Oxford Square Capital Corp (OXSQ) 2014 Q1 法說會逐字稿

Good morning and welcome to the TICC Capital first quarter 2014 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, CEO. Please go ahead.

Thank you. Good morning and welcome everyone to the TICC Capital Corp. first quarter 2014 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. 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 a 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 the presentation back to Jonathan.

Thanks Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.29 per share for the first quarter of 2014. We reported total investment income of approximately $28.7 million for the quarter, representing a decrease of approximately $1.8 million from the fourth quarter. That decrease was largely due to lower interest income and some larger inaugural payments from our CLO equity investments during the fourth quarter.

Our first-quarter GAAP net investment income was approximately $17.8 million, or $0.33 per share, which includes the impact of capital gains incentive fee accrual reversal of approximately $2.2 million. Excluding the impact of that fee accrual reversal, our core net investment income was approximately $15.6 million, or $0.29 per share.

We also reported a net unrealized depreciation of approximately $3.6 million and net realized capital losses of approximately $900,000 for the quarter. As a result of those unrealized and realized gains and losses, we had a net increase in net assets resulting from operation of approximately $13.3 million for the quarter, or approximately $0.24 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 submitted at 2.2 at the end of the first quarter 2014 compared to 2.1 at the end of the fourth quarter 2013. At March 31, 2014, our net asset value per share stood at $9.78 compared with a net asset value at the end of the fourth quarter of $9.85.

During the fourth -- first quarter of 2014, we made additional investments totaling approximately $87 million, with the additional investments consisted of approximately $58.6 million in corporate securities and $28.4 million in CLO equity. For the first quarter, we received proceeds of approximately $55.4 million from repayments, sales, and amortization payments on our debt investments.

For the quarter ending March 31, 2014, TICC recorded income from our investment portfolio as follows: approximately $12.5 million from our syndicated and bilateral investments; approximately $15.1 million from our CLO equity investments; approximately $500,000 from our CLO debt investments; and approximately $600,000 from all other income. At March 31, 2014 the weighted average yield of our investment-producing investments on a cost basis was approximately 12.9% compared with 13.2% at December 31, 2013.

I'd note that at March 31, we had one investment on non-accrual status with a fair value of $3.5 million. The Company's Board of Directors has declared a distribution of $0.29 per share for the second quarter this year payable on June 30, 2014, to stockholders of record as of June 16. Additional information about TICC's first quarter performance will be posted to our website at www.ticc.com. And with that, operator, we're happy to now poll for questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Good morning, Jonathan and Saul.

Good morning, Mickey.

Just a couple questions. Previously as the CLO 1.0 positions were approaching the end of their reinvestment period, you rotated into CLO 2.0. So now we're not there yet but we're getting closer to the day where CLO 2.0 will end its reinvestment period. So I was curious what your thoughts are as to what you'll do with those positions as you get closer.

Sure. Our general view at this moment is we are focusing on rotating out of older vintage CLO equity, whether -- now, the 1.0, 2.0 line of demarcation is a clear and easy one because the credit prices essentially afforded us a clear distinction between pre-and post-credit prices transactions. There isn't quite such a clear line of distinction or demarcation in the context of 2.0 CLO transactions.

However, that agent of these transactions and are viewed as to when might be an appropriate moment to rotate out of certain 2.0 positions is consistent with that theme. But we have historically looked, as you said, to take advantage of marked opportunities to rotate out of older vintage paper in the CLO market and into new primary transactions and that has continued.

Mickey, it may or may not be such a thing as CLO 3.0. Nobody uses that terminology yet. It may come online at some future point, but whether they are officially called 3.0 or not, there obviously hundreds of millions of billions of dollars of new CLO issuance this year and for the foreseeable future and we'll continue to stand out at the market.

Okay. I understand.

And my next question is more straightforward. I'm assuming the non-accrual is Nextag? Is that correct?

Correct, Mickey. Yes.

And can you give us any update on its outlook?

We can't, Mickey. No.

Okay. Thanks for your time this morning.

Jon Hecht, Stephens.

Good morning. Thanks for taking my questions.

