Oxford Square Capital Corp (OXSQ) 2016 Q1 法說會逐字稿

Good morning, and welcome to the TICC Capital Corp First Quarter 2016 Earnings Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Jonathan Cohen, please go ahead.

Thanks very much. Good morning and welcome everyone to the TICC Capital Corp first quarter 2016 earnings conference call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer and Bruce Rubin, our Chief Financial Officer. 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 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.

And with that, I'll turn the presentation back over to Jonathan.

Thanks Bruce. For the first quarter of 2016, TICC reported GAAP total investment income of approximately $15.3 million, representing a decrease of approximately $3.5 million from the fourth quarter of 2015 of $18.8 million.

First quarter GAAP income from our portfolio was earned as follows; approximately $8.9 million from our debt investments, approximately $5.9 million from our CLO equity investments, and approximately $500,000 from all other sources.

Income from our debt investments was down $1.1 million. Income from our CLO equity investments was down $2.6 million, and our other income was up slightly from the prior quarter. The decrease in our income from our debt investments was due largely to the timing impact of sales of loans initiated by us during the fourth quarter of 2015 in order to fund the December 2015 repayment of the Company's credit facility of $150 million and the repurchase of approximately 8.5 million shares of our common stock for approximately $49.3 million.

Of that amount, we repurchased 4.9 million shares of our common stock at a weighted average price of approximately $5.2 for a total price of approximately $25.6 million that was in the first quarter of 2016.

TICC also reported GAAP net investment income of approximately $4 million or $0.08 per share for the first quarter of 2016, which remained the same from the fourth quarter's $0.08 per share GAAP net investment income figure. I'd note that in the first quarter of 2016, we recognized approximately $1.6 million of expenses related to the engagement of legal and financial advisors to the Company's special committee.

During the first quarter of 2016, our core NII was substantially higher than our GAAP NII, due to accounting for CLO equity investments under GAAP. Core NII for the quarter was $15.5 million or $0.29 per share. That core NII represents net investment income adjusted for additional cash distributions we received or we're entitled to receive from our CLO equity investments if either in any case, if any in other case.

For the reconciliation of core NII, which is a non-GAAP number to NII calculated in accordance with GAAP, we refer you to the earnings release we issued earlier today. The Company's Board of Directors has declared a second quarter distribution of $0.29 per share payable on June 30, 2016 to shareholders of record as of June 16.

For the quarter ended March 31, 2016, we also recorded net realized capital losses of approximately $600,000 and net unrealized depreciation of approximately $20.6 million. Our CLO positions experienced a significant price declines during the quarter with $9.5 million of that net unrealized depreciation associated with our CLO investments. We note that the CLO equity market was significantly weak on a quarter-over-quarter basis, but that we have seen a significant increase in prices within that market since quarter's end.

As a result of those realized and unrealized losses, we had a net decrease in net assets resulting from operations of approximately $17.1 million or $0.32 per share for the quarter. Our weighted average credit rating on a fair value basis stood at 2.2% at the end of the first quarter of 2016. It also stood at 2.2% at the end of the fourth quarter of 2015.

As a reminder, our credit rating system is based on a one-to-five scale with a lower number of representing a stronger credit quality. At March 31, 2016, our net asset value per share stood at $5.89 compared with a net asset value at the end of the fourth quarter of $6.40.

During the first quarter of 2016, we made additional investments totaling approximately $12.8 million consisting primarily of $9.7 million in corporate securities and $2.7 million in CLO debt. Also we invested approximately $400,000 in CLO equity during the period. Also for the first quarter, we received proceeds of approximately $17.2 million from repayments, sales and amortization payments on our debt investments.

As of March 31, 2016 the following weighted average yields were calculated. The weighted average yield of our debt investments at current cost stood at approximately 7.1%. It also stood at 7.1% as of December 31, 2015.

The weighted average effective yield of our CLO equity investments at current cost stood at approximately 8.5% at quarter's-end compared with 11.3% as of December 31, 2015. We note that that decline in the effective yield calculation was primarily attributable to the changes in our GAAP effective yield assumptions as a function of first quarter market conditions in the syndicated corporate loan market.

The weighted average yield of our cash income producing CLO equity investments at current cost was approximately 24.7% compared with 27.4% as of December 31, 2015. That is cash effective of average yield calculation. We note that the cash yield calculated on our CLO investments, equity investments is based on the cash distributions we received or we're entitled to receive at in each respective period-end and excludes the CLO equity investments, if any, which has not yet made their inaugural payments.

I note that at March 31, we had one investment on non-accrual with a cost basis of approximately $15.5 million and a fair value of approximately $10.4 million. This investment was purchased for a total of approximately $10.7 million in separate purchases in 2011 and 2013. This was the same investment that was on non-accrual status in the prior December quarter.

Additional information about TICC's first quarter performance has been posted to our website at www.ticc.com. And with that, operator, we're happy to open the line for any questions.

(Operator Instructions) Mickey Schleien, Ladenburg.

Jonathan, could you expand a little bit on the decline of the cash yield of the CLO equity investments, what caused that? And also, what caused the deterioration in the CLO equity average WARF?

