized gains and losses, we had a net increase in net assets resulting from operations of approximately $23.6 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 2.1 at the end of the third quarter of 2013 compared to 2.2 at the end of the second quarter of 2013. By way of reminder, the lower the number, the higher the credit quality.

At September 30, 2013 net asset value per share stood at $9.90 compared with the net asset value at the end of the second quarter of $9.75. During the third quarter of 2013 we made additional investments of approximately $85 million. Those additional investments consisted of approximately $62.1 million in corporate securities, $17.2 million in CLO equity, and $5.7 million in CLO debt. It is worth noting that for the nine months ended September 30, 2013 we invested approximately $492.3 million consisting of $351.1 million in corporate securities, $124.1 million in CLO equity, and $17.1 million in CLO debt.

For the third quarter we received proceeds of approximately $61.9 million from repayments, sales, and amortization payments on our debt securities.

For the quarter ending September 30, 2013, TICC recorded earned income from our investment portfolio as follows -- approximately $13.7 million from our syndicated and bilateral investments, approximately $12.2 million from our CLO equity investments, approximately $700,000 from our CLO debt investments and approximately $800,000 from all other income.

At September 30, 2013 the weighted average yield of our debt investments on a cost basis was approximately 8.7% compared with 8.5% at June 30, 2013 and I note that as of September 30, we had no investments on non-accrual status.

Our Board of Directors has declared a distribution of $0.29 per share for the fourth quarter of this year, payable on December 31, 2013 to Shareholders of Record as of December 17.

Additional information about our third quarter performance will be posted to our website at www.TICC.com.

With that, Operator, we are happy to open up the call for any questions.

We will now begin the question and answer session. (Operator Instructions)

Our first question comes from Kyle Joseph of Stephens. Please go ahead.

Jonathan, when you say that the third quarter, we have talked in the past about the contribution of CLO equities to earnings and how there is a little bit of delay from investment to earnings there. Would you say the third quarter is reflective of a bit of a run rate now given how much you have deployed into that asset class?

I think we have seen an improvement third quarter over second quarter in terms of the CLO equities positions that we hold. Generating income for us, I don't think that we have seen the full magnitude of that manifest itself yet in our financial performance.

So you had no investments on non-accrual. I remember a few quarters ago you actually purchased an investment that was on non-accrual. Can you explain, did you sell that or did you restructure it? Can you explain what happened there?

We didn't sell it. We didn't restructure it. The company has performed better and as a result, it came off non-accrual status. It is now on accrual.

Okay, even better. And then can you talk a little bit about the deal flow trends throughout the quarter? It was mostly investment activity towards the end and was the deal flow accelerating into the fourth quarter and what are your outlooks for deal flow in the fourth quarter?

I think our outlook for deal flow into the fourth quarter and into 2014 is strong. We were capital constrained in the third quarter in terms of available capital to deploy I think to a much greater extent than we were opportunity limited so the pace of activity in the third quarter I think was dictated by available capital as opposed to those opportunities that were available to us.

Okay, and then just a nitty question here but on your repayments, were those just on -- that you disclosed in the press release -- were those just debt investments or did that include any CLO investments as well?

It included both things.

Okay, and then so it looked like the yield on the debt investments expanded a bit in the quarter. Can you give us some color on that? Was that a result of a little interest rate spike in the second quarter moving into the third quarter or are you targeting a different asset class? What is going on there?

I don't think, Kyle, it is related to anything systemic in the portfolio. It was really just a function of the normal ebbs and flows of our investment activity.

Understood. Great, thanks a lot for answering my questions.

The next question comes from Greg Mason from KBW. Please go ahead.

Can you talk a little bit about new CLO equities and what types of yields you are seeing on those investment opportunities today on six, nine, 12 months ago?

Greg, the CLO activity that we have engaged in tends to fall across a fairly wide spectrum so I wouldn't say that the deal flow that we have seen either in the secondary market or in the primary market for CLO transactions are coalescing tightly around a particular data point.

We are generally targeting returns in the low teens, low teens to mid-teens but those returns are highly assumption driven and they are also highly variable transaction to transaction.

Would you say that in general, the equity returns have been coming down meaningfully over the last 12 months or has it been relatively stable for CLO equity?

I would say they have been trending down but I wouldn't say they have gapped down in a meaningful way and again, I would caveat that statement by reiterating what I said a moment ago which is that there is a fairly wide dispersion pattern for these transactions.

Okay great, and then could you give us any additional color on the significant appreciation in investments this quarter? Was that coming from the CLO book, any particular debt investments? Any color there?

Sure, we had some markups in the CLO portfolio certainly and the significant distressed asset or asset that we held on non-accrual status which has seen improved financial performance and as result, is now on accrual status was markup as well, in addition to the normal markups and markdowns in any particular quarter.

Could you give us the magnitude of that one investment, where that went to on a fair value basis this quarter?

I think it was marked last quarter, Patrick, at --

In the 35 range, it is in the 70 range now so 35, from 35 to 72 for that one position.

