Oxford Square Capital Corp (OXSQ) 2016 Q4 法說會逐字稿

Good morning and welcome to the TICC Capital Corp. fourth-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thanks very much. Good morning, and welcome everyone to the TICC Capital Corp. fourth-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 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 those projections. We do not undertake to update our forward-looking statements, unless required 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. We are pleased to report that we generated a strong total return for shareholders during the fourth quarter, and for the full-year 2016. Our book value per share rose from $7.08 at the end of the September 2016 quarter, to $7.50 at December 31.

We note that our book value per share now is $1.10 higher than it was at the end of 2015, and that we have paid distributions to our shareholders during 2016 of $1.16 per share. In other words, for the year ending 2016, we produced an increase in NAV per share, combined with distributions paid equal to a 35.3% increase over our book value per share, as of year-end 2015.

For the quarter ended December 31, 2016, we recorded net investment income of approximately $7.3 million, or approximately $0.14 per share. In the fourth quarter, we also recorded net unrealized depreciation of $30.1 million, and net realized capital losses of $1.1 million.

Our collateral loan obligation positions experienced significant market value appreciation during the quarter, with $20.7 million of net unrealized depreciation associated with those investments. In total, we had a net increase in net assets from operation of approximately $36.3 million or $0.71 per share.

Our core net investment income for the quarter ending December 31 was approximately $11.2 million, or approximately $0.22 per share. Please see the earnings release we issued today for a reconciliation of net investment income with core net investment income.

Following the Company's strong total return performance for the fourth calendar quarter and for the full-year 2016, and with the continuation of strength in the syndicated loan market into the first quarter of calendar 2017, the Company's Board of Directors has declared a $0.20 per share distribution for the quarter ending March 31, 2017, payable to shareholders of record as of March 16, 2017, and two additional distributions of $0.20 per share each, payable to shareholders of record as of June 16, 2017, and September 15, 2017, with respect to the quarters ending June 30, 2017, and September 30, 2017, respectively.

With the recent rise in three month LIBOR and the corresponding loss of the benefit from the LIBOR floors, and with the recent compression in corporate loan spreads leading to lower projected taxable income, we believe that the change to this level of distributions will allow us to retain and compound returns on our capital over longer time frames. We note that this change is not related to any current or projected cash flow diversions from our CLO equity portfolio, and that all of our CLO equity positions made full distributions in the December, 2016 quarter. Going forward, we intend to declare and pay special dividends to our shareholders on an as-needed basis, in order to comply with our income distribution requirements as a regulated investment Company.

As a reminder, we are required to distribute at least 90% of our taxable income to our shareholders in the form of annual cash distributions, as we continue to focus on the total investment returns we provide to our shareholders, and on the objective of NAV stability and growth over time, we believe that this change should benefit us going forward. We believe that the various initiatives, including the large share repurchase program we completed earlier in 2016, and the portfolio rotation strategy we continue to implement contributed to the strong total return we generated in the fourth quarter as well as for the full-year 2016. We note that we had no investments on non-accrual status as of December 31, 2016.

With that, I would like to turn the call over to Kevin Yonon, who is a Portfolio Manager focusing on our corporate loan business, to talk about one recent development after the end of the quarter.

Thank you, Jonathan. In late February 2017, SourceHOV, Novitex, and Quinpario Acquisition Corp 2 publicly announced that they were combined to form Exela Technologies, a NASDAQ-listed provider of business process outsourcing services. TICC has debt investments in both SourceHOV and Novitex.

If this proposed combination is completed, then all TICC's existing first- and second-lien debt at SourceHOV and first-lien debt at Novitex would be paid in full at par plus any applicable call premium. Pending the successful closing of this transaction, which is expected in Q2 2017, subject to regulatory approval, TICC would receive a payment of 102% of par on its $50 million face value investment in the SourceHOV second-lien tranche. We note that as of December 31, 2016, we ascribe a fair value to this investment equal to approximately 65% of par, which was determined based on available information prior to the notification of the proposed transaction.

