Oxford Lane Capital Q4 2023 Earnings Call Transcript

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May 16, 2023

There are 4 speakers on the call.

Operator

Good morning or good afternoon all. Welcome to today's Oxford Lane Capital Corp 4th Fiscal Quarter Conference Call. My name is Adam and I will be your operator for today. I will now hand the floor over to CEO, Jonathan Cohen, to begin. So Jonathan, please go ahead when you are ready.

Speaker 1

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. 4th fiscal quarter 2023 earnings conference call. I'm joined today by Saul Rosenthal, our President Bruce Rubin, our Chief Financial Officer and Joe Kupka, our Managing Director.

Speaker 1

First, could you please open our call with a disclosure regarding forward looking statements? Sure, Jonathan. Today's conference call is being recorded. A replay of the call will be available for 30 days. Replay information is included in our press release that was issued earlier this morning.

Speaker 1

Please note that this call is the property of Oxford Marine 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. Lastly, we refer to our most recent filings with the SEC important factors that could cause actual results to differ materially from VFOs indicated in these projections.

Speaker 1

We do not undertake to update our forward looking statements unless During this call, we will use terms defined in the earnings release and also refer to non GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted on our website at www.oxfordlanecapital.com. With that, I'll turn the presentation back to Jonathan. Thanks very much, Bruce. On March 31, 2023, our net asset value per share $4.61 compared to a net asset value per share of $4.63 as of December 31, 2022.

Speaker 1

For the quarter ended March, we recorded GAAP total investment income of approximately $66,500,000 representing a decrease of approximately $1,200,000 from the prior quarter. The quarter's GAAP total investment income from our portfolio Consisted of approximately $62,800,000 from our CLO Equity and CLO Warehouse Investments and approximately $3,600,000 From our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $37,400,000 or $0.22 per share for the quarter ended March Compared to approximately $41,400,000 or $0.26 per share for the quarter ended December. Our core net investment income was approximately $37,500,000 or $0.22 per share for the quarter ended March Compared with approximately $50,100,000 or $0.31 per share for the quarter ended December 31. For the March quarter, we reported net realized losses of approximately $4,900,000 and net unrealized Depreciation on investments of approximately $3,500,000 or $0.05 per share in total.

Speaker 1

We had a net increase in net assets resulting from operations of approximately $29,000,000 or $0.17 per share for the 4th fiscal quarter. As of March 31, the following metrics applied. None of these metrics represented a total return to shareholders. The weighted average yield of our CLO's debt investments at current cost Was 18%, up from 16.6% as of December 31. The weighted average effective yield of our CLO equity investments Current cost was 15.8%, up from 15.7% as of December 31.

Speaker 1

The weighted average cash distribution yield of our CLO equity investments at current costs was 16.5%, Down from 18.6 percent as of December. We note that the cash distribution yields calculated on Our CLO equity investments are based on the cash distributions we received or which we were entitled to receive at each respective period end. During the quarter ended March, we issued a total of approximately 3,900,000 shares of our common stock pursuant to an aftermarket offering, We will be net proceeds of approximately $22,600,000 During the quarter ended March, we made additional CLO investments were approximately $117,400,000 and we received approximately $24,800,000 from sales and from repayments. On May 10, our Board of Directors declared monthly common stock distributions of $0.08 per share For each of the months ending July, August September of 2023. And with that, I'll turn the call over to Joe Cuesta.

Speaker 1

Thank you, Jonathan. During the quarter ended March 31, 2023, U. S. Loan market performance improved versus the prior quarter. U.

Speaker 1

S. Loan prices, as defined by the Morningstar LSPA U. S. Leveraged Loan Index, increased from 92.44 percent of par as of December 31 To 94.71 percent of par as of February 9 before dropping to 93.38 percent of par as of March 31. According to LCD, during the quarter, there were some pricing dispersion related to credit quality with BB rated loan prices increasing 17 basis points, Single B rated loan prices increasing 165 basis points and CCC rated loan prices increasing 270 basis points on average.

Speaker 1

The 12 month trailing default rate for the loan index increased to 1.35% by principal amount at the end of the quarter From 0.72 percent at the end of December 2022. Additionally, the distress ratio defined as the percentage of loans with a price below 80% of par End of the quarter at 6.3% compared to approximately 7.4% at the end of December 2022. The increase in U. S. Loan prices led to an approximate 10% increase in median U.

