Oxford Square Capital Corp (OXSQ) 2019 Q4 法說會逐字稿

Good day and welcome to the Oxford Square Capital Corp. Fourth Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

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

Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp. Fourth Quarter 2019 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Kevin Yonon, our Managing Director and Portfolio Manager.

Bruce, could you open the call this morning with a disclosure regarding forward-looking statements?

Sure, Jonathan. Today's conference 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 issued earlier this morning. Please note that this call is the property of Oxford Square Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. At this point, please direct your attention to the customary disclosure in this morning's press release regarding forward-looking information.

Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, future events and financial performance. We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those indicated in those 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.oxfordsquarecapital.com.

With that, I'll turn the presentation back to Jonathan.

Thanks, Bruce. For the quarter ended December 31, Oxford Square's net investment income was $0.18 per share and our net asset value per share stood at $5.12 compared to net investment income per share of $0.19 and the net asset value per share of $5.42 in the prior quarter.

For the fourth quarter, we recorded total investment income of approximately $13.4 million compared to $14.1 million for the prior quarter. In the fourth quarter of 2019, we recorded unrealized depreciation on investments of approximately $13.3 million or $0.28 per share compared with $41.6 million or $0.87 per share for the prior quarter.

In the fourth quarter of 2019, we did not recognize any realized gains or losses on our investment portfolio. In total, we had a net decrease in net assets from operations of approximately $4.9 million or $0.10 per share compared to a net decrease of $33.1 million or $0.69 per share for the prior quarter. We note that as of December 31, we held 2 investments on nonaccrual status with combined fair values of $5.8 million.

During the fourth quarter of 2019, we made new investments totaling $3.9 million, and we had principal repayments in sales of $19.7 million. On February 24, 2020, our Board of Directors declared monthly distributions of $0.067 per share for the months ending April, May and June of 2020. Additional details regarding record and payment date information can be found in our press release that was issued earlier this morning.

And with that, I'll turn the call over to our Portfolio Manager, Kevin Yonon.

Thank you, Jonathan. During the quarter ended December 31, the U.S. loan market continued to exhibit pricing dispersion and remained bifurcated from a demand perspective.

At the beginning of the quarter, U.S. loan prices as defined by the S&P/LSTA leveraged loan index declined from 96.3% of par to a quarterly low of 95.35% by the beginning of November. The decline in U.S. loan market pricing was likely caused by continued one-off idiosyncratic loan market weakness, increased loan downgrades, weak earnings for certain loan issuers and continued outflows from U.S. loan funds. As the quarter progressed, U.S. loan prices stopped declining and started to stabilize likely due to positive market technicals as there was virtually no primary loan issuance and a limited 4 calendar and broader macro market strength.

To highlight the pricing dispersion and bifurcation of the U.S. loan market, the percentage of U.S. loans trading at prices of par or higher increased to approximately 50% at the end of December from approximately 34% at the end of September. During the same period, the percentage of loans quoted at 80% of par or below peaked at 5.9% at the end of November before finishing at 3.9% at the end of December from approximately 4.1% at the end of September.

While the percentage of performing loans quoted at 80% of par or below is at a 3-year high, this remains well below post-crisis highs of 12.1% in February 2016, which was caused by sector-level stress within the oil and gas, metals and mining and brick-and-mortar retail sectors.

Moreover, during the quarter, BB-rated loan prices increased to 0.3 -- increased by 0.3%, B-rated loan prices increased 0.8%, and CCC-rated loan prices increased 3.9%. Despite the increase in rating agency downgrades of U.S.-leveraged loans, the U.S. loan market default rate remained relatively stable throughout 2019, as the 12-month trailing default rate for the S&P/LSTA loan index ended the year at 1.4% by principal amount after starting the year at 1.6% by principal amount.

In this environment, we continue to focus on portfolio management strategies designed to maximize our long-term total return. And as a permanent capital vehicle, we historically have been able to take a longer-term view towards our investment strategy.

