Oxford Lane Capital - Q1 2024

Transcript

Operator (participant)

Hello, everyone, and welcome to the Oxford Lane Capital Corporation First Fiscal Quarter 2024 earnings call. My name is Emily, and I'll be coordinating your call today. After the prepared remarks, there will be the opportunity for any questions, which you can ask by pressing Star, followed by one on your telephone keypads. I'll now turn you over to our host, Jonathan Cohen, CEO of Oxford Lane Capital. Please go ahead, Jonathan.

Jonathan Cohen (CEO)

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp First Fiscal Quarter 2024 earnings conference call. I'm joined today by Saul Rosenthal, our President, Bruce Rubin, our CFO, and Joe Kupka, our Managing Director. Bruce, could you open the call with a disclosure regarding forward-looking statements?

Bruce Rubin (CFO)

Sure, Jonathan. Today's conference call is being recorded. Audio replay of the 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 Lane 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 answer you referred 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.

During this call, we'll 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 over to Jonathan.

Jonathan Cohen (CEO)

Thanks, Bruce. On June thirtieth, 2023, our net asset value per share stood at $4.34, compared to a net asset value per share of $4.61 as of March thirty-first, 2023. For the quarter end of June, we recorded GAAP total investment income of approximately $70.5 million, representing an increase of approximately $4 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $66.2 million from our CLO equity and CLO warehouse investments and approximately $4.3 million from our CLO debt investments and from other income.

Oxford Lane recorded GAAP net investment income of approximately $42 million, or $0.24 per share for the quarter end of June, compared to approximately $37.4 million, or $0.22 per share for the quarter end of March. Our Core Net Investment Income was approximately $75 million, or $0.43 per share for the quarter end of June, compared with approximately $37.5 million, or $0.22 per share for the quarter ended March 31st. For the quarter ended June 30th, we recorded net realized losses of approximately $1.3 million and net unrealized appreciation on investments of approximately $55.5 million, or $0.13 per share. We had a net decrease in net assets resulting from operations of approximately $14.8 million, or $0.08 per share for the first fiscal quarter.

As of June 30th, the following metrics applied. We note that none of these metrics represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 18.1%, up from 18% as of March 31st. The weighted average effective yield of our CLO equity investments at current cost was 16%, up from 15.8% as of March 31st. The weighted average cash distribution yield of our CLO equity investments at current cost was 24.6%, up from 16.5% as of March. We note that the cash distribution yields calculated on our CLO equity investments are based on cash distributions we received, or which we were entitled to receive at each respective period end.

During the quarter ended June 30th, we issued a total of approximately 12.1 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $60.2 million. During the quarter ended June 30th, we made additional CLO investments of approximately $111.9 million, and we received approximately $69.7 million from sales and from repayments. On July 27th, our board of directors declared monthly common stock distributions of $0.08 per share for each of the months ending October, November, and December of 2023. With that, I'll turn the call over to our managing director, Joe Kupka. Joe?

Joe Kupka (Managing Director)

Thanks, Jonathan. During the quarter ended June thirtieth, 2023, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA US Leveraged Loan Index, increased from 93.38% apart as of March thirty-first to 94.24% apart as of June thirtieth. According to LCD, during the quarter, there was some pricing dispersion, with BB-rated loan prices increasing 69 basis points, B-rated loan prices increasing 134 basis points, and CCC-rated loan prices increasing 212 basis points on average. The 12-month trailing default rate for the loan index increased to 1.71% by principal amount at the end of the quarter from 1.35% at the end of March.

we note that the percentage of the pools within US CLOs, which are actively managed, remains lower than the index. The increase in US loan prices led to an approximate 9-point increase in median US CLO net equity values. Median junior overcollateralization cushions declined 0.3% to approximately 4.2%. Additionally, we observed loan pools within CLO portfolios modestly increased their weighted average spreads to 359 basis points, compared to 357 basis points last quarter. With the primary market arbitrage remaining challenging, Oxford Lane continued to be active in the secondary market during the quarter. We added 12 new CLO equity investments and 2 new CLO debt investments 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 CLO equity portfolio.

In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across US CLO equity, debt and warehouses as we look to maximize our long-term total return. 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.

Jonathan Cohen (CEO)

Thanks, Joe. We note that additional information about Oxford Lane's Q1 performance has been uploaded to our website at www.oxfordlanecapital.com. With that, operator, we're happy now to poll for any questions.

Operator (participant)

Thank you. If you'd like to ask a question today, please do so now by pressing Star, followed by the one on your telephone keypads. If you change your mind and would like to be removed from the queue, please press Star and then 2. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. The first question today comes from the line of Mickey Schleien with Ladenburg. Mickey, please go ahead. Your line is now open.

Mickey Schleien (Analyst)

Yes, good morning, everyone. Jonathan, I think Joe just-

Jonathan Cohen (CEO)

Good morning.

