Oxford Square Capital Corp (OXSQ) 2021 Q4 法說會逐字稿

Good morning or good afternoon, all, and welcome to the Oxford Square Capital Corp. Fourth Quarter 2021 Earnings Conference Call. My name is Adam, and I'll be your operator today. (Operator Instructions) I will now hand you over to CEO, Jonathan Cohen to begin. So Jonathan, please go ahead when you are ready.

Thank you very much, Adam. Good morning, everyone. Welcome to the Oxford Square Capital Corp. Fourth Quarter 2021 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 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 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 to Jonathan.

Thank you, Bruce. For the quarter ended December 31, Oxford Square's net investment income was approximately $4.5 million or $0.09 per share, and our net asset value per share stood at $4.92. This compares to net investment income of approximately $4 million or $0.08 per share and a net asset value per share of $5.03 for the prior quarter. That increase in net investment income was principally driven by higher interest income partially offset by lower CLO effective yield income.

For the fourth quarter of 2021, we recorded total investment income of approximately $10.2 million as compared to approximately $9.8 million in the prior quarter. In the fourth quarter of 2021, we recorded net unrealized depreciation on investments of approximately $700,000 or $0.01 per share compared to net unrealized appreciation on investments of approximately $5.6 million or $0.11 per share for the prior quarter.

In the fourth quarter of 2021, we reported realized losses on investments of approximately $3.7 million or $0.08 per share compared to realized gains of $1.7 million or $0.03 per share for the prior quarter.

During the fourth quarter of 2021, our investment activity consisted of purchases of approximately $23.3 million, sales of approximately $10.3 million and repayments of approximately $1.6 million. As of December 31, we held cash and equivalents of approximately $9 million. On March 1, 2022, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending April, May and June 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 will turn the call over to our Portfolio Manager, Kevin Yonon, to discuss the loan market. Kevin?

Thank you, Jonathan. During the quarter ended December 31, 2021, the U.S. loan market exhibited stability versus the quarter ended September 30, 2021. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index slightly increased from 98.62% of par as of September 30 to 98.64% of par as of December 31. According to LCD, during the quarter, pricing dispersion related to credit quality occurred with BB-rated loan prices decreasing 12 basis points, B-rated loan prices decreasing 25 basis points and CCC-rated loan prices decreasing 144 basis points on average.

The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index decreased 0.29% by principal amount at the end of the quarter after starting the quarter at 0.35%. Note that this rate is just 14 basis points above the all-time low.

Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par ended the quarter at approximately 0.99% compared to 2.7% at the end of December 2020 and 3.75% at the end of December 2019.

During the quarter ended December 31, primary market issuance was approximately $113 billion bringing 2021 primary market issuance to an all-time high of approximately $598 billion versus $289 billion during 2020. This was driven by strong refinancing, M&A and LBO activity.

Moreover, U.S. loan funds, as measured by Lipper, were approximately $7.9 billion for the quarter ended December 31, bringing 2021 total inflows to approximately $33.8 billion versus total outflows of approximately $19 billion during 2020. 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'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) The first question today comes from Mickey Schleien from Ladenberg.

Jonathan, I hope you're doing well. Jonathan, given your long experience of investing in the CLO market, I think it would be helpful if you could describe how in your experienced CLO equity cash flows have historically behaved in periods of rising interest rates, which obviously is what's expected for the coming year.

Generically, Mickey, what has happened historically is that initially, you begin to lose the benefit of the LIBOR floors, which will now become the SOFR floors. But then over time, the higher rates manifest in higher returns on the equity component of the overall capital structure. That's sort of the historic norm.

Jonathan, digging a little deeper. When these rates have risen in the past, have you seen any stress develop in terms of borrowers' abilities to the fund their -- to service their debt?

Sure, Mickey. I'm going to turn the call over for a moment to Deep Maji, you know, who's our Chief Portfolio Manager and our CLO investment side.

So what you've seen in certain instances in the past, when rates rises often, you'll see the coupon or the spread above the index potentially decrease because if the all-in cost to borrowers is too high, they just will choose not to finance themselves in the loan market. So in other periods, like we've seen in the past when LIBOR, the previous index, was at much higher levels, often, the coupons above that LIBOR were at lower levels, and that commensurately kept kind of all-in cost of borrowers, relatively stable but this cycle could be different.

I understand. And Deep in that regard, when you look at borrowers' revenues and margins trend this year over the last year, any insight into how they're doing in terms of revenue and margin growth? And can they -- how exposed are they to the rising commodity prices that we're seeing?

It's very difficult to say, Mickey. I mean, this period is relatively new in terms of rising -- the prospect for rising rates, the prospect for rising commodity prices, inflation permeating markets broadly is a new enough phenomenon that I'm not sure we're quite ready or prepared to comment on how that's manifesting at the borrower level.

Okay. A couple of more questions. Jonathan, you mentioned LIBOR floors, which will become SOFR floors. Can you give us an idea what the average floors are in the loan portfolio and in the CLO portfolio?

I mean broadly for the market, Mickey, it's probably right around 50 to 75 bps.

Okay. And my last question is related to effective yields in the CLO book versus cash yields. I'm trying to understand why at Oxford Square, the effective yield is of around 9% is less than half of its cash yields, which are over 20%.

And I'm asking because at other CLO funds, including Oxford Lane, those CLO equity yields are well into the teens. So the effect that Oxford Square is, as you know, to book less to income and more to the cost of the investment.

Sure, Mickey. Keep in mind, of course, there are different portfolios with different incept dates, different final maturities and different levels of aging across those 2 portfolios. It doesn't mean that 1 profile is necessarily superior or inferior to the other. But from an effective yield perspective, as you know, there is a meaningful difference.

So it's more idiosyncratic than anything else, Jonathan?

It's more a function of timing and age.

And just to follow up. I mean, when I see an effective yield of 9 and a cash yield of 20, we know that over time, cash and GAAP and tax all have to combine that can take a long time to happen. But does the fact that the effective yield is so much lower than the cash yield imply that those cash yields are likely to come down over the future?

I wouldn't necessarily draw a linear implication on that basis.

Okay. Thanks, Jonathan. Those are all my questions for this morning.

I show no further questions. And with that, I will turn the call back to Mr. Jonathan Cohen, CEO.

All right. I'd like to thank everybody for their interest and participation in Oxford Square Capital Corp. We appreciate your interest in this call, and we look forward to speaking soon. Thanks very much.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.