Just within the CLO structures, can you remind us what the composition of investments you're making in this -- excuse me, that are in these structures, are these floating-rate or fixed rate investments?

They are floating-rate investments, John.

Okay. And then also remind me, are these fully distributing to equity and all of the equals right now?

They are. Yes.

Okay. Great. Thanks very much guys.

Sure. Thank you John very much.

And just by way -- I'm sorry, operator. Just by way of clarification, Mr. Hecht's question referred to the lack of -- the absence of any blockage in the operations of the CLO structure by virtue of having failed some indenture test that would result in the diversion of interest away from the equity tranche to repay the debt from the top of the capital stack down. And we are not experiencing any such diversion or blockage at this moment.

So just by way of expansion and clarification of Mr. Hecht's question.

Ryan Lynch, KBW.

Thank you for taking my questions, guys.

First one, I think you guys probably had about a $2 million to $2.5 million write-down in Nextag this quarter but you guys had about $4.5 million of total portfolio depreciation. Were there any large, other large write-downs in other portfolio companies or was it kind of spread across the entire portfolio and just small markdowns?

I wouldn't characterize anything as being -- anything within the remainder of that basket that you referenced as being of an unusual magnitude or something that's subject of particular focus by us at the moment.

Okay. And then over the last years, we've seen a lot of BDCs start gaining the CLO equity market purchasing a lot of investments. Has that affected -- that increased competition, has that affected the pricing you guys are seeing on any CLO equity investments? Or is the market just big enough where other BDC competitors are not really affecting the pricing or anything?

Well, it's not just BDCs. This is a market of buyers and sellers --

Right. The answer to your specific question is yes. That the inclusion of additional BDC and non-BDC participants into the CLO equity market has resulted in increased competition and all else are equal, higher prices.

The corollary to that though is that we believe the market is large enough that we are still being provided with interesting and appropriate opportunities.

What kind of yields are you guys hope to get on these CLO equities?

It really varies widely as a function of the structure of that particular transaction, the nature of the indenture, the nature of the underlying collateral, the assumptions that we or the market are making about forward three-month (inaudible). the assumptions that we in the market are making about default rates and recovery rates.

We have historically generated what we considered to be a very good returns in the CLO strategy. We hope and expect that strong returns will continue for us in this strategy.

But we haven't a numerator, a specific yield target for th strategy broadly because each deal is different, and because we negotiate price based on a wide array of factors, most of which, or many of which put back to the quantum of risk we perceive we're taking in any particular deal.

So I understand. Each deal is different but in general, are we thinking about 10% yields? 13% yields? 15% yields? in that kind of area?

Each of those would be acceptable depending on the level of risk that we perceive to be taking -- we're taking.

Okay.

And then one more. You guys have about $75 million of cash on your balance sheet. What do you think is the timeline before you guys would be to deploy substantially all of that in investments?

Right. That was the cash position as of March 31.

It would certainly be reasonable to expect that we're putting cash to work on a weekly basis, on a real-time basis essentially and that is a higher level of cash than we look to maintain on a run rate basis. So it would be reasonable to assume that we're working to put cash to work and that was the number as of March 31.

Okay. Thanks.

Chris York, JMP Securities.

Good morning, guys. Thanks for taking my questions.

Did your internal expectations about the credit quality of an investment change in Q1? It appears that the weighted average internal credit rating of grade three investments increased during the quarter.

The answer to your question is yes. There were I believe two changes, both of which went from 2 to 3, nothing like to a 4 or a 5. And the magnitude of the overall change is not something we would consider to be particularly material.

Got it. That's helpful. And then lastly for me, do any of your CLO 1.0 equity investments possess collateral exposure to energy future holdings?

The answer is yes. They do.

And then is there -- how should we think about the effect or the expectation and the changes in distribution for any of your CLO equity investments there?

No. The position that we were just referencing has already been priced into our models and into the fair value calculations that are evidenced on our March 31 disclosures.

Got it. Okay. That's it for me. Thanks.

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

Sorry. I think there might be one more question, operator.

Jonathan Bock, Wells Fargo.

Good morning. I apologize and thank you for taking my question at the last minute.

