Oxford Lane Capital - Q2 2024

Transcript

Operator (participant)

Good morning, everyone, and welcome to the Oxford Lane Capital Corp second fiscal quarter financial results conference call. My name is Chach, and I'll be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you were to change your mind, please press star followed by two. I'll now hand you over to your host, Jonathan Cohen, CEO. To begin, please go ahead.

Jonathan Cohen (CEO)

Thanks very much. Good morning, and welcome to the Oxford Lane Capital Corp. second fiscal quarter 2024 earnings conference 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?

Bruce Rubin (CFO)

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. 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, current, 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. 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)

Thank you, Bruce. On September 30th, 2023, our net asset value per share stood at $4.81, compared to a net asset value per share of $4.34 as of June 30th. For the quarter ended September, we recorded GAAP total investment income of approximately $74.4 million, representing an increase of approximately $3.9 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $69.3 million from our CLO equity and CLO warehouse investments and approximately $5.1 million from our CLO debt investments and from other income.

Oxford Lane recorded GAAP net investment income of approximately $44.8 million, or $0.23 per share for the quarter ended September, compared to approximately $42 million or $0.24 per share for the quarter ended June thirtieth. Our core net investment income was approximately $79.7 million, or $0.41 per share for the quarter ended September, compared with approximately $75 million, or $0.43 per share for the quarter ended June 30th. Quarter ended September, we recorded net realized losses of approximately $10.5 million and net unrealized appreciation on investment of approximately $95.8 million, or $0.44 per share in total. We had a net increase in net assets resulting from operations of approximately $130.1 million, or $0.67 per share for the second fiscal quarter.

As of September 30th, the following metrics applied. We note that none of these metrics represented total return to shareholders. The weighted average yield for our CLO debt investments at current cost was 18.5%, up from 18.1% as of June 30th. The weighted average effective yield of our CLO equity investments at current cost was 16.3%, up from 16% as of June 30th. The weighted average cash distribution yield of our CLO equity investments at current cost was 25%, up from 24.6% as of June 30th. 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 September, we issued a total of approximately 20.8 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $104.8 million, which resulted in net accretion to shareholders of approximately $0.07 per share of NAV for the quarter. During the quarter ended September, we made additional CLO investments of approximately $171.7 million, and we received approximately $11.8 million from sales and from repayments. On October 26th, our board of directors declared monthly common stock distributions of $0.08 per share for each of the months, ending January, February, and March of 2024. With that, I'll turn the call over to our managing director, Joe Kupka.

Joe Kupka (Managing Director)

Thanks, Jonathan. During the quarter ended September 30th, 2023, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index, increased from 94.24% as of June 30th to 95.55% as of September 30th. The increase in U.S. loan prices led to an approximate 11-point increase in median U.S. CLO equity net asset values. Median junior over-collateralization cushions declined 0.1% to approximately 4.1%. Additionally, we observed loan pools within CLO portfolios increase their weighted average spreads to 370 basis points, compared to 359 basis points last quarter.

The 12-month trailing default rate for the loan index decreased to 1.27% by principal amount at the end of the quarter, from 1.71% at the end of June. Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 4.36%, compared to approximately 6% at the end of June. CLO new issuance during the quarter totaled approximately $28 billion, an increase of $6 billion from the prior quarter. However, the $84 billion of year-to-date issuance as of quarter end trails the $106 billion of issuance for the same period in 2022. Oxford Lane continued to be active during the quarter, transacting in both the primary and secondary markets.

Overall, we executed over 40 transactions in the quarter, adding 16 new CLO equity investments and two new CLO debt investments. 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. 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.

Jonathan Cohen (CEO)

Thanks, Joe. Additional information about our second quarter performance has been uploaded to our website at www.oxfordlanecapital.com. With that, operator, we're happy to open the call for any questions.

Operator (participant)

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Mickey Schleien from Ladenburg. Please go ahead.

