Oxford Lane Capital - Q1 2025

Transcript

Operator (participant)

Hello all, and welcome to Oxford Lane Capital Corp's first fiscal quarter earnings call. My name is Lydia, and I'll be your operator today. After the prepared remarks, there will be an opportunity to ask questions. If you'd like to ask a question during the Q&A, you can do so by pressing star followed by one on your telephone keypad. I'll now hand you over to Jonathan Cohen, CEO, to begin.

Jonathan H. Cohen (CEO)

Good morning, everyone, and welcome to the Oxford Lane Capital Corp. first fiscal quarter 2025 earnings call. I'm joined today by Saul Rosenthal, our President, Bruce Rubin, our Chief Financial Officer, and Joe Kupka, our Managing Director. 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 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., and the 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. Do not undertake to update our forward-looking statements unless required to do so by law.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 over to Jonathan.

Thank you, Bruce. On June 30th, 2024, our net asset value per share stood at $4.91, compared to a net asset value per share of $4.90 as of the prior quarter. For the quarter ended June 30th, we recorded GAAP total investment income of approximately $89.8 million, representing an increase of approximately $7.1 million from the prior quarter. The quarter's GAAP total investment income consisted of approximately $84 million from our CLO equity and CLO warehouse investments, and approximately $5.7 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $56 million, or $0.22 per share, for the quarter ended June, compared to approximately $51 million, or $0.22 per share, for the quarter ended March 31st.

Our core net investment income was approximately $107.2 million, or $0.41 per share, for the quarter ended June 30th, compared with approximately $79.9 million, or $0.35 per share, for the quarter ended March 31st. For the quarter ended June, we recorded net unrealized depreciation on investments of approximately $14.4 million and net realized gains of approximately $6.1 million. We had a net increase in net assets resulting from operations of approximately $47.7 million, or $0.18 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 17.4%, up from 17.1% as of March 31st.

The weighted average effective yield of our CLO equity investments at current cost was 16.8%, down from 16.9% as of March 31st.

The weighted average cash distribution yield of our CLO equity investments at current cost was 26.9%, up from 23.5% as of March 31st. 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 June, we issued a total of approximately 45.9 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $242.1 million. During the quarter ended June, we made additional CLO investments of approximately $216.9 million, and we received approximately $96.3 million from sales and from repayments. On July 25th, our board of directors declared monthly common stock distributions of $0.09 per share for each of the months ending October, November, and December of 2024.

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 30th, 2024, the U.S. loan market price index opened at 96.73%, reaching 96.99% in mid-May before softening in June and ending the quarter at 96.59%. The decrease in U.S. loan prices led to an approximate two-point decrease in median U.S. CLO equity net asset values. Additionally, due to elevated levels of repricing activity, we observed median weighted average spreads across loan pools within CLO portfolios decrease to 361 basis points compared to 368 basis points last quarter. The 12-month trailing default rate for the loan index decreased to 0.9% by principal amount at the end of the quarter from 1.1% at the end of March 2024. We note that out-of-court restructurings, exchanges, and subpar buybacks, which are not captured in this cited default rate, remain elevated.

Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 4.4% compared to approximately 3.5% at the end of March. CLO new issuance during the quarter totaled approximately $53 billion, an increase of $4 billion from the prior quarter, marking the second highest quarterly volume in CLO market history as CLO liabilities have continued to tighten. Oxford Lane remained active this quarter, trading over $500 million notional of CLO equity and junior debt while participating in opportunistic resets and refinancings. As a function of our overall activity during the quarter, we were able to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio from July 2026 to November 2026.

Our investment strategy during the quarter was to engage in relative value trading and seek 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 our opportunistic and unconstrained CLO investment strategy across U.S. 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 H. Cohen (CEO)

Thanks, Joe. Additional information about Oxford Lane's Q1 results has been uploaded to our website at www.oxfordlanecapital.com. And with that, the operator will now poll for any questions.

Operator (participant)

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. If you change your mind or your question has already been answered, you can withdraw from the queue by pressing star followed by two. Our first question today comes from Mickey Schleien with Ladenburg. Your line is open. Please go ahead.

Mickey M. Schleien (Managing Director - Equity Research)

Yes, good morning, everyone. Jonathan, there's been a leveraged loan repricing wave with over a third of the market trading above par, and due to higher expectations of a soft landing. That trend can impact loan spreads, and I do see that the average spread in your CLO equity portfolio declined 8 basis points, which can pressure the CLO equity arbitrage. I also see that your average AAA liability spreads were about stable. So what caused your CLO cash yields to increase so much this quarter?

Joe Kupka (Managing Director)

Hey, Mickey. So a lot of that was due to, so you're looking at the January versus April payments, so there's a bit of lag in those numbers. So we've seen managers continue to build spread up until this quarter. The July payments did take a dip down from the April payments, so you'll continue to see that repricing wave hit. So there's a lag there. Additionally, we did have some first-time payments come on, which bolstered that cash yield number for this quarter.

Mickey M. Schleien (Managing Director - Equity Research)

Okay. That's helpful. Thank you. What are your expectations for the remaining ability to refinance or reset liabilities in your CLO equity portfolio to help defend yields against the loan spread compression we're seeing?

