Oxford Square Capital Corp (OXSQ) 2013 Q4 法說會逐字稿

Good morning and welcome to the TICC Capital Corp fourth quarter 2013 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. (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 and welcome everyone to the TICC Capital Corp fourth quarter 2013 earnings conference call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer, and Patrick Conroy, our Chief Financial Officer. Patrick, 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 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 so by law. To obtain copies of our latest SEC filings, please visit our website at www.TICC.com. With that, I'll turn it back to Jonathan.

Thanks, Patrick. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.30 per share for the fourth quarter of 2013. We reported total investment income of approximately $30.5 million for the quarter, representing an increase of approximately $3 million over the third quarter of 2013. That increase was largely due to greater interest income and distributions from our CLO equity investments during the fourth quarter.

Our fourth quarter net investment income was approximately $16.9 million, or $0.32 per share, which includes the impact of a capital gains incentive fee accrual reversal of approximately $700,000. Excluding the impact of that fee accrual reversal, our core net investment income was approximately $16.2 million, or $0.30 per share.

We also recorded net unrealized depreciation of approximately $3.2 million and net realized capital losses of approximately $700,000 for the quarter. As a result of our net investment income and our unrealized and realized net losses, we had a net increase in net assets resulting from operations of approximately $13.1 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 fourth quarter 2013, which remains the same when compared with the credit rating at the end of the third quarter of 2013. At December 31, 2013, net asset value per share stood at $9.85 compared with the net asset value at the end of the third quarter of $9.90.

During the fourth quarter of 2013, we made additional investments of approximately $85.2 million. The additional investments consisted of approximately $46 million in corporate loans, $35.3 million in CLO equity, and $3.9 million in CLO debt. It is worth noting that, for the year ended December 31, 2013, we invested approximately $577.5 million, consisting of $397.2 million in corporate loans, $159.4 million in CLO equity and $20.9 million in CLO debt.

For the fourth quarter, we received proceeds of approximately $92.2 million from repayments, sales, and amortization payments on our debt investments. For the quarter ended December 31, 2013, TICC recorded investment income from our portfolio as follows: approximately $13.5 million from our syndicated and bilateral investments, approximately $15.6 million from our CLO equity investments, approximately $600,000 from our CLO debt investments, and approximately $800,000 from all other sources.

At December 31, 2013, the weighted average yield of our debt investments on a cost basis was approximately 8.7%, which remained the same as the weighted average yield at September 30, 2013. At December 31, 2013, we held one investment on non-accrual status. For the year ended December 31, 2013, we reported core net investment income of approximately $1.07 per share.

We currently anticipate that our 2013 dividend distributions will be fully covered by our earnings and profits and therefore, there is not expected to be a tax return of capital. The Company's Board of Directors has declared a distribution of $0.29 per share for the first quarter of this year, payable on March 31, 2014 to stockholders of record as of March 25.

Additional information about our year-end performance, I believe, is now currently posted to our website at www.TICC.com. With that, operator, we're happy to turn the call over for any questions.

(Operator Instructions) Kyle Joseph, Stephens.

I was hoping if you could discuss which investment you added to non-accrual and tell us what's going on with that Company?

Sure. We had a single investment. It is a syndicated position that's has gone on non-accrual by virtue of a diminished operating performance over the last several months. I don't believe we have yet announced the name, released the name, of that particular Company, although that may be in the K.

Got it. Thank you. The fourth quarter CLO investment income, is that a good run rate going forward or do you have any CLO equity positions that aren't contributing yet?

We have, yes. I believe all of the positions on our balance sheet, as of December 31, contributed to earnings and cash income with respect to the December quarter. I believe that is correct.

There may be one exception to that. There may actually you be a single position that was not the case for with respect to December 31, but as these positions are aging and in the primary market as we exit the first six months of holding, obviously we're getting the benefit of those cash flows with respect to the TICC P&L.

In terms of the run rate, Kyle, we don't, as you know, provide go-forward projections, but I will say that the cash flows associated with individual CLO equity holdings have been, for us, fairly stable recently.

All right. Can you talk about your outlook for 2014 for the CLO market?

I think we've got opportunities in the CLO market, both in the primary market where we've been principally active recently, and also in the secondary market. What we saw, certainly in the last credit cycle, was that as the primary market slowed down, the opportunity set in the secondary market became more pronounced.

If we do see a market slowdown, although we're not necessarily anticipating a meaningful slowdown from these levels, the new issuance calendar, our hope and expectation would be that the secondary market could provide us some interesting opportunities.

