Q2 2020 Oxford Square Capital Corp Earnings Call

Welcome to the Oxford Square capital Corp. second quarter Twentytwenty awnings.

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Conference over to Mr., Jonathan Cohen.

Thank you and what do yourself.

Thanks, very much good morning, everyone and welcome to the Oxford Square capital Corp. second quarter 2020 earnings Conference call.

I'm joined today by Saul Rosenthal, our President Bruce Rubin, our Chief Financial Officer, Kevin Young men are managing director and portfolio manager Bruce could you open the call. Please with the disclosure regarding forward looking statements.

Sure John.

Today's call is being recorded an audio replay of the coffee as Paul will be available 30 days replay information is included in our press release that was issued earlier. This morning. Please note that this call is the property offered square capital Corp. any unauthorized rebroadcast of this call in any form is strictly prohibited.

This point please direct your attention to the customary disclosure in this mornings press release regarding forward looking information.

Today's conference call includes forward looking statements and projections.

Like the company's current views with respect to among other things future events and financial performance, we had 30 or 30, our most recent filings with the FCC four important factors that could cause actual results could differ materially from those indicated in these projections do not undertake to update for what the state.

Unless required to do so by law.

Pertain copies I'll leave it to actually see Follies. Please visit our website at Www Dot, Oxford square capital, but with that I'll turn the presentation backup to Jonathan.

[music].

Thank you Brett for the quarter ended June Thirtyth, Oxford squares net investment income was nine cents per share and our net asset value per share stood at $3.54 compared to net investment income per share of 13 cents and the net asset value per share $3.32 in the prior quarter.

The second quarter of 2020, we recorded total investment income of approximately $8.3 million compared to $10.8 million for the prior quarter.

In the second quarter 2020, we recorded net unrealized depreciation on investments of approximately $19 million worth 38 cents per share compared to net unrealized depreciation on investments of approximately $85.4 million were $1.74 cents per share for the prior quarter.

The second quarter of 2020, we recognized realized losses on investments of approximately $2.8 million or six cents per share compared to a realized loss of $300000 or one cents per share for the prior quarter.

In total for the second quarter, we had a net increase in net assets from operations.

Actually $20.6 million or 41 cents per share compared to a decrease in net assets for operations of $79.4 million or $1.62 cents per share for the prior quarter.

During the second quarter 2020, our investment activity consisted of purchases are approximately $21.3 million sales of approximately $9.5 million and repayments of approximately $16.7 million, we know that as of June Thirtyth, we continue to hold.

To that investments on nonaccrual status.

We also hope preferred equity investments in one of our portfolio companies on nonaccrual status.

As previously announced by the company our board of Directors had declared monthly common stock distributions of three and a half sense.

Through September Thirtyth of 2020.

In light of current economic and market conditions, specifically as a result of the global crisis caused by the spread of the covert 19 virus no assurance can be provided the level of common have any common stock distributions that maybe declared by the common divide the company's board of directors for the fourth quarter of 2020, which are currently expected to be.

Clarity in September.

With that I'll turn the call over to our portfolio manager, Kevin Yes, [laughter]. Thank you Jonathan.

During the quarter ended June Thirtyth, 2020, U.S. loan market strengthened versus the quarter ending March 31st 2020.

Yes, one prices as defined by the S&P <unk> leveraged loan index increased from 82.9% parts at March 31st quarterly high 91.2% on June 10, before declining to 89.9 for sound you don't yet.

According to LCD during the quarter fighting dispersion related to credit quality occurred with double B right, along crazy prices, increasing 7.2% B rated loan prices, increasing 11.5% a trophy waited long prices increasing 18.7% on average.

Rating agency downgrades of U.S. large loans continued during the quarter pays a downgrade slowed in the quarter progress.

Additionally, the 12 bump trunk default rate for the S&P Osteovive is long index increased 25 year high 3.2% excellence Bald mountain.

The quarter after starting the quarter at 1.8% by principal not.

Finally, the distressed ratio defined as a percentage of loans, where they priced below 80% of par ended the quarter at 8% compared to 24% on March 31st after peaking at 57% on March 23rd.

Do you 30, a year to date primary market. If you want <unk> like $140 billion, what is 5% below if she wants during the comparable period in 2019.

Additionally, U.S. loan fund outflows as measured by Lipper have moderated what approximately 4 billion Buffalo's for the quarter ended June 30 of course is approximately 12 bone of outflows for the quarter ended March 31st.

In this environment, we continue to focus on portfolio management strategies designed to maximize our long term total return the permanent capital vehicle, we historically have been able to take a longer term view toward our investment strategy.

Thanks, very much Kevin.

We note that additional information about Oxford Square Capital Corp, second quarter performance has been posted to our website at Www Dot, Oxford square capital Dot Com and with that operator, we're happy to open the discussion for any questions.