Kevin, thank you very much. I'd like to turn the call over now briefly to Debdeep Maji, who is going to talk specifically to our CLO business during 2016 and the fourth quarter of 2016. Debdeep?

Thank you. 2016 represented a period of strength in the markets in which we participate. From January 1, 2016, to December 31, 2016, the LSTA Corporate Loan Index rose from 91.29% to 98.08%, an increase of 7.4%. At the same time, corporate loan default rates remained at low levels, providing investors with a generally lower risk, lower return corporate debt environment. Both our corporate loan and CLO portfolios had strong performance during 2016, with higher loan prices leading to increased CLO equity net asset values, and significantly higher CLO equity market values.

During the second half of 2016 and into 2017, tighter leverage loan credit spreads reduced the weighted average spread of the loan assets in our CLO investments. This reduction in credit spreads on CLO collateral, coupled with a meaningful increase in three-month LIBOR during the 2016 calendar year led to a lower current and projected cash flow distribution payment from many CLO equity tranches.

This reduction in cash flow payments also had the effect of increasing the perspective duration on our CLO equity investments, i.e., tilting the balance towards a less front-end loaded CLO equity return protocol then had existed in previous years. This dynamic concurrently had created various opportunities for us, with higher NAVs, presenting us with greater possibilities for CLO calls, and for opportunistic investments in CLO junior debt at discounts to par.

The current market environment has also resulted in tighter CLO liability spreads, presenting us with ongoing refinancing, as well as resetting opportunities. A reset is a refinancing that includes an extension of the reinvestment period of the CLO. With both CLO collateral and liability spreads at nearly their tightest levels since the 2008 credit crisis, and with three-month LIBOR now at approximately 1%, we believe the CLO asset class is currently well-positioned for any widening of spreads and/or dislocation in the market.

Debdeep, thanks very much. As we executed our strategy of rotating out of more broadly syndicated corporate loans into a combination of club deals and narrowly syndicated loans, through purchases in both the primary and secondary markets, we remained mindful of maintaining overall portfolio liquidity.

We believe this strategy has allowed us to maintain corporate debt investments, which have sufficient liquidity to be sold if necessary, in order to pay down leverage at TICC, and to take advantage of market opportunities, as reflected by the significant reduction in our overall corporate debt level during 2016, and by higher yields on new corporate loan investments in 2016. We ended 2016 with approximately $8.3 million of cash from our balance sheet, after the repurchase of $20.5 million of convertible notes in December 2016, and we expect the cash from balance sheet will increase during 2017, in anticipation of the maturity of our convertible notes in November of 2017.

As of February 28, 2017, we estimate our balance sheet cash balance to stand at approximately $64.9 million. Additionally, we redeemed approximately $74.7 million of Class A notes issued by your 2012-1 CLO during the fourth quarter. As of December 31, we had approximately $129.3 million of debt within our 2012-1 CLO, down from $240 million as of December 31, 2015.

During 2016, we took steps to increase shareholder value in multiple ways. We repurchased stock significantly, reduced our overall debt, rotated into higher yielding corporate loan assets, and rotated our CLO portfolio, with a view towards maximizing our expected near and longer term returns.

We continue to view our mandate as maximizing the risk adjusted return on our shareholders' adjustment in TICC. As such, we have and continue to focus on portfolio management strategies, designed to maximize our total return, as opposed to generating a certain level of income over a particular timeframe. We view the market opportunity currently available to us as strong, and as a permanent capital vehicle, we have historically been able to take a longer term view towards our investments. We believe this perspective serves us well in 2016.

I note that additional information about TICC's fourth-quarter performance has been posted to our website at www.TICC.com. And with that, operator, we are happy to turn the call over for any questions.

(Operator Instructions)

Jonathan Bock, Wells Fargo Securities.

Jonathan, will the new dividend contain a return of capital and thus, we continue to see book value diminution from this level? I noticed that NOI is still at $0.14 or so, and likely on a model go forward basis, not going to go much higher, given deleveraging? And the dividend is still set at a level above it.

