Oxford Square Capital Corp (OXSQ) 2015 Q1 法說會逐字稿

Good day and welcome to the TICC Capital Corp first-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thanks very much. Good morning and welcome, everyone, to the TICC Capital Corporation first-quarter 2015 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, could you open the call today with the 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 Corporation. The unauthorized rebroadcast of this call in any form is strictly prohibited. I would also like to call your attention to the customer 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 very much, Bruce. As we noted in our press release this morning, our estimated distributable net investment income, EDNII, for the quarter ended March 31, 2015 was approximately $0.38 per share. We note that our EDNII represents that portion of our estimated annual taxable income available for distribution to common shareholders that we estimate to be attributable to any period. The Company's Board of Directors has declared a distribution of $0.29 per share for the second quarter of this year payable on June 30, 2015 to stockholders of record as of June 16. We note that at March 31, 2015, our net asset value per share stood at $8.72 compared with a net asset value at the end of the fourth quarter of $8.64.

As we noted in our press release this morning, we have now changed the methodology that we use to account for income from our CLO equity investments. We note that this change in methodology has no direct or material effect on our net asset value per share or on the determination of the Company's quarterly dividend distributions. Starting with our first-quarter results for 2015, we have applied the effective yield method for determining that income under GAAP, as opposed to the dividend method used previously.

For the first quarter of 2015, TICC reported total GAAP investment income of approximately $21.7 million, representing a decrease of approximately $6.8 million from the fourth quarter of 2014. That decrease reflects the lower reported GAAP earnings associated with our CLO equity class investments resulting from the change in accounting methodology.

While reportable GAAP earnings on our CLO equity investments were approximately $8.2 million, using the effective yield methodology whereby we assume that we continue to hold all of our CLO equity positions to their respective maturities or liquidations with various assumptions made, including for losses over time, we received or were entitled to receive approximately $18.5 million in cash distributions for the first quarter of 2015. For the fourth quarter of 2014, we reported comparable CLO equity distributions of approximately $14.5 million.

TICC also reported GAAP net investment income of approximately $12.3 million or $0.21 per share for the first quarter of 2015 compared with the fourth quarter of 2014, which also stood at $0.21 per share. We note that the indirect impact of the change in accounting resulted in an approximately $2.4 million difference in net investment income incentive fees. That amount was repaid to us by our investment advisor and accounted for approximately $0.04 per share of our first-quarter net investment income.

For the quarter ended March 31, 2015, TICC recorded income from our investment portfolio as follows: approximately $13.2 million from our debt investments, approximately $8.2 million from our CLO equity investments and approximately $300,000 from all other income. For the quarter ended March 31, 2015, we also recorded net realized capital losses of approximately $6.7 million and net unrealized depreciation of approximately $15.2 million, which includes the impact of a net cost reduction of approximately $10.3 million due to the effect of yield accounting methodology.

As result of those unrealized and realized losses, we had a net increase in net assets resulting from operations of approximately $20.8 million or $0.35 per share for the quarter. Our weighted average credit rating on a fair value basis stood at 2.1 at the end of the first quarter of 2015. It also stood at 2.1 at the end of the fourth quarter of 2014. As a reminder, our credit rating system is based on a one to five scale with the lower numerical figure representing a stronger credit quality. At March 31, 2015, again our net asset value stood at $8.72.

During the first quarter of 2015, we made additional investments totaling approximately $52.2 million, excluding approximately $7.3 million of restructured securities. The additional investments consisted of approximately $24.7 million in corporate securities and approximately $27.5 million in CLO equity. Also for the first quarter of 2015, we recognized portfolio exits of approximately $44.4 million from repayments, sales and amortization payments on our investments.

At March 31, 2015, the weighted average yields were calculated as follows. The weighted average yield of our debt investments stood at approximately 7.7%, compared with 7.8% at December 31, 2014. The weighted average effective yield of our CLO investments at cost was approximately 11.4%. And the weighted average yield of cash income producing CLO equity investments at cost was approximately 26.1% compared to 23.3% at December 31, 2014.