Sure, Mickey, it primarily was due, in our view, to the increase in three-month LIBOR that we've been seeing over the course of the last sort of six months or so. That, as you know, is an element that interacts with the LIBOR floors that are embedded inside of these various loans that represent the collateral pools for US CLOs, so more than anything else, the diminishment in the cash was probably a function of the increase in LIBOR.

And how about the deterioration in WARF on average?

Sure, Mickey. Probably a function primarily of increased numbers of CCC rated assets as syndicated corporate loans saw a downgrade into the tail end of last year and the first part of this year.

Okay. One follow-up Jonathan, any additional comments you can give us on restarting your direct origination business. How that's going and how many investment professionals are involved at this point?

Sure, Mickey. As we talked about last quarter, we have taken steps to reinitiate our less liquid corporate loan participations. We've seen some initial progress in that direction. But I'd want to wait until we see more of that progress before we speak about it publicly.

Okay, I understand and I appreciate your time. I do have one more question. I'll get back in the queue. Thank you.

Jonathan Bock, Wells Fargo Securities.

Good morning and thank you for taking my question. Jonathan, just as I listened to Mickey's question, it kind of popped into my mind, in-light of the potential decline for cash income off the CLO's. So if we kind of look at the core NII measure, historically in the 30%s and now kind at 29% or at the dividend with cash flows potentially going lower because of LIBOR increasing. Can you give us a sense as to why one would want to keep the dividend where it is relative to your earnings, because it cause the NAV bleed as well as continues to keep leverage above one-to-one. So thoughts on why one would keep the dividend policy intact if it continues to lead to a book value decline today.

Sure, John. Thanks very much for the question. As you know, our dividend policy is based primarily on our ongoing estimates of our taxable income, which we are required to distribute through to our common shareholders, at least the vast majority of, on an ongoing basis. So when the Board convenes to consider setting of a dividend, the fact is that they consider our projections for future income, future GAAP income, future taxable income and the likely trajectory of those cash flows over the next several quarters.

So the Board essentially matched the $0.29 core NII figure this quarter with the dividend payment that they've just declared. Certainly to the extent that those projections or those figures change over time, the Board will consider those changes in the establishment of the dividend.

Okay. So to the extent cash flow declined more, it's entirely possible that the dividend may or may not follow with it. And then the only follow-up question I have is the NAV impact to CLO securities. So clearly levered loan bids have come up that is beneficial to CLO NAVs and I'm curious as to its impact on CLO equity prices because, can values for CLO equity increase in light of the potential for declining cash flow because I understand there is both the NAV and a cash flow component to a CLO's value. When does CLO equity kind of move in terms of pricing or have you seen it move since 12/31 and maybe to subsequent this time today, where is CLO equity pricing moving today?

Sure John, it's a great question. CLO equity pricing probably hit its low point mid-to-late February, March was an up month. The end of March was particularly strong for the CLO market, CLO equity market broadly defined and the month of April has been particularly strong in terms of CLO equity prices in the secondary market. We're actually beginning to see some primary market activity.

So to answer your question, CLO equity investors as you know consider interest payments, interest cash flows, principal recovering and the timing of both of those elements, which is in particular a critical aspect in the determination of an appropriate net present value for these future cash flows. With all of that in mind, we continue to see significant strength across the CLO equity market concurrent with and partially as a function of, the strength in the syndicated corporate loan market.

Christopher Testa, National Securities Corp.

Good morning. Thank you for taking my questions. Just speaking more about the CLO cash and effective yields going down given the LIBOR picking up, what would it take to bring those yields back up even if LIBOR remains stubbornly high where it's been?

Essentially, would you need to see reinvestment prices go lower than what you would assume? Would you have to see defaults tick down? And I guess just a follow-up to that, how much cyclical exposure is in the CLO's and would you be able to bring that down given your OC cushion is well above 4%?

Sure, Chris, appreciate the question. What we've seen recently is rotation within the collateral pools of these various CLO vehicles, as managers are seeking to build spread and to build par. And the market, syndicated corporate loan market sort of circa January, February, March; the early part of March anyways; allowed them some ability to do that. We hope to see the economic benefit of those rotations in the fullness of time as an increased spread or the potential for an increased spread within certain of these CLO entities begins to actually flow through to the equity.

And I just noticed the debt levels were pretty constant when you knew marks are going to be pretty negative given the spread widening in the market. So why not shed more assets during the March 31 quarter to bring down that debt to equity under one-to-one?

Sure. I mean, what we had seen Chris during the March quarter was really the low point in asset valuations. And so, we certainly didn't want to sell either corporate loan assets or CLO equity assets that we expected would experience some price rebound over the course of the coming months, which is so far what's been happening.

So the 115% ratio that you're referring to is obviously something that we expect to bring down over time, but we don't want to bring it down by selling assets at discounts to what we believe their true economic value is today.

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

Thank you very much operator. We'd like to thank everybody who participated in this call and everyone for their interest in TICC Capital Corp. Thank you all very much.

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