Oxford Square Capital Corp (OXSQ) 2022 Q2 法說會逐字稿

Hello, and welcome to today's Oxford Square Capital Corp. Second Quarter 2022 Earnings Conference Call. My name is Drew, and I will be coordinating your call today. (Operator Instructions) I'm now going to hand over to Jonathan Cohen to begin. Please go ahead.

Thanks very much. Good morning, everyone. Welcome to the Oxford Square Capital Corp. Second Quarter 2022 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.

Thank you.

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 issued 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 can cause actual results to differ materially from those indicated in 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 at www.oxfordsquarecapital.com.

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

Thanks, Bruce. For the quarter ended June 30, Oxford Square's net investment income was approximately $4.3 million or $0.09 per share, which was unchanged from the prior quarter. Our net asset value per share stood at $3.67 as compared to a net asset value per share of $4.65 for the prior quarter. For the second quarter, we recorded total investment income of approximately $9.9 million, which was unchanged from the prior quarter.

In the second quarter, we recorded net unrealized depreciation on investments of approximately $46.2 million or $0.93 per share compared to net unrealized depreciation on investments of approximately $13.5 million or $0.27 per share for the prior quarter.

In the second quarter, we recorded realized losses on investments of approximately $1.5 million or $0.03 per share compared to realized gains of $1 million or $0.02 per share for the prior quarter. During the second quarter, our investment activity consisted of purchases of approximately $26.9 million and sales and repayments of approximately $9.6 million. As of June 30, we held cash and cash equivalents of approximately $23.2 million.

On July 21, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending October, November and December of 2022. Additional details regarding record and payment date information can be found in our press release that was issued this morning.

With that, I'll turn the call over to our Portfolio Manager, Kevin Yonon, to discuss the loan market. Kevin?

Thank you, Jonathan. During the quarter ended June 30, 2022, the U.S. loan market exhibited weakness versus the quarter ended March 31, 2022. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index decreased from 97.60% of par as of March 31 to 92.16% of par as of June 30.

According to LCD, during the quarter, there was pricing dispersion related to credit quality with BB-rated loan prices decreasing 399 basis points or 4.06%, fee-rated loan prices decreasing 596 basis points or 6.08% and CCC-rated loan prices decreasing 744 basis points or 8.37% on average.

The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index increased to 0.28% by principal amount at the end of the quarter from 0.19% at the end of March 2022. Additionally, the distressed ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at approximately 3.65% compared to 1.55% at the end of March 2022.

During the quarter ended June 30, 2022, primary market issuance was approximately $56 billion, representing a 48% decline versus the quarter ended June 30, 2021. This was driven by lower refinancing, M&A and LBO activity. At the same time, U.S. loan fund outflows, as measured by Lipper, were approximately $2.9 billion for the quarter ended June 30. 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 very much, Kevin. Additional information about Oxford Square's second quarter performance has been posted to our website at www.oxfordsquarecapital.com. And with that, operator, we're happy to open the call for any questions.

(Operator Instructions)

Our first question comes from Mickey Schleien from Ladenburg.

Can you hear me, Jonathan?

Yes. Good morning, Mickey.

Jonathan, could you give us some idea as to what trends you're seeing in terms of your borrowers and the collateral obligors and the CLOs in terms of their revenues and margins so far this year?

Sure. I'm going to hand the call over, Mickey, to Deep, who can talk a little bit about what we're seeing within the collateral pools of the various CLO structures that we invest in. Kevin, may also chime in.

Thanks, Mickey. Yes. So I think we've seen borrowers report earnings. I would say that, generally speaking, earnings have been stable. That being said, there has been some weaker guidance for later this year. I think generally speaking, the expectation was that earnings were going to be a little bit weaker into the second quarter earnings that we're starting -- that are starting to kind of come out now, but they've actually been a little bit ahead of what we expected. Kevin?

And specifically in our corporate loan portfolio, we haven't yet received Q2 results for our portfolio. That's -- those results are due in the next month or so. However, when you look at Q1 results as well as the commentary that were provided by certain management teams, as Deep was saying, through Q1 earnings and revenues generally were flat, margins are generally holding in there. However, there has been commentary, which we've heard sort of across the market just regarding inflation and the impact on wages, supply chain disruptions and potential future impacts on margins. So I think that's where we are at this point.

And with that in mind, what's your outlook for the loan and CLO markets for the balance of this year going into next year when we consider the level of inflation and the potential for the economy to slow down as the Fed tightens even more?

Sure, Mickey. We don't have a stated or published target for loan prices, default rates, CCC downgrades or any of the other metrics that we focus on and think about in the context of direct loan investing and CLO equity tranche investing. The real issue from our perspective is to what greater or lesser extent the loan market has already discounted some of these variables and some of this potential dislocation going into the latter part of the year. The loan market today, having rallied about 125 or 150 basis points off its recent low of circa 92, is clearly at a discount -- trading at a discounted par. The question is the sufficiency of that discount relative to these economic variables, and on that front, we don't have a specific view.

Jonathan, in terms of the portfolio, do you see more relative attractiveness in the loan market given what you just said or in CLO equity? And is that affecting your portfolio's allocation to any extent?

The answer, Mickey, I think, is both, although in different ways, certainly. The CLO market is broadly, I would say, less liquid, generally speaking, than the larger parts of the syndicated corporate loan market. That lack of liquidity can occasionally lead to opportunity. At the same time, some of the less liquid syndicated corporate loan names have also shown some interesting price movements. So the short answer, Mickey, is that we're monitoring both and we're continuing to invest in both.

Our next question comes from Steven Bavaria from Financial Writer.

Jonathan, I wanted to ask you a little bit more about the drop in the NAV from 1 quarter to the next. I know this kind of is seen as a knee-jerk negative by a lot of retail investors, but I know it's a bit more nuanced than that. And could you explain or give your thoughts on how often -- I mean, your own portfolio, even though in the secondary market, it's now perhaps marked down if you were to sell it, your loans are all 98% or more of them probably are still performing and you'll collect them at par.

So when you do that, and if you're able to go back into the market and buy new loans in the secondary market at even cheaper prices than perhaps is justified, that can actually be a benefit for you folks, right? I mean we often hear that CLOs and loan investor -- professional loan investors do better during turbulent times when secondary prices are down than they do in more normal times. Can you see what I'm getting at? And can you give me a little bit of your take on that, how you view it?

Sure, Steve. Thank you very much for the question. I think the question very neatly encapsulates a great deal of the philosophy around investing in syndicated corporate loan and CLO tranches in times of economic dislocation and price volatility across the low market broadly. So yes, we're in fundamental agreement with what you've just said, which is that to the extent that we don't see a dramatic increase in corporate loan defaults. We have the prospects certainly of seeing some accretive pull to par, which can be enormously powerful in the context of our dual investment strategies.

So while we're not saying that we expect every loan across our portfolio to repay at par. We're not saying that we don't expect some increase inevitably in what has been historically a very, very low corporate loan default rate. At the same time, we are expectant that the significant majority of syndicated loans will repay at par and our hope and even our expectation is to benefit from that dynamic, just as you say.

Thank you. That concludes today's Q&A session. I will now refer you back to Jonathan Cohen for further remarks.

Thank you very much, operator. I would like to thank everyone who's participated in this call or who's listening to the replay for their interest in Oxford Square Capital Corp. We look forward to speaking to you again. Thank you.

That concludes the Oxford Square Capital Corp. Second Quarter 2020 Earnings Call. Thank you for your participation. You may now all disconnect.