We note that the yield calculated on the CLO equity investments is based on the cash distributions we received or were entitled to receive at each respective period end and excludes the CLO equity investments which had not yet made their inaugural payments. We note that at March 31, we had no investments on non-accrual status. Additional information about TICC's first quarter has been posted to our website at www.ticc.com. And with that, operator, we are happy to take any questions.

(Operator Instructions)

Mickey Schleien, Ladenburg.

Good morning, guys.

Good morning, Mickey.

I would like to understand what is your outlook for the loan markets for the rest of the year, given how tight things have been so far with dearth of supply and incredible demand. And also what you believe, to the best of your ability, the impact of the GE exit will be?

Sure, Mickey. Our outlook for the US syndicated corporate loan market for the remainder of the year is essentially one where we are looking for the market to tread water to one where we are looking to see some widening in US corporate loan spreads. We've tried to position ourselves into that eventuality in a few different ways. One of which included the debt facility that we took on fairly recently.

We enjoy the benefit of what we think is an attractive cost of capital and a positive spread between that cost of capital and the syndicated loans we've placed into that facility. That said, your larger point I think is an accurate one, which is that the syndicated corporate loan market remains characterized by very, very tight spreads, a significant amount of demand and less supply than loan participants like us would generally like to see.

So Jonathan, what could change in the second half of the year that would allow spreads to recuperate a little bit?

I think part of that is going to depend on the overall market for credit globally and the extent to which what is currently a very benign corporate debt environment, a very benign debt environment generally, becomes somewhat less benign. We'd begin to see some increase in default rates.

We'd begin to see more companies coming to market with more flexibility around the pricing of their loan securities, their debt securities generally. Those are the kinds of things that are going to in our view, likely lead to some widening of spreads.

Do you think you think that's already started, Jonathan?

The other piece, Mickey, obviously is the behavior of governments and the monetary policies that the US government and European Union and other global actors are pursuing. Obviously that's been in a single direction for a while now.

We don't see at the moment, any indication in the market of a widening spread market. We would like to see some of that. We haven't seen any appreciable degree of that thus far.

All right. I was asking because I have noticed sort of a trend where, despite the fact that in the first quarter spreads tightened meaningfully, sort of what we could call credit watch investments have deteriorated. But my last part of my question was any thoughts you have on GE's exit from the lending business, given that they had such an attractive cost of capital?

I think others have made that the case GE's exit from that market, from this market creates the potential for opportunities for middle-market lenders, direct bilateral lenders, syndicate loan participants that would be good to see. We would love to see some enhanced and increased opportunities that were resulting from GE's exit. We are not making any actual predictions about that, though at the moment.

Okay, thanks for your time this morning.

Thank you, Mickey, very much.

Greg Mason, KBW.

Great, thanks. Good morning guys.

Good morning, Greg

First, on the GAAP tax difference now that we have GAAP using the effective yield method. Is there any time where the tax number gets impacted by the exit of the CLO? Either when a CLO is called or something that realizes the loss for tax that obviously the effective yield of GAAP is showing that there is some type of loss there with the lower yield? So can you talk about that tax implication since your dividend's going to be based on the tax number?

Sure, Greg, this is Patrick. The interesting part of this is in the early years, all these years up until some point that there's an exit or liquidation of the CLO, generally speaking it is ordinary income as reported to us on these PFIC statements. If there is a capital loss on the other end, as you know that's a different bucket, let's say, from which we make distributions or don't make distributions. We currently have capital losses on our balance sheet as an example. We haven't had a capital gains distribution from TICC in quite some time.