Speaker 1

S. CLO equity net asset values. ED and junior over collateralization cushions declined 0.2% to approximately 4.5%. Additionally, we observed loan pools within CLO portfolios modestly increased our weighted average spreads to 3 57 basis points compared to 3 54 basis points last quarter. Oxford Lien continued to be active in the secondary market during the quarter.

Speaker 1

While most of our activity took place in the secondary market, we added 2 new issue CLO equity investments and 1 new issue CLO debt investment during the quarter. Our investment strategy during the quarter was to engage in relative value trading and to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy Across U. S. CLO Equity, Debt and Warehouses as we look to maximize our long term total return.

Speaker 1

And as a permanent capital vehicle, we have historically been able to take a longer term view towards our investment strategy. With that, I'll turn the call back over to Jonathan. Thanks, Joe. We note that additional information about Oxford Lane's 4th quarter performance has been uploaded to our website at www.oxfordlayingcapital.com. And with that, we're happy, operator, to open the call for any questions.

Operator

Thank you. And our first question today comes from Mickey Schleien from Ladenburg.

Speaker 2

Mickey, you are on the line. Please go ahead. Yes. Good morning, everyone. A few Questions this morning.

Speaker 2

Jonathan, I wanted to start by asking you how the problems at the regional banks That we've seen in the last few months impacted overall demand for CLO debt and its pricing as well.

Speaker 1

If it's had an impact, Mickey, we haven't seen it. I'm not sure What correlations there might exist between the situation at U. S. Regional banks And the CLO market broadly, I'm sure there are some interrelations, but none that have been evident to us.

Speaker 2

Okay. That's good to hear. And it looks like about a third of your Filo Equity Investment portfolio is beyond its reinvestment period. And with liabilities generally, You're seeing spreads that are still quite wide. The refinancing and reset opportunity is difficult.

Speaker 2

So how do you see your CLO equity portfolios

Speaker 1

Sure, Mickey. So yes, that's definitely a challenge with wider liability prices and limited refine reset optionality. The one positive I would note is just the ability for these managers to extend And reinvest even after the reinvestment period. So we continue to see low prepayment rates, strong reinvestment, so that's definitely an offset to the current environment. So we continue to see strong cash on cash returns and attractive profiles even with post reinvestment deals.

Speaker 1

Very much to your point, Mickey. I mean, that is essentially the reason we have been focused more on the secondary market and secondary market trading Then on the primary market as of late.

Speaker 2

Yes. I actually wanted to ask you about the secondary market, Jonathan. From what I understand, after the April payments were made on CLO Equity, there was a lot of Feel like we offered into the secondary market. How did that deal flow impact your ability to push out the reinvestment period? And what sort of estimated yields are you getting on current deal flow?

Speaker 1

Sure. I mean, as a general matter, Mickey, to your point, a more liquid and a greater volume of secondary market activity, We think it's beneficial to us. We are, as you know, active portfolio managers within this asset class, We turn this portfolio over time and have done historically. So more liquidity, more volume, again, Can be more conducive in terms of our ability to push out our reinvestment periods. Joe?

Speaker 1

Yes. Now like you said, we definitely saw a lot of activity post payments come out. We were able to take advantage of that just Given the volume, we think we were able to pick up some attractive paper. In terms of future Expectations, we don't, I think, really get into that, but see very attractive risk adjusted profiles in the secondary market right now. Okay.

Speaker 2

Core NII was down quarter to quarter even as the spread between 1 month and 3 month interest rates compressed, which had been a problem for several quarters. I would have expected that to help the CLO market in terms of the April distribution. So can you just walk us through At a high level, what caused core NII to decline quarter to quarter?

Speaker 1

Sure. There were really 2 major components. One was that the 1 month, 3 month basis had its widest point in October when the liabilities for January were being set. So remember, the quarter we're looking at are mainly composed of the January payments. So that was really the payment that took the brunt of this 1 month, 3 month basis.

Speaker 1

Since then, it's definitely tightened, and we expect to see that continue to more normalize going forward, again, just based on the popular available Forward curves. And specifically within Oxford Lane's portfolio, we had an unusually large number of first time payers, Which make their inaugural distribution, which is an outsized payment the previous quarter. So when you're looking for that quarter over quarter core comparison, That explains that delta, you said.

Speaker 2

So if I'm understanding you correctly, Are you saying that the April payments were meaningfully better than the January payments On an alternate basis?

Speaker 1

Yes. That's correct. Yes.

Speaker 2

Okay. And is that the rationale for raising the dividend above The core NII you reported for this current quarter?