Mickey Schleien (Managing Director and Equity Research)

Yes, good morning, everyone. Jonathan, I want to start by asking you how you would describe how the managers in your CLO portfolios responded to take advantage of the strength in the loan CLO markets during the third quarter in terms of the opportunity to refinance or reset liabilities?

Joe Kupka (Managing Director)

Hey, Mickey, this is Joe. Yeah, we saw, you know, some limited activity in terms of, you know, refis and some resets around the margin. The liability market, you know, was quick moving during the quarter, so just given the amount of supply out there, we tend to see, like, a push and pull pretty quickly. We also see some called deals, but, you know, there wasn't that wave of refis and resets that are waiting in the wings, but we did see some around the margins.

Mickey Schleien (Managing Director and Equity Research)

I imagine that given, you know, the war in the Middle East and the weakness in the markets in October, if anything, that opportunity is lower now than it was in the third quarter. Would you agree with that?

Joe Kupka (Managing Director)

Yeah, I think that's fair to say.

Mickey Schleien (Managing Director and Equity Research)

Okay. My next question, with inflation still above target, the consensus seems to be building around higher interest rates for longer. So curious to understand how managers are dealing with that risk in terms of the stress to their issuers, interest coverage ratios and the potential for more downgrades to CCC.

Joe Kupka (Managing Director)

Yeah, I think that's definitely, you know, been at the top of managers' mind for several quarters now, so I think they've had time to prepare and, you know, manage their portfolios appropriately. We've seen some managers take proactive measures in terms of limiting their CCCs, limiting their single B exposure, just at the, you know, just for the potential further downgrades to manage those tests. Also have seen managers limiting certain sectors where they see,

Jonathan Cohen (CEO)

Less of an ability to pass through price increases, Mickey, where demand elasticity is lower, we've seen a push for managers to make those smaller positions inside of their collateral portfolios.

Mickey Schleien (Managing Director and Equity Research)

I understand. You've reported, you know, net realized losses pretty consistently every quarter. I want to understand, you know, to what extent is your goal of defending the portfolio's average reinvestment period driving exits from post-reinvestment periods CLOs? You know, those prices have been relatively weak, and are those what's leading to the loss, the realized losses?

Jonathan Cohen (CEO)

I don't think in a meaningful way, Mickey. I mean, we are trading the portfolio on a relative value basis. So in instances where we see the ability to sell something and buy something at a better price, with a better reinvestment period or a cleaner portfolio, or more stronger cash flows, or a diminished probability of a future diversion, we will likely engage in those trades. But there's no wholesale effort to sell positions, either at losses or gains, simply with the sole objective of extending the reinvestment period. That is one objective, but it is not the driving objective beyond all of our trading activity.

Mickey Schleien (Managing Director and Equity Research)

Okay. So these consistent realized losses have been proactive decisions on relative trades in the portfolio. Is that - Am I understanding you correctly?

Jonathan Cohen (CEO)

Yeah, that is a truthful and fair statement, Mickey. Yes.

Mickey Schleien (Managing Director and Equity Research)

Okay, that's it for me this morning. I appreciate your time, as always.

Jonathan Cohen (CEO)

Thank you, Mickey.

Operator (participant)

The next question on the line is from Matthew Howlett, from B. Riley Financial. Please go ahead.

Jonathan Cohen (CEO)

Morning, Matt. You may be on mute.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Oh, sorry about that. Good morning, Jonathan. Hi, Joe. Hey-

Jonathan Cohen (CEO)

Morning.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Thanks for taking my question. Good morning. Just your thoughts on relative value. And when you look at primary versus secondary, you look at, you know, the credit curve, you look at tiering among managers. Are things becoming more pronounced now, where you could really look at value, you know, in, you know, between those sort of metrics? Or just, just I'd love to hear your thoughts on relative value within the CLO market today.

Jonathan Cohen (CEO)

Joe?

