Oxford Square Capital Corp (OXSQ) 2014 Q3 法說會逐字稿

Good morning and welcome to the TICC Capital third quarter 2014 earnings conference call. (Operator Instructions). Please also note that 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. third quarter 2014 earnings conference call. I'm 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, will your 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 would also like to draw 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 with the SEC for important factors that could cause actual results to differ materially from these projections. We do not undertake or 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 will turn the call 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 2014. We reported total investment income of approximately $30.2 million for the quarter compared with approximately $29.9 million for the second quarter of 2014, and approximately $27.4 million for the third quarter of 2013. For the quarter ended September 30, 2014 TICC reported income from our investment portfolio as follows; approximately $13.1 million from our debt investments, approximately $15.2 million from our CLO equity investments and approximately $1.9 million from all other income. Our third quarter GAAP net investment income was approximately $17.5 million or $0.29 per share which (inaudible -- technical difficulty) capital gains incentive fee accrual reversal of approximately $838,000. Excluding the impact of that fee accrual reversal, our core net investment income was approximately $16.7 million or $0.28 per share.

We also recorded net realized capital losses of approximately $3.5 million and net realized depreciation of approximately $15.3 million for the quarter as we saw an increase in volatility in the debt and CLO markets in which we participate. As a result of those unrealized and realized losses we had a net decrease in net assets resulting from operations of approximately $1.3 million for the quarter.

At the same time we believe that the credit quality of our portfolio remained stable. Our weighted average credit rating on a fair value basis of 2.1 at the end of the third quarter of 2014 compared to 2.1 at the end of the second quarter of 2014.

As a reminder our credit rating system is based on scale with a lower number representing a stronger credit quality. At September 30, 2014 our net asset value per share stood at $9.40 compared with a net asset value at the end of the second quarter of $9.71.

During the third quarter of 2014 we made additional investments totaling approximately $97.6 million. The additional investments consisted of approximately $38 million incorporate securities and $59.6 million in CLO equity. For the third quarter we received proceeds of approximately $122.0 million from repayments, sales and amortization payments on our debt investments.

At September 30, 2014 the weighted average yield of our income producing investments on a cost basis was approximately 12.6% compared with 12.2% at June 30, 2014. I would note that at September 30 we had one investment on non accrual status with a cost value of approximately $11.6 million and a fair value of approximately $6.7 million.

The Company's Board of Directors has declared a distribution of $0.29 per share for the fourth quarter of this year, payable on December 31, 2014 to stockholders of record as of December 17.

I'm pleased to note that as of October 27 TICC Funding, LLC, a special purpose vehicle and a newly formed subsidiary of TICC, entered into a revolving credit facility with CitiBank N.A. We have used part of the proceeds from the facility to redeem all of the $101 million secured notes issued by TICC CLO LLC.

Subject to certain exceptions, the pricing under the facility is based on three month LIBOR spread over 150 basis points. The secured notes previously issued under TICC CLO LLC were based on three month LIBOR plus a spread of 225 basis points.

Pursuant to the terms of the credit agreement governing the facility, TICC Funding has borrowed, on a revolving basis, the maximum aggregate principal value of $150 million. All amounts borrowed under the facilities will mature, and all accrued and unpaid interest will be due and payable October 27, 2017.

I would also note additional information about TICC's third quarter performance has now been posted to our website at www.ticc.com. Operator, with that presentation we can now poll for any questions.

(Operator Instructions). The first question comes from Mickey Schleien of Ladenburg.

Good morning, Jonathan.

Morning, Mickey.

Jonathan, just a few questions. Can you tell me what the impact was or has been recent -- recently wider spreads on the estimated yield you are seeing or modeling for new CLO equity tranches versus perhaps what you saw in the first half of the year?

We haven't seen any enormous impact recently. I would say that as corporate spreads have widened and then we have seen some volatility in the market, overall, we've got some potential for wider spreads on the CLO equity tranches that we have seen those in the primary and secondary market. That's a generalization.

Okay. And in terms of the unrealized losses in the quarter, was that driven more by the new non accrual or the mark-to-market change for the wider spreads?

It was more due, Mickey, to the wider spreads and the lower marks on our CLO equity book.

Okay. And if I'm not mistaken, some of your deals in the past in terms of CLO have been with smaller CLO managers. I imagine you have seen better economics with those guys.

Do you think they will be squeezed out of the market by new risk retention rules in the US for CLOs? And if you agree with that, how do you think that will affect TICC's financial performance?

Well, taking the questions in approximate order, Mickey. I'm not sure that we would characterize ourselves as focusing primarily on smaller CLO sponsors. Our sponsor participation has been fairly broad-based.

We have participated in the CLOs of some very large issuers and some smaller ones. While I'm also not sure that we necessarily either projected or generated better returns from smaller sponsors as opposed to larger sponsors. Those are variables.

In terms of the risk retention rules and our expectations for the impact on the issuance, we are taking a wait and see approach. I don't think there's a great deal of certainty in the market as to how this will all come to pass. There's a great deal of uncertainty, in fact, and we don't have a defined position yet as to what the likely these primary issuance of CLO transactions will be 2014, for 2016 or 2017 when the rules will come into effect more dramatically.

