Oxford Lane Capital Corp. (OXLC) Earnings Call Transcript & Summary

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

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. Fourth 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. Bruce, could you please open our call with a disclosure regarding forward-looking statements?

Sure, Jonathan. Today's conference call is being recorded. The 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 ask all 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 will use terms to [indiscernible] 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 stood at $4.61 compared to a net asset value per share of $4.63 as of December 31, 2022. For the quarter ended March, we recorded GAAP total investment income of approximately $66.5 million, representing a decrease of approximately $1.2 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $62.8 million from our CLO equity and CLO warehouse investments and approximately $3.6 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $37.4 million or $0.22 per share for the quarter ended March, compared to approximately $41.4 million or $0.26 per share for the quarter ended December. Our core net investment income was approximately $37.5 million or $0.22 per share for the quarter ended March compared with approximately $50.1 million or $0.31 per share for the quarter ended December 31. For the March quarter, we recorded net realized losses of approximately $4.9 million in net unrealized depreciation on investments of approximately $3.5 million or $0.05 per share in total. We had a net increase in net assets resulting from operations of approximately $29 million or $0.17 per share for the fourth fiscal quarter. As of March 31, 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%, up from 16.6% as of December 31. The weighted average effective yield of our CLO equity investments at current cost was 15.8%, up from 15.7% as of December 31. The weighted average cash distribution yield of our CLO equity investments at current cost was 16.5%, down from 18.6% 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 3.9 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $22.6 million. During the quarter ended March, we made additional CLO investments of approximately $117.4 million. And we received approximately $24.8 million 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 and September 2023. And with that, I'll turn the call over to Joe Kupka.

Thank you, Jonathan. During the quarter ended March 31, 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 [indiscernible] of par as of December 31 to [ 94.71% ] of par as of February 9 before dropping to [ 93.38% ] of par as of March 31. According to LCD, during the quarter, there was some pricing dispersion related to credit quality with BB-rated loan prices increasing 17 basis points, B-rated loan prices increasing 165 basis points and CCC-rated loan prices increasing 270 basis points on average. 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% ] at the end of December 2022. Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended 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.S. CLO equity net asset values. [ Median junior ] [indiscernible] [ cushions ] declined 0.2% to approximately 4.5%. Additionally, we observed loan pools within CLO portfolios, modestly increased our weighted average spreads to 357 basis points compared to 354 basis points last quarter. Oxford Lane continues to be active in the secondary market during the quarter. While most of our activity took place in the secondary market, we added 2 new issue CLO equity investments and 1 new issue flow 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. 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 at our Oxford Lane's fourth quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, we're happy, operator, to open the call for any questions.

[Operator Instructions] Our first question today comes from Mickey Schleien from Ladenburg.

A few questions this morning. 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.

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 have been evident to us.

Okay. That's good to hear. And it looks like about 1/3 of your CLO equity investment portfolio is beyond its reinvestment period. And with liabilities generally we're seeing spreads that are still quite wide, the refinancing and reset opportunity is difficult. So how do you see your CLO equity portfolio's yields on cash develop as these investments unwind?

Sure, Mickey. So yes, that's definitely a challenge with wider liability prices and limited refinery set 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.

But 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 than on the primary market as of late.

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 CLO equity 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?

Sure. I mean, as a general matter, Mickey, to your point, a more liquid and a greater volume of secondary market activity, we think is 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 period. Joe?

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. 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?

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 payments that took the blunt of this 1-month, 3-month basis. Since then, it's definitely tightened, and we expect to see that continue to normalize going forward, again, just based on the publicly available forward curves. And specifically within Oxford Lane's portfolio, we had an unusually large number of first-time payers, which make the 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 can say.

So if I'm understanding you correctly, are you saying that the April payments were meaningfully better than the January payments on a relative basis?

Yes, that's okay.

Correct. Yes.

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

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.

The next question comes from Matthew Howlett from B. Riley.

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

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

Got you. And then I mean, from just a high level, I mean when you look at -- I mean defaults are still low, you obviously picked up a little bit. I'd love to hear so your expectation is this just sort of a normalization. Have you seen anything idiosyncratic on maturity defaults that coming up so far, are people able to refinance? Just curious at a high level what you're seeing in the leveraged loan market today.

Sure. Matt, I'm not sure we're seeing anything radically different from what everyone else is seeing. We're not seeing the kind of idiosyncratic events that 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. So said against that is the fact that the LSTA is sitting with the 93 handle, and there's a potentially powerful pull-to-par. So all of these things, we seek to account for in modeling out our projected cash flows and total returns.

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

Sure. As you said, we've taken 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. But -- sorry, Joe.

Yes. So in combination with length and the reinvestment period, relative value trading. If we do see some mid-length or shorter data deals just to increase our margin safety from an absolute basis and also moving up manage [indiscernible], participating and investing in these managers who have proven themselves to be good credit selectors or who we think we'll 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.

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 with in a particular deal structure. So we are, in some cases, able to seek to compensate for collateral pool 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 of the time.

Yes. And my thought was exactly that does that arbitrage increase generally rates are going down as opposed to going up and I look at your balance sheet, you have low-cost locked-in sticky debt. I know [indiscernible] in the money, but I mean could you -- are you thinking about some point exploring more unsecured debt and things of that if the rate cycle does begin to change?

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 deploy and the cost of capital that the market presents us with.

Appreciate that. You've done a terrific job really positioning the company for this and managing through. So I look forward to the next stage of the cycle.

Thank you, Matt, very much. Thanks.

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

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

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