Mickey Schleien (Analyst)

Yeah, good morning. You hear me okay?

Jonathan Cohen (CEO)

Jonathan? We do.

Mickey Schleien (Analyst)

Okay, I think, Jonathan, Joe just mentioned that the primary markets are, in CLO equity are still challenging. I'm just curious whether you've seen, you know, at the margin, any improvements in the trends in CLO equity trading, either primary or secondary, with this sense that maybe an economic soft landing is actually more probable than we might have thought?

Jonathan Cohen (CEO)

We have, Mickey. Yes, I would say since quarter's end, we've seen an upturn both in the, the tone of the secondary market and also perspectively, the arbitrage in the primary market. Yes, I would say things have just in the past, in the past month or so, strengthened across our asset class.

Mickey Schleien (Analyst)

Okay, last quarter, Joe mentioned that managers have some ability to reinvest, even past the end of a CLO's official reinvestment period. You know, just counting this morning, the positions you're showing in the presentation, it looks like about a third of the portfolio's past its reinvestment period. So could, could you maybe help us understand or describe the parameters that managers have to follow in that situation to continue to invest after the end of the reinvestment period?

Jonathan Cohen (CEO)

Sure, Mickey. It's, it's essentially a function of the four corners of the indenture itself, but Joe will speak more specifically to that.

Joe Kupka (Managing Director)

Sure. Like Jonathan mentioned, a lot of it depends on the exact test in the indenture, and these vary by manager to manager and even deal by deal. That's a big part of where we believe, you know, we deliver value, decomposing those indentures, and finding the managers who are able and willing to continue reinvesting. It has various tests like weighted average life or diversity score, the various OC tests, and they can vary from, you know, satisfy at the end of the reinvestment period or maintain your, or improve. You know, there's a wide range, I would say. No deal is exactly alike, and that's part of just analyzing the individual deals.

Jonathan Cohen (CEO)

Yep.

Mickey Schleien (Analyst)

Okay, my last question. There, there has been some spread tightening, I believe, in the, in CLO liabilities. Looking at the portfolio's average AAA spread at 128, it looks like there was, there's still a long ways to go before it's economical to reset most of the portfolio's positions. We don't see more, you know, significant spread tightening, then there could be more pressure on Oxford's cash flows as more reinvestment periods end. How are you managing that risk without having to take losses in the secondary market to trade out of those positions that are in that predicament?

Jonathan Cohen (CEO)

Sure. As you say, Mickey, we are an active trader across this asset class. The issue for us isn't, isn't whether we happen to take a loss on a particular position or not. The issue for us is optimizing the portfolio as, as aggressively as we can for the best possible risk-adjusted return. We are, I don't believe, heavily reliant on the assumption of refis or resets across the portfolio. We're looking at cash flows, we're looking at interest income, and we're looking at the quantity of, of likely return of principal. All of those things set against the arbitrage that exists between the, the use of proceeds and the cost of capital on a deal-by-deal basis, and our ability and desire to, to trade out of things and into new things in the secondary market, just as you say.

Mickey Schleien (Analyst)

Okay. Now, those are all my questions this morning. I appreciate your time. Thank you.

Jonathan Cohen (CEO)

Thank you, Mickey, very much.

Operator (participant)

Our next question comes from Steven Bavaria with Inside the Income Factory. Steven, please go ahead. Your line is now open.

Steven Bavaria (Contributor)

Oh, thanks. Hi, guys. Hey, you're doing a great job, and we're just trying to understand it and explain what's a still a pretty complex asset class to a lot of the retail investors. There's a lot of concern expressed about how your, your NAV, which I understand sometimes can move opposite to your business prospects. I mean, it seems to me like as, as loans drop on the secondary market to the point where you can then collect at par and reinvest at 92% of par or whatever, and then collect again at par when those loans mature, your business prospects probably improve when the loan market drops. At the same time that your own, the CLO equity, in theory, probably drops because their loans are worth less, but their debt is still worth the same. How do you...

Am I interpreting that appropriately? Then when people see that they're earning 17% yields on your, you know, very secured distribution at the moment, how much realistically should they regard that as perhaps a certain erosion of NAV that's inevitable over time? How much of that 17% is real, sort of, total return they get to keep?

Jonathan Cohen (CEO)

Sure, Steve. Thank you for those questions. As you, as you say, very correctly, it's a complex asset class. In terms of our, our, our assumption or our presumption about the total return we are looking to receive over an extended period of time, we're not managing across all periods to any specific rate of return. We are looking for the best possible risk-adjusted return, risk-adjusted total return, over, over each period that we're managing to. At this moment, we are enjoying the benefit of relatively high cash flows in the secondary market. We are not participating, especially actively in the primary market by virtue of the, the very challenged arbitrage that Mickey referenced in his earlier question. We're not projecting out any number of years into the future in terms of a targeted total return.