So just getting back, I was interested in Chris' question as it relates to a TXU. You mentioned it's reflected in the fair value.

Does that default in any way, shape or form reflect the cash flow that will come off your CLO 1.0 investments where that credit is in that portfolio?

Well, the answer is that it's already been incorporated into our expectation for forward cash flows and into the fair value assessment that was done at March 31. So we don't see any material change relative to those two elements.

And don't forget that the typical, without commenting on any one CLO in particular, but the typical one has -- 100-plus to 200 different positions. So even if it's contained in there, it's just going to be a very small position and, at least thus far, has not materially affected anything that we see.

No, that's fair, and then maybe diving into the CLO specifics a little bit.

Jonathan, Saul, give us a sense in the roughly $285 million, just looking here at your CLO portfolio, something that you owned. Of the collateral, how much of that collateral contains a LIBOR floor?

The substantial majority, Jonathan, probably in excess of -- in a range of maybe 80% or 90% order of magnitude.

Got it. So let's walk through a situation where LIBOR goes to 100 basis points and stays there. What does that look like for both your equity value and the cash flow distributions off the CLO equity securities that you own?

Both would diminish. I think we've attempted to quantify the magnitude of that diminishment in our public disclosure documents. We've included historically that it will continued to include calculations around increases in LIBOR and how those increases would affect our cash flows.

Makes sense but I'm also -- Jonathan, understanding that if you were buying something at a set IRR of 13%, et cetera, and that IRR goes to 9%, people will no longer be willing to pay par for the asset. So a third of the book has more mark-to-market risk and if you're running at 0.8 or 0.85 times leverage, how should people typically think about that?

Now granted, you've been very conservative in your funding and I'm not trying to answer my own question. I'm just trying to get to understand what happens in the event of the CLO securities end up going down substantially in the event of a LIBOR rise?

It's a very good question, Jonathan. And the answer, I think, is that we would suffer a diminishment in the values of those equity positions commensurate or at least related to the diminishments in the cash flows that those investments were producing, exactly as you suggest.

But we haven't quantified the (inaudible) because we don't know?

I think that's a calculation that's very difficult to do. We have not undertaken to try to estimate how the market would value a series of cash flows in an environment that was very different from the environment we're operating in today, meaning much higher LIBOR rate context.

Got it. Then now with the stock trading where it is in line with, of course, the group, which has seen some substantial outflows in the last two weeks, walk us through the investment -- I'd say, your leverage level of comfort in the current environment in light of the fact that this stock is below book value. And how one should look at forward CLO equity investment in the future considering your non-qualified asset bucket is substantially utilized?

I'm sorry. Jonathan, could you just rephrase the question? I'm not exactly sure what you --

Will you plan on investing in CLO equity securities today in light of the fact that the stock is below book value?

We don't have much room to anyway.

Right. I mean, as you say, the 30% basket is essentially full. So at the margin, we don't have much ability to increase our exposure to the asset class.

And so the only CLO traits that we'll see will be moving from 1.0 to 2.0 securities?

Or for more mature vintage 2.0 into more recently issued or primary 2.0 transactions.

I guess the one thing we're trying to understand is that with recently issued CLOs, we're looking at low LIBOR, historic lows in credit quality and may be what some people believe to be relatively [frothy] time in credit. Can you walk us through the relative value proposition of an 8 or 10 times leverage security in this environment that's exposed to interest rate risk in the event LIBOR rises?

Well, I think that the deals and the structure is that we're investing in right now, by virtue of their diversifications, by virtue of the cost of capital that they enjoy the benefit of, by virtue of a very low default and high recovery rate environment that we're operating in currently, and by the optionality afforded these vehicles in the event of a less benign credit environment.

If a credit environment where we see a widening in corporate spreads, all of those things together combined to make us believe that this is -- this remains an attractive risk adjusted opportunity for us.

Fair enough. Thank you so much.

That will conclude the question-and-answer session. Please go ahead with any closing remarks.

I'd like to thank everyone for their interest and for their participation. We look forward to speaking to everybody during the quarter and at the next call. Thank you all very much.

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