Oxford Square Capital Corp (OXSQ) 2017 Q2 法說會逐字稿

Good morning, and welcome to the TICC Capital Corp. second quarter earnings conference call. (Operator Instructions) Please note, that this event is being recorded.

I would now like to turn the conference over to Jonathan Cohen, CEO. Please go ahead.

Good morning, and welcome, everyone, to the TICC Capital Corp. Second Quarter 2017 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 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 to do so by law. To take 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. We generated a total return of approximately 2.4% for shareholders during the second quarter of 2017, representing the change in TICC's book value per share plus distributions paid to our common stockholders. Our book value per share was $7.53 in the March 2017 quarter, compared to $7.51 at June 30. We paid distributions of $0.20 per share during the second quarter. For the quarter ended June 30, we recorded GAAP net investment income of approximately $7.5 million or approximately $0.15 per share. In the second quarter, we also recorded net unrealized appreciation of approximately $1 million and net realized capital gains of approximately $500,000. In total, we had a net increase in net assets from operations of approximately $9.1 million or $0.18 per share. Our core net investment income for the quarter ended June 30 was approximately $9.3 million or approximately $0.18 per share. Please see the earnings release we issued today for a reconciliation of net investment income with core net investment income. We note that we continued to have no investments on nonaccrual status as of June 30. During the second quarter of 2017, we continued to execute our strategy of rotating out of more broadly syndicated corporate loans and into a combination of club deals and narrowly syndicated loans through purchases in both the primary and secondary markets. Moreover, our corporate loan investment activity continues to focus on the rotation over the portfolio into higher-yielding loans. As of June 30, the weighted average yield of our debt investments at current cost was approximately 9.5% compared to 8.4% as of March 31, 2017.

We also continued our active rotation of our CLO investment portfolio with opportunistic purchases in sales. Several of our CLOs executed refinancing transactions, which decreased the weighted average cost of their respective liabilities and, in certain instances, executed resets which also lengthened the reinvestment period of those CLOs. During the second quarter, we submitted a notice of voluntary redemption to the trustee of our TICC 2012-1 CLO, beginning the redemption process for that vehicle. The redemption of our 2012-1 CLO will provide us with the ability to continue the rotation of our corporate loan portfolio into higher-yielding assets. With that redemption, we will eliminate approximately $73.4 million of debt, shown on our balance sheet as of June 30, 2017.

Additionally, the previously announced issuance of approximately $64 million of 6.5% 7-year notes we executed during the second quarter, the proceeds of which will be utilized in the repayment of our 7.5% 2017 convertible senior notes issue, will result in a lower cost of capital for the company going forward. We continue to view our mandate since maximizing the risk-adjusted return on our shareholders investment 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 time frame. 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 served us well during the second quarter of 2017. We note that additional information about TICC's second quarter performance has been posted to our website at www.ticc.com.

And with that, operator, we're happy to open the call up for any questions.

(Operator Instructions) Our first question comes from Mickey Schleien with Ladenburg.

Jonathan, my first question, you sort of alluded to this in your prepared remarks, but wanted a little more color. We've seen spreads to continue to compress even going into this quarter, which is offsetting the benefit of higher LIBOR for CLO assets. But I do see that the cash yield on your CLO equity investments was up. So can you give us a sense of how quickly CLO managers in your portfolio are refinancing or resetting liabilities to balance that trend? And within your portfolio, how many CLOs do you actually control, where you can influence that process?

Sure, Mickey. Generally speaking, the rate of refinancings and resets across the CLO universe, and specifically in our portfolio, has been very strong. The benefit of lower spreads on the liability side of the CLOs balance sheet is a fairly important factor, probably the driving factor, in that equation. And we continue to see that trend play out, so that's certainly been a benefit to us. In terms of how many of our transactions we control, I would say that in -- it -- there's a number that's on our Schedule of Investments. But more to the point, we would like to think that we've got a meaningful seat at the table in the context of these various discussions, given the size of our investments in this sector. So collateral managers are behaving in economically rational ways, CLO debt and equity holders and investors are behaving in economically rational ways and the nexus of those forces have resulted in continued resets and refinancings across that sector.

Just to follow up, then, were those refinancings the main reason for the higher CLO equity cash yields that we saw? Or if it wasn't, then what drove those increases during the quarter?

No, Mickey, you're exactly right, that was the principal driver.

Our next question comes from Christopher Testa with National Securities Corporation.

Jonathan, just wondering if you could touch on how much of any of the portfolio is within, let's say, 50 or 40 basis points or so of failing the weighted average spreads test?

Within 50 basis points of failing the spread test, weighted average spread test that would result in a diversion of cash or I'm sorry, Chris, can you clarify the question a little bit?

Yes, yes, just how much is within proximity of failing the weighted average spread test which would then cause a diversion of cash from the equity portion of the CLO?

Yes, I think, there may be a nomenclature issue, Chris, I think you're talking about the OC test. Not the weighted average...

No, no, I -- no, I didn't mean the OC test, I meant the weighted average spread test. Just given where spreads are, and obviously the reinvestment opportunity is being more challenging.