Jonathan H. Cohen (CEO)

Sure, Mickey. We really don't make public projections or pronouncements about those kinds of forward-looking activities, but certainly, we see the state of the CLO liability market, which looks to be generally constructive still.

Mickey M. Schleien (Managing Director - Equity Research)

Okay. And Jonathan, the ratings agencies haven't seemed to accept the higher odds of a soft landing or the amount of capital available to lower quality borrowers. So the downgrade-to-upgrade ratio is still meaningfully above 1x, which can pressure CCC buckets. So how are your portfolio managers dealing with that trend?

Joe Kupka (Managing Director)

Yeah. So one data point we've seen is actually just due to the elevated amount of reset activity. Managers have been proactively cleaning up these CCC baskets in anticipation of looking to reset into a cleaner deal. So we've seen CCC baskets in that sense declining a bit. But you're right, it's going to be a continuing battle for these managers to proactively manage around these CCC baskets. But they do have healthy OC cushions. Even if they do bump up against the limit, the OC ratios are still remaining relatively healthy.

Mickey M. Schleien (Managing Director - Equity Research)

Yeah, I saw that. My last question on the balance sheet. The fund doesn't carry particularly high leverage, even with the recent notes offering. So what's your appetite to issue additional debt or preferred shares to help lower your weighted average cost of capital?

Jonathan H. Cohen (CEO)

Our appetite, Mickey, is at this moment principally predicated on pricing. So to the extent that we think there's a sufficiently robust arbitrage available to us, we would look to add additional, selectively look to add additional debt, but only at pricing that we found to be compelling.

Mickey M. Schleien (Managing Director - Equity Research)

Okay. Any sort of target leverage that you have in mind, Jonathan?

Jonathan H. Cohen (CEO)

Not that we've shared with the world at large, no.

Mickey M. Schleien (Managing Director - Equity Research)

Okay. Those are all my questions this morning. Thank you.

Jonathan H. Cohen (CEO)

Thank you, Mickey, very much.

Operator (participant)

Our next question is from Erik Zwick with Lucid Capital Markets. Your line is open.

Erik Zwick (Managing Director - Equity Research)

Good morning, everyone. Hope you're all doing well. Wanted to start with a question on just that good morning. On the sales and repayments activity during the quarter, it was at the highest that we've seen in over the past five. So just wondering if that's reflective of market activity or some portfolio-specific factors?

Jonathan H. Cohen (CEO)

I think it's largely, Erik, a function or significantly a function of just the size of the fund that has grown substantially over the course of the last year or two. So larger scale, big gets, more repayment activity, and more sales activity. We have been and remain committed to running an actively managed portfolio, which should generate significant trading activity. You saw we did about $500 million worth of notional CLO trading in the quarter. But I wouldn't call that either unusual or necessarily unprecedented.

Erik Zwick (Managing Director - Equity Research)

Thanks for the color there. And just with regard to the quarter-over-quarter increase in expenses, any color you can provide there, whether there was anything kind of one-time in nature or just kind of a more kind of normal inflationary creep here?

Jonathan H. Cohen (CEO)

Are you referencing a percentage-based increase, Eric, or a dollar-based increase?

Erik Zwick (Managing Director - Equity Research)

A dollar-based increase, if I recall correctly.

Jonathan H. Cohen (CEO)

Just the size of the fund. Most likely just the size of the fund. We raised an enormous amount of capital, not only this quarter, but in the immediately preceding quarter. So everything else felt constant. That would likely lead to that dollar-denominated number being higher.

Erik Zwick (Managing Director - Equity Research)

And then a question just on credit. You mentioned that out-of-court restructurings remain elevated. You've seen some increase in distressed prices in the market as well. Looking at your industry exposure, you have a view into a broad slice of the U.S. economy. I guess, are there any areas where you're seeing any stress or weakness? And it seems that the odds of a soft landing recession are becoming more probable at this point, but there's still, I think, some concerns in certain areas. So I guess, from the ability that you have to look into your portfolio, are there any areas where you see some stress at this point? And if so, how are you seeking to manage that?

Jonathan H. Cohen (CEO)

Nothing, Erik, that is readily apparent outside of sort of the perception in the mainstream right now about economic activity. I think there's continued concern within the U.S. economy about consumer behavior, the state of the consumer. There's an ongoing question mark around certain parts of the economy that we're aware of and sensitive to. But in terms of the perspective that we've got on the U.S. economy as a result of the investing that we do, I don't think that we've got an insight that isn't sort of outside of the popular perception.

Erik Zwick (Managing Director - Equity Research)

Excellent. That's all for me today. Thanks for taking my questions.

Jonathan H. Cohen (CEO)

Thank you, Erik, very much.

Operator (participant)

Thank you. We have no further questions in the queue, so I'll now turn the call back to Jonathan Cohen for any closing comments.

Jonathan H. Cohen (CEO)

Thank you all. We appreciate your interest and your time today on this conference call, and we certainly look forward to speaking to you again soon. Thank you all very much for participating.