Thanks, Kevin, very much. We note that additional information about Oxford Square's fourth quarter performance has been posted to our website at www.oxfordsquarecapital.com.

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

(Operator Instructions) Our first question today will come from Mickey Schleien of Ladenburg.

A couple of high-level questions first, Jonathan. So by the end of last year, the proportion of loans in the LSTA index, which are rated B- did climb to 20%, which was expected, and that's about double the level from the end of 2018 and a rate we haven't seen since the financial crisis. I also see that Oxford Square's OC cushion in the CLO equity portfolio declined again down to 3.56%. So given these trends, what's your thesis on the outlook for CLO equity cash flows, given this climbing risk of the B- loans being downgraded into the CCC bucket?

Sure, Mickey. I think we continue to believe that CLO equity cash distributions will remain highly profile-dependent. So obviously, we're focused on total return when it comes to our CLO equity and junior debt investing strategy. We're looking at the IO component and the PO component, and certain profiles continue to look very strong from a cash flow perspective. Long-dated CLO equity as an asset class continues to demonstrate a strong front-end loaded cash flow characteristics, but we're total return investors. So if we have the ability to invest in CLO equity profiles that are more back-end loaded but offer us a compelling risk-adjusted return, we'll continue to look at those opportunities.

And Jonathan, in terms of your portfolio, do you -- the CLO equity portfolio, do you have any positions that have started to divert cash flows away from CLO equity or are very close to doing that?

So we had a single portfolio position in the fourth quarter that -- at Oxford Square that did show diversion.

Okay. Moving on to the broader market. So this year, the leverage loan market started off quite strong, I think, as you mentioned. But it's given up all its gains with investors concerned about risks related to the coronavirus. Can you discuss with us your thesis on the potential impact of the virus on the fundamentals of the borrowers amongst U.S.-leveraged loans and how you may be managing the portfolio in front of that risk?

Sure, Mickey. I don't think we presume to know more about the economic impact of the coronavirus on the U.S. and global economies than other market participants. So we've looked at what's coming out of the center for disease control. We've looked at all of the statements or most of the statements, I think, that have been made by various governments globally. We've looked at various analyses that have been performed by firms across Wall Street. I don't think we have a defining thesis at this point. I think like most other market participants in our asset class, we're monitoring closely these developments, but we don't have a specific thesis.

And just if I could follow up on that, Jonathan. Are there CLOs that have more of a focus internally into the U.S. as opposed to CLOs that may be more at risk of, let's say, the supply chain issues everyone is talking about? Or is it a situation where CLOs have become such a large component of the broader loan market that this risk is just unavoidable and the managers would just have to deal with it across the board?

Sure, Mickey. That's a great question. So as you know, U.S. CLOs, the type of CLOs that we invest in at Oxford Square, are comprised almost entirely of loans to U.S.-operating companies. So from that perspective, there's not a great deal of direct international exposure inside of the CLOs that we invest in.

The second part of your question, though, I think, is APT, which is U.S. companies of all varieties, or especially larger companies, are globally integrated operating concerns, and they take on global risk as a function of running their businesses. So we certainly have the ability to skew the portfolio over time away from certain types of exposures. We can invest in CLOs with different diversity tests or different types of CCC baskets that will limit or better define our specific risk as we invest in these structures. But in terms of eliminating or even radically diminishing risk relating to global macroeconomic concern as a function of the coronavirus, I think we and the rest of the world are fairly limited in that regard.

I understand. Just a couple of questions related to the balance sheet. Was the premier global first lien the new nonaccrual? Or was it another borrower?

Just the second lien, Mickey.

So what was the new nonaccrual this quarter?

We'll be releasing that information in the K, which should come out later today.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Jonathan Cohen for closing remarks.

Thank you very much, operator. I'd like to thank everyone on the call for their participation and their interest, and we look forward to speaking to you again soon. Thanks very much.

The conference has now concluded. We thank you for attending today's presentation, and you may now disconnect your lines.