So the short answer is we're not certain, but we do believe we're positioned to participate in the market whether it's the primary market as we have been doing more recently, or in the secondary market which we did for quite a while when we started participating in the CLO market in 2009 and 2010.

Jonathan, in terms of the primary markets, have you identified any opportunities that the implementation of the rules may provide you in terms of helping CLO managers put together deals? Given that TICC together with Oxford Lane are fairly significant players in the market, I'm just wondering if the fact that you can provide some liquidity and low risk of execution that there's something you can do to earn some perhaps outside economics in helping arrange some CLOs.

Sure. I think, Mickey, the question may be more applicable to the secondary market than the primary market. The premise being perhaps that certain institutions holding CLO transactions that are not compliant with the risk retention rules may be motivated to sell the transactions over the course of a year or two.

That's certainly a possibility. We have not yet seen much activity on that basis yet, but it's something, again, that we feel we're positioned to address.

Very good. Those are all my questions this morning. Thanks for your time.

Thank you, Mickey, very much.

(Operator Instructions). The next question will come from Mr. Greg Mason of KBW.

Great. Good morning, Jonathan. My first question is on the --

Morning.

-- good morning. The leverage target [0.08] at quarter end and your slide deck you have pro forma for the new facility, borrowing [0.88] debt-to-equity. Just wanted talk about your comfort with running it at that new 0.88 level, or should we see that decline a bit?

Well, I don't think we have, Greg, a fixed leverage target, but rather a series of leverage targets that take into account things like the cost of capital, the maturity of these various facilities and all of the other terms and conditions that we're obligated to operate under the CitiBank facility, or the 2011 CLO, or the 2012 CLO, or any other structure. So we don't have a defined goal or a mandate either to bring the leverage ratio up or to bring it down. Instead it's really seen very much against the backdrop of the nature of those various facilities.

Do any of those facilities have any type of issues if you get to one-to-one or go above one-to-one debt-to-equity where that could become an issue?

Yes, they do. They do, and they may continue to in the future as we look at our facilities, yes.

Okay. So you do want to stay give you yourself some cushion to that one-to-one maximum.

We do.

Yes, okay. On the new facility is there any revolving period on that facility, and is that different than the overall term?

It is a two-year revolver, which is runs concurrent with the term itself.

Okay. Great. And then just want it talk a little bit about the yields on the CLO equity.

You're generating 23% yields according to your slide deck, and what we have been hearing is the yield over the life of CLOs over the last couple of years has been running 12% to 15%. So I just wanted to see if you could give us some color on you generating 23% yields today and the confidence level of that continuing going forward.

Sure, Greg. That figure I think is a cash on cash return statistic which may or may not (inaudible -- technical difficulty) actual economic return over time. Certainly to the extent that we're looking at new CLOs other than the primary and second markets right now, we are not targeting a 23% economic return. We are targeting a lower return based upon a series of assumptions, including a default rate.

Is it expected that the current CLO portfolio as LIBOR rises or default rates move up, that we will see any type of material change in that 23% rate of return off the portfolio today?

Well, we're not expecting, again, a 23% economic IRR going forward. We may or may not experience a 23% cash return for a particular vehicle, but it's not the metric or the return that we're underwriting to as we purchase in the primary market or in the secondary market.

Okay. But that cash return, though -- (inaudible -- multiple speakers)

To answer your question --

-- the income statement, right?

Right. To answer your question more directly, Greg, and just to be clear; an increase in LIBOR, all else held constant, would result almost certainly in a diminishment in both our cash flow and our economic return on the CLO vehicles. An increase in LIBOR in conjunction with various other metrics changing such as a widening in corporate spreads or an increase in corporate [default] would have a less predictable impact on our economic returns.

Got it. So the expectation is ultimately the cash flows are going to decline over time as you talk about your economic returns. You are taking into income, though, the cash flows, is that correct?

Yes, we are taking into income the cash flows, and historically, the actual economic returns at TICC from the CLO strategy has been very high.

Got it. You mentioned that you have got lower marks on the CLO book. How much of that is related to just mark-to-market volatility in the quarter versus taking in the cash flows into income and, therefore, having to write down the ultimate end value of the equity expected to be received? Can you give us any type of breakout between those mark-to-market versus permanent loss?

Sure. The primary metric that we are looking to mark our book to on the CLO side and on the leverage loan side are actual trades in the markets, or bids, or firm bids. So my view is that our marks with respect to this quarter on the CLO equity side was primarily a function of lower prices in the market. Whether or not those lower prices were in some way a manifestation of an expectation for lower future cash flows is debatable, and I think uncertain.

Okay. Great. And then one last thing. What was the new non accrual this quarter?

It was a company called --

It will be in the [Q].

Yes. It will be in the Q. I wasn't sure if we've reported it yet, but in any case we will be within a day or so. It's a company called [Unitech] which we have held for a while.

Okay. Great. I appreciate it.

Thank you, Greg, very much.

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

Thank you very much, Operator. Thank you very much, everyone on the call, for your interest and your participation. We look forward to speaking to you again very soon. Thank you.

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