Instead, we would focus on how we've done historically. Oxford Lane has been in existence since 2011. Our, our track record is, is certainly in the public record. We're, we're, I would say, generally enthusiastic about the current state of this market, but this is also a fairly volatile market, as, as you correctly note.

Steven Bavaria (Contributor)

Got it. Thank you.

Jonathan Cohen (CEO)

Thank you, Steve.

Operator (participant)

Our next question comes from Matthew Howlett with B. Riley. Matthew, please go ahead. Your line is now open.

Matthew Howlett (Managing Director)

Oh, hi, good morning, everybody.

Jonathan Cohen (CEO)

Hey, Jonathan.

Matthew Howlett (Managing Director)

Morning, Matt. Good morning. Thanks for taking my question. The core NII, the, the pickup, if you could just go over what, what explains the, you know, the, the really dramatic pickup in the Core Net Investment Income quarter-over-quarter?

Joe Kupka (Managing Director)

Sure, Matt. Sure. There were two main components. Just again, when we're looking at this quarter-over-quarter increase, we're mainly comparing the payments in April to the payments in January, last quarter. The payments in January were historically depressed, mainly driven by the one-month, three-month LIBOR mismatch basis that we've spoken about a few times.

Matthew Howlett (Managing Director)

Right.

Joe Kupka (Managing Director)

In addition, for our portfolio in particular, we've also had some first-time large payers, kick on this quarter, which drove that number up further.

Matthew Howlett (Managing Director)

Got you. You say that's your CLO equity starting to cash flow immediately when you say first-time payers, that's.

Joe Kupka (Managing Director)

Yeah, either a large position we had purchased in the secondary or a large primary position we had purchased several quarters ago, who have just now finished ramping up and made their first payment.

Matthew Howlett (Managing Director)

Gotcha. Gotcha. I know you disclosed sort of what's in the ramp process on your presentation. I, I appreciate that. That's really moving the needle, you know, clearly. My second question is on the credit curve. I mean, you're actually showing higher debt yields versus, you know, equity yields. I mean, I know there's a, there's some accounting phenomenon in that, but I mean, what, is the curve flat here where, you know, you could actually go up in credit and pick up yield or, you know, up the capital stack and pick up yield? I mean, what, what are you seeing the double D versus equity yields, and how are you playing it?

Joe Kupka (Managing Director)

I think there, there are two components to that. First, the, what you see the, is the current, like you said, the GAAP accounting yield.

That's just a function of the accounting standards we apply, and it's not necessarily what we project going forward, what we could buy out in the market. That said, I believe the credit curve has flattened a bit, and we have seen some other equity players move, you know, to BBs, for instance, because they, they can't quite pick up the yield they can in equity, but, you know, pick up a definitely elevated yield in BB, for instance. I wouldn't say it's flipped, but definitely has compressed if you look at certain tranches.

Jonathan Cohen (CEO)

Yeah. The, the vast majority of our book mat is, is still CLO equity, but as you say, we've, we've been looking a bit more carefully at B and BB opportunities.

Matthew Howlett (Managing Director)

Right. Exactly. I know it, it creeped up a little bit, the % to, to CLO debt, but, it'll be interesting to see how that, you know, that, that moves going forward. Can you just comment... I know you don't give, you know, July and maybe your last day of the month, but, I mean, we've seen a strong rally in the, in the markets here. You know, is there a sense, I mean, you gave some numbers in the beginning. I don't know if that was for, for July, but, I mean, any sense of what went on in July and, you know, I'm assuming the trajectory with your NAV was positive given the market. Is there any sort of handle what you saw in July?

Jonathan Cohen (CEO)

Sure. Now, without commenting on our portfolio or, or our, our balance sheets and just speaking to the market broadly, I would say in the month of July, the market for CLO equity broadly is probably sort of mid-high single digits.

Matthew Howlett (Managing Director)

For CLO equity, equity that is.

Jonathan Cohen (CEO)

Yeah.

Matthew Howlett (Managing Director)

Great. Thanks for ... That's interesting. Well, when will you put out that July NAV? Is it a week or so from now?

Jonathan Cohen (CEO)

Hopefully, a bit sooner than that. We'd, we'd like to say probably, later this week.

Matthew Howlett (Managing Director)

Great. We look, we look forward to that. Thanks, John. Thanks for taking my questions.

Jonathan Cohen (CEO)

All right. Thanks very much, Matt.

Operator (participant)

There are no further questions at this time, so I will now turn the call back over to Mr. Jonathan Cohen, CEO.

Jonathan Cohen (CEO)

Operator, thanks very much. We'd like to thank everyone who participated in this call and who listened to the call on replay. We look forward to speaking to you soon, and thank you again for your interest in Oxford Lane. Thank you.

Operator (participant)

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.