Oxford Square Capital Corp (OXSQ) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Oxford Square Capital Corp, First Quarter 2018 Earnings Release Conference Call (Operator Instructions) Please note this 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 Oxford Square Capital Corp First Quarter 2018 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; 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 Oxford Square 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, www.OxfordSquareCapital.com. With that, I'll return the presentation back to Jonathan.

Thanks, very much Bruce. We're pleased to report that we've generated a positive total return of 3.31% for our shareholders during the first quarter of 2018. That return reflects the increased net asset value per share from $7.55 at the end of December 2017 to $7.60 per share as of March 31, as well as the effect of a $0.20 distribution. For the quarter ended March 31, we reported GAAP net investment income of approximately $8.7 million or approximately $0.17 per share compared to $7.6 million or $0.15 per share for the quarter ended December 31, 2017.

In the first quarter of 2018, we recorded a net change in unrealized appreciation on investments of $2.5 million and realized gains of approximately $300,000. In total, we had a net increase in net assets from operations of approximately $11.5 million or $0.22 per share. Our core net investment income for the quarter ended March 31 was approximately $7.6 million or approximately $0.15 per share compared with $9 million or $0.17 per share for the prior quarter. Please see the earnings release we issued today for a reconciliation of net investment income with core net investment income. Following the company's results for the first quarter, the company's Board of Directors has declared a $0.20 per share distribution for the quarter ended June 30, 2018 payable to shareholders of record as of June 15, 2018. On February 5, 2018, the Board of Directors authorized the stock repurchase program of $25 million -- up to $25 million. During the quarter, we repurchased 990,260 shares of our common stock at a weighted average price of $6.01 per share, producing book value accretion of approximately $0.03 per share over our net asset value per share as of December 31.

The first quarter of 2018 represented a period of continued strength in the markets in which we participate. From January 1, 2018, to March 31, the LSTA cooperate loan index modestly increased, trading at approximately 98.4% at par at the end of the quarter. At the same time, Corporate loan default rates remained at low levels providing investors with the generally lower risk, lower return corporate debt environment. In the first quarter of 2018, tighter leverage loan credit spreads reduced the weighted average spreads of the loan assets within various CLO investments. The current market environment has also resulted in tighter CLO liability spreads, presenting us with ongoing refinancing as well as resetting opportunities, which we have and continue to take advantage of. As we executed our strategy of rotating out of more broadly syndicated corporate loans into a combination of club deals and narrowly syndicated loans to purchases in both the primary and secondary markets, we remain mindful of maintaining overall portfolio of liquidity. We believe this strategy allowed us to maintain corporate debt investments, which had sufficient liquidity to be sold, if necessary, in order to take advantage of market opportunities. We note that we continue to have no investments on nonaccrual status as of March 31.

We continue to pursue our mandate of maximizing the risk adjusted total return to our shareholders, as such we haven't 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. Additional investment about Oxford Square capital Corp First Quarter performance has been posted to our website at www.oxford Square Capital.com. And operator, with that, we're happy to open up the lineup for any questions.

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

Jonathan, in 2017, about 18% of your distributions were a return of capital. What caused distributions to exceed tax over income last year? And what are your plans to generate sufficient taxable income this year to cover the distribution?

Sure. I don't think it's our goal, Mickey, to generate sufficient taxable income to cover any particular distribution. The tax treatment of our income and of our distributions is essentially determined after the fact by virtue of the PFIC income, the passive foreign investment company income that we receive from our CLO equity investments. So to the extent that our taxable income is lower than our GAAP NII and or our actual economic return for any particular period, that's not something we view as a negative. If we have income, cash and economic return sufficient to cover a particular distribution, but the tax treatment of that distribution is ultimately more favorable to our shareholders, we regard that as a positive outcome.

Okay, I understand. Jonathan, the Board has approved higher leverage. Can you describe what type of investment strategy the company will follow -- would follow with a larger balance sheet?

We're really not in a position yet, Mickey, to talk about that. We've talked internally and with our board about various strategies, but those really remain hypothetical at this point, because we have no near-term opportunity or no near-term strategy I should say or probably any near-term opportunity as well to exceed the historic statutory leverage limit.

And with regard to that timing Jonathan, what limitations do your existing unsecured notes have in preventing you from getting higher leverage?

None to my knowledge, Mickey. I think the notes simply require us to comply with the -- fully at leverage test.

Okay. And then as you mentioned, spreads in the fourth quarter began to stabilize, but now they are compressed, a lot of CLOs have already refinanced to reset their liabilities. So I'd like to understand what your outlook is for the ability of the CLOs in the portfolio now to continue to manage their balance sheets against that trend?

Sure, Mickey. That's a good question. So we consummated a number of refis and resets during the first quarter, and we're working on more. Some of these refi and reset opportunities are seeming to be in a sense recurring. In a sense that deals have refied or reset and then may be looking to refi or reset yet again as liability spreads on CLO structures continue to grind lower.

The next question comes from Jonathan Bock of Wells Fargo.

Maybe the first question just as it relates to leverage. Have you tried to procure or are in the process procuring any additional source of borrowings beyond what we already have outstanding via credit line et cetera?

Yes, John, thank you, for the question. We're looking at several opportunities to up lever the balance sheet, although none that would take us even close to the historic statutory limit of 1:1.