So the answer to your question is not really. The ordinary will be ordinary if it's reported to us that way by PFIC, which generally speaking has some relation to the cash flows that we see. And if there's a capital loss on the backend, that is a different distribution rationale, which is frankly, it creates that oddity that we've been seeing now for some time, that cash is closer to tax and we're required to distribute on that basis and not on the basis of a potential future capital loss if there is one.

So does that create a potential problem with this business model and these assets given that you have to pay out more than really the ultimate earnings are? Essentially we are going to be losing a little bit of book every quarter in the difference between the GAAP and tax number and really what's paid versus the true long-term return of the assets. How do you think about that dynamic?

Sure, Greg, I think a lot of that ultimately comes back to our trading of the portfolio. The extent to which we are recognizing or realizing capital losses versus capital gains or are we able to exit at prices fairly close to our purchase prices over time. Certainly looking back historically, our IRRs have been very strong and meaningfully stronger than the GAAP effective yield we are recognizing at the moment.

As you know, the effective yield calculation requires us to assume that we hold the instrument until maturity, final liquidation, et cetera. We have not historically incorporated that as an investing practice. We've traded our CLO equity book much more actively than that.

But you don't think that, if we just look at over the last two years book values went from the upper 9[%]s to now 8.67[%]. Some of that was due to the volatility in the fourth quarter, but some of that has been to having been forced to pay out more dividend than the real, true return of the CLOs is. You don't see that as a potential continuing problem going forward, being forced to pay out this higher dividend?

It is certainly an issue that we are focused on and mindful of. That said, I think our primary focus is on generating the best risk-adjusted returns we possibly can within both of our trading strategies, our investing strategies, both on the corporate debt side and on the CLO equity side where as you know, we've historically generated very strong returns.

Got it.

Your point is certainly a valid one.

Great. Finally, on the net portfolio appreciation of the $8.5 million this quarter, any specific investments or just broad movements across the portfolio?

Yes, I think we saw the same thing, Greg, that you saw and that others saw during the quarter, which is that the leverage loan market, the US corporate loan market was particularly strong in the first quarter of 2015.

Okay. Great, thanks, guys. I appreciate it, the comments.

Pleasure. Thanks for your time.

Greg Nelson, Wells Fargo Securities.

Hey, good morning, guys and thanks so much for taking my questions.

Good morning, Greg.

Just a couple for me. So the increase in distribution today from $0.27 to $0.29, is that reflecting your view of what you will pay out sustainably now? Or does some of that include any increase from the $0.04 of reversal from previously recorded incentive fees?

Sure, Greg. The $0.38 includes $0.04 of reversal. So the $0.34, the $0.38 minus the $0.04 would be the adjusted number that we would be focusing on. We don't, as you know, make projections with respect to future income or future dividend distributions. But I think the Board, when it considered the establishment of the $0.29 dividend this quarter, was looking at all of the information available to it including any projections that we have, the current quarter and the desire to be compliant with the primary goal of TICC as a BDC, which is to generate sustainable cash income on a quarterly basis to its shareholders.

Okay. And then just as you think about value creation for shareholders, I think you did $2.4 million in share purchases during the quarter out of a $50 million authorized program that expires at the end of June. Average price was about $7.56. Obviously shares have traded down since then. When you think about value creation for shareholders and you see the yield on your debt portfolio declining, your stock is trading at a meaningful discount to NAV and leverage is already close to one times, I just want to think about, get an idea of your capital priorities.

Sure. I think our principal priority is to generate again, the best risk-adjusted return possible. And certainly, the repurchase of shares represents a useful and important component of that calculation. We did buy a limited amount of stock back fairly recently and we continue to look at share repurchase opportunities in a variety of ways as a useful method for value creation for shareholders, certainly.

All right. Thanks so much for taking my questions.

Thank you, Greg, very much.

At this time I show no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Jonathan Cohen for any closing remarks.

Great. I would like to thank everybody who participated in our first-quarter 2015 TICC earnings call. We thank you all for your interest and for your participation and we look forward to speaking to you very soon. Thanks very much.

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