Speaker 1

The dividend declaration, Mickey, is really Taking into account a larger set of factors, we're looking at cash flow, we're looking at core NII, we're looking at NAV, We're looking at our own internal projections. All of these things are being considered by the Board in setting the distribution.

Speaker 2

Okay. That's it for me this morning. I appreciate your time. Thank you.

Speaker 1

Thank you very much.

Operator

The next question comes from Matthew Hallett from B. Riley. Matthew, your line is open. Please go ahead.

Speaker 3

Yes. Thanks for taking my question. Just first on rating agencies, Have you seen any sort of meaningful change in upgrades, downgrades since this bank turmoil started?

Speaker 1

Yes. So I think we continue to see downgrade, outpace upgrades In terms of how that flows through with CLO buckets, they're definitely increasing, getting closer to that 7.5% Pocket, but there's still some room, and we still see managers continue to reduce CCC risk where they see appropriate. So definitely something worth keeping an eye on. But yes, right now, we still see downgrade picking up slowly but steadily.

Speaker 3

Got you. And then, I mean, from just a high level, I mean, when you look at The defaults are still low. It has obviously picked up a little bit. I'd love to hear sort of your expectations. Is this just sort of a normalization?

Speaker 3

Have you seen anything It is syncretic on maturity defaults that's coming up so far. Are people able to refinance? Just curious on at a high level what you're seeing in the leverage line market today.

Speaker 1

Sure. Matt, I'm not sure we're seeing anything radically different from what everyone else is saying. We're not seeing the kind of idiosyncratic events, wild outliers that you referenced. But at the same time, I think we're preparing, as Joe said, for higher default rates overall. Our model certainly Take account of that, especially with respect to certain profiles and certain collateral pools.

Speaker 1

So set against that is The fact that the LSTA is sitting with the 93 handle and there's a potentially powerful pull to pass. So all of these things, we seek To account for in modeling out our projected cash flows and total returns.

Speaker 3

And that leads into the next question, Jonathan. When you look at Oxford Lane, you guys are the leader have been the leader for years in CLO market. If you think about the Fed and Potentially on hold now and the forward market projecting easing at some point this year or next year, whether Yes. You believe it or not, how does the how do you position Oxford Lane for it's going to be likely a change in the interest rate cycle? And what can you tell sort of investors how Actually, you may historically benefit from lower rates.

Speaker 1

Sure. As you said, taking into account the forward curves, we try, as Jonathan mentioned, to try to lengthen that reinvestment period as much as possible, Which really, Matt, represents the best risk mitigant structurally that we're able to affect. Sorry, Jim. Yes. So in combination with lengthening the reinvestment period relative value trading, if we do see some mid length or shorter The deal is just to increase our margin safety from an absolute basis and also moving up manager clearing, Participating and investing in these managers who have proven themselves to be good credit selectors or who we think will be able to Getting these lender groups, which will be able to be the leaders in these workouts where we see some difficult situations in the future.

Speaker 1

Right. And at the end of the day, obviously, the collateral pool is vitally important to the performance of these structures. But equally important, sometimes of equal importance, is the total return that we're going to receive or we're projecting to receive Based on the arbitrage that we're presented within a particular deal structure. So we are, in some cases, able to Seek to compensate for collateral poor risk by virtue of either our entry price Or some combination of that, plus the inventory structure itself and the arbitrage based on the cost of capital For the CLO overall. So these are all things that we're thinking about all the time.

Speaker 3

Yes. And my thought was, you have to add, does that arbitrage Increase in general rates are going down as opposed to going up. And I look at your balance sheet, you have low cost, locked in, sitting dead. I know All of those are weighing the money, but I mean, could you are you thinking about, at some point, exploring more unsecured debt And things of that as the rate cycle does begin to change.

Speaker 1

I mean, Matt, we're looking all of the time At our overall capital structure, we're not seeking to change our liability stack at the moment, But to the extent the market provides us with and we're very happy with the state of our overall liabilities right now, But these are things that we're looking at in real time based on the use of proceeds that we're able to And the cost of capital that the market presents us with.

Speaker 3

Appreciate it. You've done a terrific job of positioning the company for this and managing I look forward to the next stage of the cycle. Thanks, John.

Speaker 1

Thank you, Matt, very much. Thanks.

Operator

This concludes today's Q and A session. So now I hand the call back over to CEO, Jonathan Cohen, for some concluding remarks.

Speaker 1

Thank you very much, operator. I'd like to thank everybody who listened to the call today and who listened to the call on the replay. We look forward to speaking to you again soon. Thanks very much.

Operator

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

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Oxford Lane Capital Q4 2023
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