Okay. And then maybe a question as it relates to CLO equity, can you just explain how GAAP yields go up a quarter-over-quarter, but cash yields actually go down? Specifically, what changed in the outlook for effective yield?

Sure, John, absolutely. It's principally a function or completely a function of 2 different dynamics. The first element are called deals, deals that we or we and the other equity holders have called for liquidation. Those deals may be producing significant GAAP, effected yield income for us, but they may not be producing the sort of cash that they had historically. The total returns, the total IRR, the total cash on cash returns are what we are ultimately focused on. The second and probably more relevant dynamic relates to what we just talked about with respect to the refi and reset transactions. So when we refi or reset a deal, the economic value of that deal generally increases, our book value increases as a result of that refi or reset, the ultimate economic profitability will generally increase, but the cash income may decline for a quarter -- a single quarter typically, by virtue of the front-end loaded refi or reset expenses associated with that transaction.

The next question comes from Christopher Testa of National Securities Corporation.

Just a following up a little on what you were just going over with John Bock, just wondering if you could quantify the impact per share from the refinance and reset cost during the first quarter?

Sure. We don't have a number immediately to hand, but it was certainly the vast majority or essentially all of that Delta in the Core NII. We had, for example the effect of 3 cold deals during the quarter to some greater or lesser extent and 6 refi or reset transactions that had some effect or that were at least relevant, some portion of those anyways were relevant, with respect to that number. So was it a significant delta.

Okay, that's fair. And just looking obviously, AAA spreads has continued to come in, I think, the average response to something like 98 basis points. Where do you see the shaking out? In other words, are you looking to just refinance everything that you're able to refinance now? Or are you still trying to kind of stagger that a little bit in the event that AAA spreads can come in even more?

Sure. Thanks, Chris. We're being very opportunistic about our refis and our resets. It has to make sense for the deal, for the transaction, for us. Economically it needs to be an accretive transaction. So we have, as you know a significant practice in the CLO market. Last year, I believe across the entire platform, we traded approximately $2 billion of notional CLO equity. And I'm not sure if there are any other market participants who traded that sort of volume. So we think we're in a strong position to participate not only in the warehousing market and the primary markets going forward but also in the secondary market. So to the extent that I sort of, interpret your question as is there are more room to go, in terms of tightening of CLO liability spreads? The answer is, we're not sure, but we've been able to very opportunistic in generating strong returns over the last several years and in this asset class partially and recently as a function of these refi and reset opportunities.

Got it. And given the ability of you to do some primary originations here, obviously, these very favorable financing -- the financing costs, are you expecting your GAAP effective yields to kind of be north of where the weighted average yield on the book is right now?

I mean our GAAP effective yield, Chris, has been stable, maybe trending slightly higher. I mean part of this is a function of our ability to relever the balance sheet, which we are looking to do opportunistically, and only on the right terms and at the right price. If we're able to do that, we then gain the ability to rotate the CLO book, which we don't have the ability to do currently by virtue of being in excess of the 30% limitation for nonqualified assets. That I believe would allow us to generate, not only potentially higher GAAP effective yield numbers, which are interesting, but much more importantly, actual economic returns, which are much more relevant to us.

The next question is a follow up from Mickey Schleien of Ladenburg.

Yes, Jonathan. Just a couple of questions. We don't have the queue obviously, so can you give us some color on what drove the unrealized appreciation during the quarter?

Thank you, Mickey. It was principally due to appreciation on the CLO equity portfolio, and also but to a lesser extent on the leverage loan book.

Okay. Was that driven by any meaningful changes in assumptions when you were valuating the CLO equity or was that..

No. We've been very consistent now for a long period of time about our core assumption. The refis and resets certainly help the valuations, because it makes these deals typically more valuable.

I understand. And my last question, there was a pretty meaningful decline in professional fees quarter-to-quarter, can you tell us what caused that? And what sort of trend we might expect for the balance of the year?

Sure, Mickey. That was principally due to a decline in our audit expenses. We had over accrued modestly in calendar 2017, and we had the benefit of that in the first quarter. Our expectation is that audit fees going forward, we'll be more consistent with those reduced levels.

And next, we have a follow up from Jonathan Bock of Wells Fargo.

Apologies, I was cut off unexpectedly when I was trying to ask my next set of question, so I ask the operator to respectfully hold off once we're done. So 1 quick question is, I understand Jonathan, you have the board majority of independent directors approve leverage. Yet we found that there are a certain subset of BDCs that will and are taking votes to increase leverage to allow for shareholders to participate in that discussion. So, John, can you talk about your unique situation as to why you're choosing not to ask shareholders when compared and contracted to those that are?

Sure, John. I'm not sure the situation is unique as you referenced, I think quite a few other BDCs have taken the position of having a board approval. From the board's perspective and from management's perspective, this is optionality. It's not an option that we have any immediate or intermediate term expectation of taking advantage of, but to the extent that dislocated market or if opportunity presents itself, we want to be in a position to take advantage of this new higher statutory limitation.

And then the next question just relates to the share buyback. Just in terms of timing, also understand that there were meaningful management purchases of shares as well. Was this buyback done before or after those management purchases were affected?

They were affected, John, at the same time on a (inaudible) basis.

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

All right. I'd like to thank everybody for their interest and for their participation in the Oxford Square first quarter release. We look forward to speaking to you all again hopefully in the near future. Thanks very much.

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