Q3 2021 Oxford Lane Capital Corp Earnings Call

Good morning, and welcome to the Oxford Lane Capital Corp, third fiscal quarter Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing star.

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Please note this event is being recorded.

I would now like to turn the conference over to Jonathan H Cohen, Chief Executive Officer. Please go ahead.

Thanks, very much good morning, everyone and welcome to the Oxford Lane Capital Corp, third fiscal quarter 2021 earnings Conference call.

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

Sure Jonathan. Thank you today's conference call is being recorded and 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.

Authorized breakup.

Broadcast 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 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 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 to our website at Www Dot, Oxford Lane capital Dot com with that I'll turn the presentation over to Jonathan.

Thanks, Bruce on December 31st 'twenty, 'twenty, our net asset value per share stood at $5.44 compared to a net asset value per share of $3.88 per share as.

As of September 30th Twenty-twenty for.

For the quarter ended December 31st we recorded GAAP total investment income of approximately $31.4 million, representing an increase of approximately $1.3 million from the prior quarter.

The quarter's GAAP total investment income from our portfolio consisted of $29 $2 million from our CLO equity investments and $2.2 million from our CLO debt investments and from other income.

Oxford Lane also reported GAAP net investment income of approximately $18 9 million or 21 cents per share for the quarter ended December 31st compared to approximately $18 $2 million or 21 cents per share for the quarter ended September 30th.

Our core net investment income was approximately $33.5 million or <unk> 37 cents per share for the quarter ended December 31, compared with approximately $23 million or 24 cents per share for the quarter ended September 30th.

During the quarter ended December 31st we issued a total of approximately $4 5 million shares of our common stock pursuant to an aftermarket offering resulting in net proceeds of approximately.

$23.6 million.

For the quarter ended December 31st we recorded net realized losses of approximately $6 $5 million or seven cents per share. We reported net unrealized appreciation of approximately $144.1 million or $1 61 per share.

We had a net increase in net assets, resulting from operations of approximately $156.5 million or $1.75 per share for the third fiscal quarter.

As of December 31, the following metrics apply we net that none of these metrics represented a total return to shareholder.

The weighted average yield of our CLO debt investments at current cost was 10.5% down from 11% as of September 30th.

The weighted average GAAP effective yield for our CLO equity investments at current cost.

It was 14, 5%, which was unchanged from the number as of September 30th.

The weighted average cash distribution yield of our CLO equity investments at current cost was.

2.2% up from 14.9% as of December as of September 30th.

We note that the cash distribution yields calculated on our CLO equity investments are based on the on the cash distributions, we received or which we were entitled to receive at each respective period end.

During the quarter ended December 31, we made additional CLO investments of approximately $133 million and we received approximately $83.5 million from sales and repayments.

On January 29th our board of Directors declared monthly common stock distributions of six and three quarter cents per share for the months for each of the months of April may and June of 'twenty and 'twenty one.

With that I'll turn the call over to our portfolio manager deep magic.

Thank you Jonathan during the quarter ended December 31, the U S loan market continued to strengthen U S loan prices as defined by the S&P leveraged loan index increased from 93, 2% of par as of September 30th took approximately 96, 2% of par.

December 31st as of January 29th 2021, the loan index stood at approximately 97.3% three 5% of par.

Given the rally in U S loan prices the percentage of the loan index traded at a price of par or higher increased approximately 13% as of December 31st 2020.

As of January 29th the percentage for the loan index trades at prices of par or higher is approximately 40%.

In addition, the percentage of the loan index trades at prices of 80% of par or below which is a common measure of distress improved to approximately 2% as of December 31, 2020 from 5% at the end of September during the quarter. The increase in the U S loan market pricing led to an increase in U S. CLO equity net asset values, which became broadly positive.

According to Wells Fargo as of December 30th for 2020 at the median U S CLO equity.

<unk> improved to approximately 40% of par during.

During the fourth quarter of 2020 at the percentage of U S. CLO transactions failing one of their cash flow diversion test continued to show improvement quarter over quarter. Accordingly for bank of America, approximately 17% of outstanding U S. Yellows were failing one of their cash flow diversion test during the fourth quarter of 2020, which improved from approximately 25% as of the previous quarter.

We have continued to see an improvement in cash flow diversion tests over the past several months due to the proactive portfolio management by CLO managers, certain triple C issuers being upgraded and self healing cash flow diversion mechanisms of the theatres themselves. We saw the similar dynamic during the 2008 global financial crisis, when approximately 50% of Outstandings CLO transactions field cash flow.

For an average of two to four quarterly payment dates for.