Great. Thanks. Can you just talk about your thoughts on repayment activity in 2014? It was somewhat elevated in 2013 for pretty much everyone, but do you expect that to continue going forward, or your thoughts there?

More or less. We don't have a specific point estimate with respect to velocity or turnover or repayment activity. We are being fairly circumspect about the prices that we pay for assets because of the general expectation, I think, for continued high levels of repayment activity and continued high levels of refinancing activity within the credit markets broadly. That is a reasonable backdrop against our investing activity at the moment.

Great. Thanks so much for answering my questions and congratulations on a good quarter.

Ryan Lynch, KBW.

Can you guys just provide some color on the current returns you guys are seeing in new issued or secondary market purchases of CLO equity?

There's an enormous disparity within the CLO equity market, both the secondary market and the primary market, by virtue of the fact that, as you know, new issue deals tend to be priced within a fairly broad range. Obviously, our return expectation is very different if we're paying [90] than if we're paying [82] for a particular piece of equity.

Also, the return expectations for new issue CLO equity tend to be enormously driven by assumptions. The default rate assumptions you're using, the recovery rate assumptions you're using. I will say that the cash returns we've generated off of the CLO equity strategy continues to meet or exceed our expectations.

Okay. Can you give us an update on RBS holdings? I know that had a nice write-up last quarter. Can you give any update on how that business is performing?

I believe we held, in this most recent period, the value of that investment relatively flat. I don't think there was a meaningful or a very substantial movement up or down. I can't speak directly to the operating performance of the business by virtue of the fact that it's a private company and we're under a nondisclosure agreement. But from a valuation perspective, that value was reasonably steady after the large write-up that you noted.

Okay. On the new originations you guys made this quarter, can you give a breakdown of what percentage of those were in CLO equity and debt investments versus other just debt investments like middle market or broadly syndicated debt investments?

Sure. In the quarter ending December 31, 2013, total CLO activity, which was equity-focused, represented face value purchases of $42.7 million and a cash outlay of $39.2 million, meaning that we purchased at about 91.6% of par. On the loan side, we purchased $46.5 million of face value loans at a purchase price of approximately $46 million, meaning that we purchased it just a little under 99% of par.

Okay. Thanks.

Chris York, JMP Securities.

What recent behavior did you see in both or either the primary or secondary market as a response to the Volcker Rule?

I don't think we've seen a meaningful shift in the CLO primary market or really the secondary market, yet. I think those shifts or those changes are, at the moment, probably still more prospective.

What kind of shifts would you expect maybe potentially in the latter part of this year?

I think the most obvious one that people are talking about is the diminishment or the elimination of bond bucket provisions in various CLO new issue structures.

Okay. Tangential with that, I've heard of a couple banks that have started placing CLO investments as available for sale and are shopping their portfolios in the market. Could any of these portfolios be of interest to you in the secondary market?

Yes, they could.

Great. Thanks, Jonathan.

Rob Goszkowski, Wells Fargo Securities.

Just had a few questions about your CLO positions, following up on what some other people said and some of the underlying collateral. What percentage of the collateral in your CLO investments carry a LIBOR floor? What impact would this have on the weighted average rates you are receiving on your CLO collateral of 26% today?

Certainly a meaningful percentage of the underlying collateral within the various CLO structures where we hold equity maintain the provision for a LIBOR floor. All else held equal, meaning that in the absence of a widening of corporate spreads, concurrent with an increase in three-month LIBOR, we would necessarily expect a diminishment in our cash returns on the basis of an increase in LIBOR.

Have you guys done any work on the sensitivity to rising rates within the portfolio; like for every 100 basis points is there somewhere where that could be provided or has there been -- ?

We have models that we run internally. They're highly assumption-dependent. Again, they are heavily influenced by other assumptions outside of an increase in LIBOR. An increase in LIBOR on its own is relatively straightforward to model.

But if you're assuming changes in corporate spreads and risk premiums and corporate costs of capital, along with other variables such as an increase potentially in default rates or diminishment in recovery rates, concombinant with an increase in three-month LIBOR, the modeling, as you can imagine, gets more complex.

Looking at the trustee reports you guys have provided on your CLOs, it looks like one of the CLOs is out of line on the diversification limits for CAA collateral. Are there any implications for this being out of line?

No immediate implications. The CCC test is a maintain or improve parameter, meaning you're only required to the extent that it trips to not make any additional investments that would make the CCC basket bigger.

Okay. That's really helpful. Thanks and congratulations on the quarter.

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

No additional remarks but just to say thank you all very much. We appreciate your interest in TICC Capital and we look forward to talking to you at the next quarterly call. Thanks very much.

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