Oxford Square Capital Corp (OXSQ) 2017 Q3 法說會逐字稿

Good morning, and welcome to the TICC Capital Corp. Third Quarter 2017 Earnings Release and Conference Call. (Operator Instructions) Please note that this event is being recorded.

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

Thanks very much. Good morning, and welcome everyone to the TICC Capital Corp. Third 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 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 these 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 turn the presentation back to Jonathan.

Thanks very much, Bruce. We generated a total return of approximately 1.6% for shareholders during the third quarter of 2017, representing the change in TICC's book value per share plus distributions paid to our common shareholders. The book value per share was $7.43 at the end of the third quarter of 2017 compared to $7.51 at the end of the second quarter of 2017. We paid distributions of $0.20 per share during the third quarter.

For the quarter ended September 30, 2017, we reported GAAP net investment income of approximately $6.8 million or approximately $0.13 per share. In the third quarter, we recorded net realized losses of approximately $3.3 million, of which $2.2 million represented an acceleration of costs associated with the optional early repayment of the TICC 2012-1 CLO secured notes and net unrealized appreciation of approximately $2.6 million. In total, we had a net increase in net assets from operations of approximately $6 million or $0.12 per share.

Our core net investment income for the quarter ended September 30, 2017, was approximately $6.8 million or approximately $0.13 per share. Please see the earnings release we issued today for reconciliation of net investment income with core net investment income. We note that we continued to have no investments on nonaccrual status as of September 30, 2017.

During the third quarter, we continued to execute our strategy of rotating out of broadly syndicated corporate loans and into more narrowly syndicated loans through purchases in both the primary via premarketing and general syndications and the secondary markets. Moreover, our corporate loan investment activity continues to focus on the rotation of the portfolio into higher-yielding loans.

We also continued the active rotation of our CLO portfolio with opportunistic purchases and sales. Several of our CLOs executed refinancing transactions, which decreased the weighted average cost of their respective liabilities and, in certain instances, executed reset transactions, which also concurrently lengthened the reinvestment period of those on the CLO.

During the quarter, we voluntarily redeemed with secured notes on our TICC 2012-1 CLO. The redemption of that CLO provides us with the ability to continue the rotation of our corporate loan portfolio into higher-yielding assets. With that redemption, we eliminated approximately $73.4 million of debt on our balance sheet.

Additionally, on November 1, 2017, our 7.5% 2017 convertible senior notes matured and were repaid in full, representing a $94.5 million reduction in our leverage.

We continue to pursue our mandate of maximizing the risk-adjusted total return to our shareholders. As such, we have and continue to focus on portfolio management strategy to -- 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 has served us well during 2017. We note that additional information about TICC's third quarter performance has been posted to our website at www.ticc.com.

And with that, operator, we are happy to open the call for any questions.

(Operator Instructions) Our first question comes from Christopher Testa with National Securities Corporation.

Jonathan, just curious, what would have been the decrease in the CLO equity cash yields backing out the onetime costs of refinances and other things you noted in the press release?

Decently higher, Chris. We don't have a precise figure for that, but given the onetime expenses associated with these various refinancing and resets, that was certainly a drag during the quarter. The other change was a diminishment in our effective yield during the quarter consistent with tighter syndicated corporate loan spread environment. Against that, we have the potential and we are realizing in certain instances an ability to diminish our cost of capital within these various CLO structures as they refinance and reset.

Got it. And just a high-level question for me, if I can. I totally appreciate that CLO equity is an asset class and what it does in terms of generating cash that's generally in excess of what you're allowed to recognize under GAAP. Having said that, it is causing you to kind of bleed out NAV because you're underearning the dividend consistently on a GAAP NII basis. Is there any thought on the board's behalf in terms of changing it to set it on GAAP NII as opposed to core income?

Sure, Chris. The Board of Directors every quarter looks at both GAAP and cash or GAAP and core along with all the other components of our income stream and our total return proposition and makes their determinations based upon all of those things. So that's something to be considered. But in terms of bleeding out NAV, I -- as you put it, I think that is worth some additional discussion. Over the course of the last year, from the end of the third quarter of 2016 to the end of the third quarter of 2017, our book value per share has actually increased approximately 4.9%, about $0.35 a share, from $7.08 to $7.43. During that period, we have distributed out $0.89 per share in cash distributions. So representing about 12.6% return on the distribution side against the $7.08 per share net asset value. So I think, we've managed to do a fairly good job over the course of an extended period and certainly over the last year maintaining book value, while managing our CLO equity investment strategy.

And our next question comes from Mickey Schleien with Ladenburg.

Jonathan, between TICC and Oxford Lane, you have a lot of insight into the collateral underlying all these CLO investments, which numbers hundreds, if not thousands of individual loans. So my question is, I assume, you track that collateral fairly closely. Are you seeing any signs at all of a slowdown or perhaps a pickup in the economy? And the reason for my question is, we're just statistically so long into the -- this expansion cycle. I'm trying to understand if that will persist or not? And if not, are you positioning the portfolio for a downturn?

Sure, Mickey. To answer the first part of your question, the answer is, we have not seen any meaningful signs or any signs that we consider to be highly relevant within our various collateral pools inside of the CLO equity structures that we own, that would indicate the beginning of a meaningful decline in overall economic activity. The most relevant aspect of all of the various things that we look at is probably default rates. And default rates have remained very, very low within U.S. CLO structures now for an extended period of time. So we're not seeing that. In terms of syndicated corporate loan spreads, the tightening -- the rise in the prices and the tightening in corporate loan spreads continues and we agree with you. We are sort of in agreement that we are almost certainly closer to the top of a credit cycle than the middle or the bottom of a credit cycle, certainly. So with all of those things, and to answer the second part of your question, we have taken steps to attempt to insulate ourselves to the greatest extent possible against an economic downturn, against the rising rates, against the widening in spreads. Some of those things have included a fairly dramatic deleveraging in the portfolio or debt-to-equity ratio a year ago to the 86%. It stands at 41% as of the end of the third quarter of 2017. And with the repayment of our 2017 converts, we've obviously taken a significant step towards a lower levered portfolio. Additionally, within our CLO equity book, there are certain things that we have attempted to do to architect a more resilient portfolio. We have talked about some of those things in the past, but that remains a priority for us.

That's helpful, Jonathan. My follow-up question regards LIBOR. And if I could just get your thoughts on what could replace LIBOR down the road? And how are financial institutions and regulators going to handle that process which is a shock to the system?

Sure, Mickey. CLO indenture structures, U.S. CLO indenture structures are already beginning to build a mechanism to allow for the ultimate replacement of LIBOR with some alternate mechanism, some alternate index that will, as you say, eventually replace LIBOR. In terms of the specific mechanism or the specific index that will ultimately take LIBOR's place, we haven't really speculated on that. I think, the market is still in a state of uncertainty around that. But again our hope and expectation is that, that will over a multiyear period represent a fairly seamless transition.

At this time, we have no further questions. So I would now like to conclude our question-and-answer session, and turn the conference back over to Mr. Cohen for any closing remarks.

Great. Thank you very much. I'd like to thank everyone, who has participated in this call or who listens to the replay for their interest in TICC Capital Corp. And we look forward to speaking with you during the fourth quarter and on our call early next year. Thank you very much.

Thank you. The conference has now concluded. Thank you for joining us for this presentation. You may now disconnect your lines.