Sure, Jon. The Board has set the dividend with an eye toward long-term stability. That is the Board's usual perspective, when they establish the dividend, and the dividend again has been set now for three quarters forward. In terms of book value per share, obviously you have seen a very substantial rise in book value in each of the --

Just to cut it, I understand the asset side. Assets appreciated, Jonathan, but ceteris paribus, all else equal, with no uplift evaluation marks, will book value under this dividend policy go up or down?

We can't provide any an estimate as to forward book value, John, we haven't done that in the past. What I can say is that the lower dividend will provide us with additional capital to be recycled.

The other point that you mentioned earlier is a relevant one, which is a highly relevant one, which is the deleveraging the balance sheet. We are, as you can imagine, actively looking at alternate strategies to put additional leverage on our balance sheet in the right sort of way with the right sort of terms. All else being equal, our hope and expectation is that it could add to cash flows on a go-forward basis.

Of course. And last question, where do you think the market is on a price perspective? Based on maybe some of your financing options? Thank you for taking my question.

Thank you, Jon. That is a great question. The answer is, as a BDC and as a company with our asset base, we've got several opportunities, or several possibilities I should say, in terms of additional releveraging possibilities.

We can look at the $25 par market, the preferred stock market, we can look at the convert market. Obviously, we've had the benefit of an existing convert for some period of time. That market, as you know, is a healthy one, with a great deal of activity at generally tighter spreads compared to where they were a year or two ago.

Or we can look at the bank loan market, the term market. All of those, each of those markets represent different benefits and different costs for us, and we are actively reviewing our opportunities and our options across that spectrum.

Mickey Schleien, Ladenburg.

I wanted to follow up on your prepared remarks, where you mentioned your interest in pursuing other strategies. The first time you mentioned that, it may have been as long as a year ago, maybe three quarters ago, when it became clear that holding CLOs within a BDC was not generally perceived as a positive attribute by the investment community. But from what I can see, there hasn't been any decisions made or progress made on those efforts.

Can you update us on where you stand? What are you looking at? Have you turned down any ideas? What are you most interested, some timeframe for those things to occur?

Sure. Mickey, as you know, we have had a tremendously productive last 12 months on several fronts. First of all, in terms of the corporate loan market, we've actively rotated that book. We've enjoyed the benefit now of increasing weighted average spreads and weighted average yields on our syndicated corporate loan book, as we have moved very actively away from the broadly syndicated corporate loan market, and into the more narrowly syndicated middle-market and second lien markets. That has been a productive undertaking for us and I would regard that effort as generally successful.

In terms of the CLO book, we have not taken steps in order to reduce our overall CLO exposure. What we have done, is we have sought to mitigate risk within that market by virtue of rotating our portfolio into positions that we regard as stronger, able to refinance in many cases. We've enjoyed the benefit of refinancings in our book, and positions that give us the benefit of a better risk-adjusted return.

So the strategy continues, as it has really for the last year or 18 months, which is to continue to rotate into higher yielding corporate loan assets held on a less leveraged basis, and to rotate, but not necessarily to significantly diminish any time in the immediate future, our CLO portfolio.

I understand, Jonathan, but it goes back to the fundamental question, which is that the market generally doesn't like to pay fees for folks or management teams to pick credits, whether they are broadly syndicated or more narrowly syndicated, or CLO. And my understanding was that your intent was to look at directly originated deals, and to build a team to do that, well, originally it was to sell the business to Benefit Street to do that, but when that didn't work, to build a team or in some other fashion to do that. So where do you stand on progress toward directly originated transactions?

It may be an issue, Mickey, that you have misconstrued. We had not previously said that we were intending to rotate into the direct originated business. That has not been part of our strategy, really for several years now.

The focus has been on rotating into narrowly syndicated club deals and second lien loans. That has been a successful undertaking, we have made very substantial strides in that direction, and again, you have seen the benefit of that through a higher yielding portfolio over each of the last several quarters.

I show no further questions, so I would like to turn the conference back over to Mr. Cohen for any final remarks.

Great. Well, I would like to thank everyone for participating in the call, and for their interest in TICC. We certainly look forward to speaking to you again in the future. Thank you very much.

Thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect.