Oxford Square Capital Corp (OXSQ) 2020 Q2 法說會逐字稿

Good day and welcome to the Oxford Square Capital Corp. Second Quarter 2020 Earnings Release and Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to hand the conference over to Mr. Jonathan Cohen, CEO. Thank you, and over to you, sir.

Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp.'s Second Quarter 2020 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; Kevin Yonon, our Managing Director and Portfolio Manager.

Bruce, could you open the call please with the disclosure 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 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 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.

Thank you, Bruce.

For the quarter ended June 30, Oxford Square's net investment income was $0.09 per share, and our net asset value per share stood at $3.54 compared to net investment income per share of $0.13 and a net asset value per share of $3.32 in the prior quarter. For the second quarter of 2020, we recorded total investment income of approximately $8.3 million compared to $10.8 million for the prior quarter.

In the second quarter of 2020, we recorded net unrealized depreciation on investments of approximately $19 million or $0.38 per share compared to net unrealized depreciation on investments of approximately $85.4 million or $1.74 per share for the prior quarter.

In the second quarter of 2020, we recognized realized losses on investments of approximately $2.8 million or $0.06 per share compared to a realized loss of $300,000 or $0.01 per share for the prior quarter.

In total, for the second quarter, we had a net increase in net assets from operations of approximately $20.6 million or $0.41 per share compared to a net decrease in net assets from operations of $79.4 million or $1.62 per share for the prior quarter.

During the second quarter of 2020, our investment activity consisted of purchases of approximately $21.3 million, sales of approximately $9.5 million and repayments of approximately $16.7 million. We note that as of June 30, we continue to hold 2 debt investments on nonaccrual status. We also hold preferred equity investments in one of our portfolio companies on nonaccrual status.

As previously announced by the company, our Board of Directors had declared monthly common stock distributions of $0.035 through September 30, 2020. In light of current economic and market conditions, specifically as a result of the global crisis caused by the spread of the COVID-19 virus, no assurance can be provided at the level of any common stock distributions that may be declared by the company's Board of Directors for the fourth quarter of 2020, which are currently expected to be declared in September.

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

Thank you, Jonathan.

During the quarter ended June 30, 2020, U.S. loan market strengthened versus the quarter ending March 31, 2020. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index, increased from 82.9% of par as of March 31 to a quarterly high of 91.2% on June 10 before declining to 89.9% on June 30. According to LCD, during the quarter, pricing dispersion related to credit quality occurred, with BB-rated loan prices increasing 7.2%, B-rated loan prices increasing 11.5% and CCC-rated loan prices increasing 18.7% on average.

Rating agency downgrades of U.S. leveraged loans continued during the quarter, but the pace of downgrades slowed as the quarter progressed. Additionally, the 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index increased to a 5-year high of 3.2% by principal amount at the end of the quarter after starting the quarter at 1.8% by principal amount.

Finally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 8% compared to 24% on March 31 after peaking at 57% on March 23. June 30 year-to-date primary market issuance of approximately $138 billion was 5% below issuance during the comparable period in 2019. Additionally, U.S. loan fund outflows, as measured by LIBOR, have moderated with approximately $4 billion of outflows for the quarter ended June 30 versus approximately $12 billion outflows for the quarter ended March 31.

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 very much, Kevin.

We note that additional information about Oxford Square Capital Corp.'s second quarter performance has been posted to our website at www.oxfordsquarecapital.com. And with that, operator, we're happy to open the session for any questions.

(Operator Instructions) The first question is from the line of Mickey Schleien from Ladenburg.

Yes. Jonathan, going into the second quarter, the ratings agencies were very quick to try to get ahead of the impact on borrowers from the pandemic, and there was a very high level of downgrades in March and April, as you know. But -- and I do see that about 1/3 of Oxford Square's CLO equity portfolio has a negative junior OC cushion, which I assume is what caused the decline in the CLO equity gap and cash yields. Is that correct?