Great, we will be able to figure that out. Alright, appreciate it, guys. Thank you.

The next question comes from Mickey Schleien of Ladenburg. Please go ahead.

I wanted to follow up on the question. We are all sort of keyed in on the CLO market here but my question is the following -- we have seen at the more liquid end of the middle market, terms have changed substantially, more leverage in the deals, spreads have compressed. It is generally -- it is favorable to issuers, not so favorable to investors so how is that affecting your appetite in the primary market for CLOs on a go forward basis?

It is diminishing it.

So are you looking at, this current quarter are you going to take advantage and maybe realize some gains in this kind of a market, in the CLO?

I think there are two offsets to the dynamic you have just described. The first is the cost of capital on the liability side of our balance sheet, and the second is the corporate credit market environment broadly including corporate default rates which are very low at present and are a natural offset to the lower corporate spreads that we are seeing in the market.

On any given day we are looking to sell positions if that is desirable for us and we are looking to buy positions if that is desirable for us. I don't think we are viewing the syndicated corporate loan market broadly or the middle market portion of the syndicated loan market as being generally overpriced right now although pricing has certainly increased and corporate spreads have diminished just as you say.

The next question comes from Jon Bock with Wells Fargo. Please go ahead.

Just as it gets to the CLO investment portion and it was great to have Kyle, Greg, Mickey, everyone dialing in on this -- where have asset spreads gone in your CLO collateral, L plus what to L plus what over the past, let's say 12 months?

I don't think we have disclosed asset spreads within the various CLO portfolios either on an individual basis, Jon, or on a combined basis. Spreads have trended down certainly over the course of the last year. That said again, the cost of capital for new CLO vehicles has been trending down over a long period of time now.

Understood so for new deals, that makes sense but for existing deals currently on balance sheet but not necessarily so, question would be where are you as it relates to the call period for the CLO equity that you do have and what type of ability do you have to effect a call outcome?

It depends on the individual deal. It depends on the provisions of the deal and it depends on our position in the equity, whether our equity position represents a majority stake or not. That is different really deal to deal but your larger point I think is a completely valid one which is that as corporate spreads diminish and have diminished, all things held equal, an existing CLO vehicle will become less profitable for the equity. That is certainly a true statement.

And I guess just kind of maybe getting back, where would you generalize call protection, to what year in the CLO portfolio today? Are they out of call? Could they be called today or do you have an additional --?

On a weighted average basis I would say we are a few years, two plus or minus years, away from the end of their respective reinvestment periods but again, we have deals that are out of reinvestment. We have deals that are brand new that have many years of reinvestment in front of them. We have actively traded this portfolio on occasion so we have traded out of deals, in many cases 1.0 transactions that are out of reinvestment or are going to soon be out of reinvestment and to deals with longer maturities.

So again, it is hard to generalize and say that we are a specific number of days or years away from being upside of reinvestment, a, because of just the disparity of the vintages of our portfolio and b, because we do trade the portfolio.

Sure, and then the amount of subordinate notes that you own, let's say, ahead of specific equities, do you own subordinate notes ahead of potential equity that has or will be coming off of a call protection in the next 12 months?

Jon, when you say subordinated notes, are you talking about what we classify in the schedule of investments as sub-notes with respect to the equity positions?

Actually, yes, that is a good clarification. This would be a security. Let's just call it a B-note that would be ahead of the CLO equity or subordinate certificates. Let's just call it ahead of the bottom floor of the CLO structure. I'm curious as to your exposure in those loans that sit above the equity and do have the potential to generate meaningful gains in the event that the CLO is called.

Absolutely. I mean, yes. The answer to your question is yes. We hold positions in Single-B notes, in Double-B notes that are senior to equity tranches within various CLO vehicles that have the potential to economically benefit in the event of an early call, no question about that.

Jon, just so you know, just for the nomenclature, very often you will see what we loosely refer to as the equity are actually technically entitled sub, subordinated notes. Sometimes it is called preferred stock, sometimes it is called subordinated notes, just so you understand the terminology.

Appreciate that, and then I guess the only other question I have is how would you characterize the second lien buckets, broadly, in the CLOs that you hold?

They have shrunk as we have transitioned from 1.0 CLO transactions into 2.0. I don't think we are seeing a sea change recently in terms of either the requirements for OC tests or WARF scores or second lien baskets or Triple-C baskets. We are in a reasonably stable market environment, I think, with respect to those various elements.

So some would argue that the second lien basket is in excess of 50% or maybe around there. Is that number too high or too low?

That is way too high.

So 30%?

Again, it depends on which one you are talking about.

We will go current, when a lot of the deals were actually transacted post-credit crisis so we will do CLO 2.0. Where do you see the second lien baskets today?

A representative figure might be around 10%, again with variability around that figure.

Good to know, okay, great. Thank you very much, guys.

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

We would like to thank everyone for their interest and their participation in this call. We look forward to talking to you intra-quarter and at the end of the fourth calendar quarter. Thanks very much everyone.

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