<unk> for CLO equity cash flow payments over time.

During the fourth quarter for 2020 U S CLO debt spreads, particularly at the top of the CLO capital structure continue to tighten as such we have seen an increase in U S. CLO, new issue and refinancing activity to start the new year and I expect this trend to continue in.

In the current market environment, we continue to utilize an opportunistic and unconstrained U S. CLO investment strategy across U S CLO debt and equity tranches to maximize our long term total return and as a permanent capital vehicle. We historically have been able to take a longer term view towards our investment strategy with that I will turn the call back over to Jonathan.

Thanks, very much deep.

We note that additional information about Oxford lanes third fiscal quarter performance has now been uploaded to our website at Www Dot, Oxford Lane capital Dot Com.

And with that operator, we're happy to poll for any questions.

We will now begin the question and answer session to ask a question you May Press Star then one.

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At this time, we will pause momentarily to assemble our roster.

The first question comes from Mickey.

<unk> line of Ladenburg. Please go ahead.

Good morning, everyone can you hear me Jonathan.

Yes, Mickey and good morning, good morning.

Jonathan.

A couple of high level questions.

Do you feel about the loan markets equilibrium when you think about the market having from what I've read over 100 CLO warehouses in place.

Versus the current level of M&A and LBO activity.

Yeah.

Do you mean, Mickey how do we feel about the the demand for U S syndicated corporate loans in light of the current base of Cielo is information yeah supply and demand is essentially what I'm asking about and potentially the impact on spreads.

Sure Deep do you want to see if you can address Mickey's question.

Sure Force I think we see.

As you mentioned there are a lot of warehouses open and I think that's a result as of the healthy demand for CLO liabilities in the marketplace.

AAA spreads continue to tighten at the top of the capital structure and we've seen demand for double double B's continued to be strong over the over the course of the first month of the year and that's what the backdrop of new issue loans supply being relatively robust and healthy at the current moment. So we.

The CLO market.

<unk> is an is very.

Very strong right now and we expect that trend to continue.

Thank you for that and last year I want to ask about.

The outlook for this year last year, we saw CLO equity cash returns supported by.

Wider spreads are helping offset a credit deterioration.

Now we're later in the cycle downgrades are certainly dropping very sharply from what we saw in the spring of last year and no defaults are expected to peak very soon.

With that in mind, how do you see CLO.

<unk> equity cash and effective yields progressing this year.

Sure Mickey we haven't published any kind of a specific set of estimates, but certainly we've seen LIBOR floors, helping cash equity cash flows from U S. CLO structures. That's it that's a fairly persistent trends.

Trend defaults as you know tend to be somewhat back.

We're looking again, we don't have a specific set of projections for the U S CLO debt or equity markets for the remainder of this year, but but certainly the deeps comment are the new issue market seems.

Fairly healthy right now is as you'd be you.

You referenced this statistic.

There's quite a lot of new issues information.

Thank you for that Jonathan looking ahead, what broadly speaking what do you believe are the key developments needed in the loan and CLO market for <unk> portfolio to be valued at pre pandemic sort of levels.

Well the key thing I think Mickey for that question is that <unk> portfolio is quite different from where it stood a year or two where or even six or nine months ago. So the portfolio continues to change and one of the defining character.

<unk> of our portfolio management strategy.

His to rotate the portfolio to be active in the secondary market to be a participant as appropriate in the primary market and then warehousing market. So we're not sort of targeting any specific level of valuation for any any assets that we hold we are.

Renewal slee rotating in and and.

Re.

Building the portfolio in order to maximize its value at any moment in time.

And in terms of our capital.

Capital Jonathan your debt to equity now is around point for which is historically at the low end are quite low and for for Oxford Lane or are you concerned and with a backdrop of a strong loan and CLO market you could argue that that number could even go down some more if you don't do anything or are you considering adding some.

Additional debt to the balance sheet to grow going.

Going forward.

Sure Mickey where we're always looking at our capital structure, we're always looking to optimize.

For the type of debt are the duration of the debt time and the price that we pay for that debt the interest rate cost of capital associated with that.

That said I think generally speaking.

We are happy.

Happy to stay well below our statutory maximum so far as leverage on the book is concerned just given the prospects for volatility in the markets generally.

I understand that that's it for me. This morning I appreciate your time as always thank you.

Thank you. Thank you very much.

This concludes our question and answer session I would like to turn the conference back over to Jonathan Cohen for any closing remarks.

Operator, thanks, very much I'd like to thank everyone for their participation and their at their interest in Oxford Lane Capital Corp. We look.

Look forward to speaking to you again soon thanks very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

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