Sure, Chris. But just to be clear, a failure of the weighted average spread test in this typical CLO structure would not result in a diversion of the cash flows.

Okay, got it.

I think what you're actually meaning to ask, and I don't mean to be presumptuous at all is what portion of our CLO equity portfolio may be close to tripping a diversion test, which would in fact be an OC test. And in that case, it's negligible to 0.

Got it. Great, thank you. And just -- I know, kind of touching on Mickey's questions on the refinances, I know in June the average discount margin was about 125 bps. Is that kind of in line with what your experience has been? Or have you seen it be a bit higher or lower? And what are you seeing kind of quarter-to-date as well in terms of the refis?

Refis has continued to tighten. So again, the driving dynamic behind this trend towards resets and refis continues to be tighter spreads in the liability sides of CLO balance sheets. That dynamic continues to play out, essentially, in lock step or possibly even in front of spread compression on corporate loans. And one of the group here is actually saying we've seen double digits on AAAs, meaning below 100 basis point spreads on AAAs, which is fairly remarkable. And thank you, Chris, very much for those questions. One sort of derivative question talking about spread compression really revolves around the weighted average yield on our debt investments, on our corporate loan book. That spread has obviously been increasing fairly dramatically. So if you look back to the first quarter of 2016, when the weighted average yield on our corporate loan investments stood at about 7.1%, the progression has been from 7.1% to 7.5% in the second quarter of 2016, 8% in the third quarter of 2016, 8.3% in the fourth quarter of 2016, 8.4% in the first quarter of 2017 and now 9.5% in the second quarter of calendar 2017. So a roughly 240 basis point widening in the weighted average yield on our corporate loan book; obviously, a fairly meaningful increase and very much consistent with our stated objectives for that portfolio.

We now have a follow-up question from Mickey Schleien.

Jonathan, I wanted to follow up by asking about nonqualified investments. Obviously, we haven't seen the Q yet, but based on the presentation, it looks like you're well above the 30% limit as of June. Could you tell me what your strategy is to cure that so that you can declare dividends beyond September?

Sure, Mickey. Thank you. We actually, as of June 30, are below the 30% nonqualified asset test basket. So we can go through whatever you're looking at off-line but could -- in fact, that test does not need to be endured by virtue of the fact that we're in full compliance.

Okay. I must have read the presentation wrong. And a broader question. At a very high level, Jonathan, do you see any signs of equilibrium developing in the middle market -- for middle market loans? And what are they? I mean, we've seen this wave of spread compression, I don't know, it's a couple of years ago, I would suppose. And there doesn't seem to be any sign of that abating. So just curious on your very high-level view of the market in general.

Sure, Mickey. Thank you. I would say the spreads on the whole in our part of the market, this lower end of the middle market continuum, the second lien market, the market that we are more focused on: club deals, narrowly syndicated transactions, has actually been fairly stable. I wouldn't go, perhaps, so far as to say there's been a bifurcation in the corporate loan market between broadly syndicated, narrowly syndicated, club deals and et cetera, but there certainly has been some divergence. And I think as you can see from our spread widening over the course of last 1.5 years, we have, I believe, benefited at least in part from that dynamic.

We now have a follow-up question from Christopher Testa.

Jonathan, just wanted to follow up and also ask given the exemptive relief that you and Oxford may have received. How does this kind of enhance your ability to do more primary and sizeable originations in the CLO equity market?

Chris, thank you. And that is a very important question and an important topic for us. As you know, and as I think others on the call know, we have historically not operated with the benefit of exemptive relief with respect to our 3 funds. We have TICC, Oxford Lane Capital Corp, and oxford Bridge, which is the private fund, each of those 3 do somewhat different things, but each of those 3 funds do invest in the CLO junior debt and equity markets. We have not been -- historically to participate generally in the primary market, between more than 1 of those 3 funds. The faculty market, we were able to participate in, and we have been able to participate in through MassMutual. So the receipt of this exemptive relief now allows us, Chris, just as you've said, to participate in the primary market between 1, 2 or 3 of the funds, which gives us a bigger footprint; it gives us greater scale; it gives us superior, in my view, negotiating capability as we originate structure and ultimately execute against the primary market, where we continue to see fairly strong opportunities for that business, for primary CLO issuance. So the answer I think is significantly.

Okay. And as a result of that, is it fair to say that we should expect less concentrated CLO equity positions as well as potentially more fee rebates on what you're paying the collateral managers?

Hopefully, sure. I mean, that would be a reasonable expectation, although, as you know, the CLO market, in particular the CLO primary market, is volatile and somewhat unpredictable. And I certainly wouldn't want to commit to any definitive path, but it certainly gives us greater optionality and greater flexibility as we face this market going forward. So yes.

I'm showing no further questions in the queue, so I will now turn the call back over to Jonathan Cohen.

All right, well I'd like to thank everyone for their participation in our June 30, TICC earnings call. We appreciate everyone's interest and participation. We look forward to talking to you in the future. Thanks very much again.

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