Joe Kupka (Managing Director)

Yeah. I think it's, you know, very quick moving. As you said, manager tiering is especially top of mind for us. We've seen that basis grow and shrink throughout the year. It's pretty wide at the moment, so that's a potential avenue for some relative value. In terms of primary and secondary, that's moved around a bit, probably not to the extent as the manager tiering. But you know, selectively, we've participated in the primary in a few instances this year, but the bulk of it has been in the secondary, just given that's where we see the relative value. But yeah, I think, like you said, there's a lot of opportunities just given the large bases between managers, between lengths and between primary and secondary.

Jonathan Cohen (CEO)

Right.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Yeah, you seem like you guys are finding a lot of value. Is that. The yields all went up on the gap yield and the core yield on the equity, and the debt. Is that from the, you know, the new purchases that you're finding deeper value, or is that just from improvement in existing holdings? Just curious on, you know, that upward movement in yields. We'd like to see that.

Joe Kupka (Managing Director)

Yeah, it's a combination of both.

Jonathan Cohen (CEO)

It's a bit of both, Matt. So, obviously, when we're turning the portfolio, by definition, we're seeking better total returns, better risk-adjusted returns in the positions we held historically. But this was a strong quarter. We saw a meaningful improvement in NAV, certainly, driven by strength in the underlying collateral pool. So very much so.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Great. No, and, look, it shows the benefits of the active management, and, congratulations to everyone on the team on that. And then I guess the final question, look, the balance sheet is just in terrific shape. You haven't really issued any new preferred or, or unsecured notes in some time. I know there's one small maturity, mid-next year. But with the growth in the equity base, the improvement in the NAV, how... I mean, can you just give us an update on those markets and when potentially you'd look to tap them? I mean, we've seen that markets open up, that five-year market open up to some other people.

Just curious that as your equity base, your common equity base grows, how willing would you be to be able to, you know, tap those markets? It seems it would be very accretive to shareholders.

Jonathan Cohen (CEO)

Sure, sure, Matt. Absolutely. We're always open to that possibility, but at a price. So we need to be very mindful of the differentials between our uses of proceeds and our cost of capital. And the five-year, for example, $25 par market that you just referenced, is certainly a wider market than it was a year or two ago. And so we're watching those markets. We're sort of always in internal discussion about the viability and desirability of issuing more debt. But as you say, we haven't chosen to in a while.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Absolutely, and it's nice that you guys are paying attention to price. It's just that the balance sheet continues to improve and improve. It just seems like, you know, even with these, putting on some higher, higher yields, it would, it would could be enormously accretive if you put on something in the 8% range call it, and, and were to go in the market and, you know, and, and buy CLO equity yielding high teens or whatever. Just, just seems to us the math would make a lot of sense at some point, when you're ready to explore.

Jonathan Cohen (CEO)

Absolutely, Matt. It's a dynamic we're very much focused on, certainly.

Matthew Howlett (Senior Managing Director and Senior Equity Research Analyst)

Great. Well, look, congrats on a great quarter. That's all I have.

Jonathan Cohen (CEO)

Thank you, Matt, very much.

Operator (participant)

We have a follow-up question from Mickey Schleien from Ladenburg. Please go ahead.

Mickey Schleien (Managing Director and Equity Research)

Jonathan, I just wanted to follow up on the relative value trades and the realized losses. Do you, as a practice, triangulate, you know, the prices that you're getting on these exits, when you consider your estimated yields? In other words, on these exits, could you argue that the estimated yields were too high and not enough return of capital was booked, and that and that led to the realized loss? Or am I misinterpreting that trend?

Jonathan Cohen (CEO)

I'm not sure, Mickey. It's a somewhat technical accounting question. We can go through it with our internal accounting group and get back to you. I'm not sure.

Mickey Schleien (Managing Director and Equity Research)

Okay. That's it. Thank you.

Jonathan Cohen (CEO)

Thanks, Mickey.

Operator (participant)

I show no further questions on the question queue.

Jonathan Cohen (CEO)

All right. I'd like to thank everybody for their interest and for their participation in our second fiscal quarter earnings call. We look forward to speaking with you again soon. Thanks very much.

Operator (participant)

Thank you for joining today's conference call. You may now disconnect your lines and enjoy the rest of your day.