Thank you, Mickey. I'm going to turn that question over to Deep Maji, who runs our CLO practice, as you know.

Thank you, Mickey. Thank you, Jonathan. Yes. So that is driving what -- the decline in the cash yields as we did experience some level of cash flow diversion for the second quarter of 2020. In terms of effective yield, Mickey, as you know, there are a variety of assumptions that go into that, and that is generally looked on a forward-looking basis and it's -- we calculate the yields to an expected call date or maturity date. So while the cash returns were affected by the level of diversion, there are many factors and assumptions that go into what drives the change in effective yield.

I understand, Deep. And it seems that the ratings agencies, at least for now, are taking more of a wait-and-see attitude. I think they're looking for second quarter earnings before they make decisions about downgrades. But I do see that the downgrades in June were about 1/5 of the level in April. And we've also seen a rally in CCC loans. So with those trends in mind, did managers have an opportunity to improve their OC test in July, which is a typical CLO payment month? And could that help improve the CLO equity cash flows in the third calendar quarter?

Sure. So I can speak through June 30, and the ratios and improvement in CCC prices generally improved OC ratios from April to June.

Okay. So it's too early to tell in terms of the July ratios?

Probably, yes, Mickey. Yes.

Okay. And moving on to portfolio allocation, Jonathan, in June, second lien bids rallied or finished the quarter at about 7% below their pre-COVID level. So I'm talking about broadly syndicated leveraged loan market. And that was similar to the performance of the -- of first liens which are now about -- were about 6% below their pre-COVID levels. So when you look at those 2 opportunities alongside CLO equity and debt, where do you see the best risk-adjusted return opportunity for Oxford Square considering how tough the economic outlook remains?

Sure, Mickey. I think it's fair to say that we're focusing principally, not exclusively, but primarily right now, on the first lien syndicated loan market and on certain selected opportunities in the CLO equity space. So CLO equity, as you know, is a highly-volatile asset class both in terms of the underlying NAVs, represented by the collateral pools that reside within these structures, and also in terms of their market values and their market prices. So those are really the areas that we're principally focused on right now.

And to follow-up, Jonathan. The last time we talked about -- you and I talked about CLO equity. At that time, the market was fairly broken. Trading was very sporadic. Bid/ask spreads were very wide. The primary market was more or less locked up. How would you characterize the CLO equity market today in terms of those issues that I just mentioned? And is there an opportunity to put money to work?

We believe there has been and continues to be an opportunity to put money to work in this asset class, and we have been continuing to. In terms of the attributes that you've just referenced in terms of the wideness of bid/ask spreads and the dislocation of the market, the relative lack of liquidity, those things have significantly ameliorated since we last spoke.

Bid/ask spreads have gotten tighter, liquidity has gotten better, which isn't to say that those things couldn't reverse again. They certainly could. But at the moment, the market has improved in those regards.

I understand. My last question, Jonathan. Unfortunately, for everyone, the -- at least down here, the pandemic is obviously going in the wrong direction, and that trend is occurring in other parts of the country and is likely to further impact borrowers, which could pressure the loan market and CLO equity. Given what's going on, can you help us understand or describe the Board's sort of base case investment thesis when they set the new dividend?

Sure. The Board, Mickey, looks at a range of different factors. They look at the financial performance of the company in the most recent -- over the most recent period, they look at projected expected cash flows, GAAP earnings, potential changes to our asset values and our NAV over time, the expense structure of the firm, the tax character of the underlying -- of the underlying income that we're receiving, both historical and prospective, although prospective tax character is an extraordinarily difficult thing to attribute to CLO cash equity flows. So I would say the Board has and continues to take into account a very wide range of factor, including -- factors, including those that I've just mentioned.

I see no questions in the queue now.

All right. Well, we'll -- I guess if there are no additional questions, we'll end the call there. But I'd like to thank everyone for their interest in and their participation in the company in this call, and we look forward to speaking to you again soon. Thank you very much.

Thank you very much. Ladies and gentlemen, the conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.