Thank you very much so.

<unk> the question answer session.

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I don't know stuff.

First question like <unk> <unk> from Ladenburg. Please go ahead.

Yes, good morning, everyone, Jonathan going into the second quarter. The ratings agencies were very quick to try to get ahead or the impact on borrowers from the pandemic and there was a very high level of downgrades in March and April as you know well and I do see that about it.

Third of Oxford squares Hello.

Equity portfolio has a negative.

Junior O C cushion, which I assume.

Well what is what caused the decline in the seal, though equity gap and cash yields is that correct.

Thank you make your good morning.

I'm going to turn that question over to a deep madry, who runs our CLL practices you know.

Thank you.

Yes, it so that that is driving what the decline in the <unk> shields.

We did experience on level cash flow diversion for the second quarter of 2020.

In terms of effective yield Mickey as you know I'm there are variety of assumptions that go into that.

That is generally looked on a on a forward looking basis and it's.

We calculate the yields to an expected call date or maturity date, so well well the cash the while the cash returns were affected by the level of diversion. There are many factors and assumptions that go into what drives that the change in effective yield.

I understand deep and it seems that the ratings agencies at least for now are taking more of a wait and see attitude I think they're looking for you know I'm second quarter earnings before they make decisions about downgrades, but I do see that the downgrades in June were about.

One fifth of level and April and we've also seen a rally in Triple C loans, so with those trends in mind didn't managers.

I have an opportunity to improve their own see tests in July which is a typical see a little payment month and could that help improve the celo equity cash flows in the third.

Calendar quarter.

Sure. So I can speak through through June Thirtyth and.

Ratios.

And.

Improvement in Triple C prices generally improved Oh see ratios from April to June.

Okay. So it's too it's too early to tell in terms of the July ratios.

Probably yes, yes.

Okay, and and and moving on to portfolio allocation Jonathan in June 2nd lien bids rallied we're finished the quarter at about 7% below their pre covert levels I'm talking about the you broadly syndicated leverage loan market well that was similar to that was similar to the preferred.

And so the first liens, which are now about were about 6% below their pretty cool coping levels.

So when you look at those two opportunities alongside Cillo equity and debt.

Where do you see the best risk adjusted return opportunity for Oxford square, considering how tough the economic outlook remains.

Sure I guess I think it's fair to say that we're focusing principally not exclusively but primarily right now I'm on the first lien syndicated loan market.

And on certain selected opportunities in the in this yellow equity space. So see yellow equity as you know is a highly volatile asset class.

Both in terms of the underlying now does represented by the the collateral pools that reside within these structures and also in terms of their market values in their market prices. So those are really the areas that were principally focused on right now.

And to follow up Jonathan the last time, we talked about a year and I talked about cillo equity at that time, you know the market was fairly broken <unk> trading was very sporadic bid ask spreads were were very wide. The primary market was you know more or less locked up how would you characterize.

The seal equity market today in terms of those issues that I, just mentioned and is there an opportunity to put money to work.

We believe there there has been and continues to be an opportunity to put money to work in this asset class and we haven't continue to in terms of the <unk> attributes that you just referenced in terms of the the widening of bid ask spreads in the dislocation of the market the relative lack of liquidity.

Those things have significantly ameliorated since we last spoke bid ask spreads have gotten tighter liquidity has gotten better which isn't to say that those things couldn't reverse again, they certainly good but at the moment the market has improved in those regards.

I understand.

My last question, Jonathan Unfortunately for everyone. The at least down here [laughter]. The pandemic is obviously going in the wrong direction and that that trend is occurring in other parts of the country and is likely to further impact borrowers, which could pressure the loan market and see a little equity.

Given what's going on what can you help us understand are described the board sort of base case investment thesis when when they set new dividend.

Sure.

The board Mickey looks at a range of different factors.

We look at the financial performance of the company in the most recent over the most recent period. They look at projected a expected cash flows.

GAAP earnings.

Potential changes to our asset values, and our or our NAV overtime.

The expense structure the from the tax character of the underlying of the underlying income that we're receiving both historical and perspective, although perspective tax characters, an extraordinarily different difficult thing to attribute to seal of equity cash flows. So I would say the board hasn't confused.

To take into account, a very wide range of factoring including factors, including those that I just mentioned.

Oh, Okay, then I do understand those are all my questions for this morning I. Appreciate your time. Thank you.

Thank you make you very much.

Thank you very much.

I see no questions into Q.

Alright, well, we'll will I guess, if there are no additional questions well, we'll end the call there, but I'd like to thank everyone for their interest and then their participation in.

The company in this call and we look forward to speaking to you again soon thank you very much.

Thank you very much.

Ladies and gentlemen.

This call.

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