Q4 2021 Oxford Lane Capital Corp Earnings Call

Questions to ask a question you May press Star then one on a touchtone phone to withdraw your question Press Star then two please note. This event is being recorded I would now like to turn the conference over to Jonathan Cohen CEO. Please go ahead.

Thanks, very much and good morning, everyone and welcome to the Oxford Lane Capital Corp, fourth 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 and Bruce could you open the call with the disclosure regarding forward.

We're looking statements.

Sure Jonathan.

Today's conference calls prerecorded and order to a replay of the call 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 of Oxford Lane Capital Corp. Any unauthorized rebroadcast of this call and 94 and we strictly prohibited at.

At this point please direct your attention to the customary disclosure on 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 on financial performance and that's what you referred to on most recent filings with the SEC for important factors that can cause.

Actual results to differ materially from those indicated and these projections, we do not undertake slipped in our forward looking statements unless required to do so by law. During this call and it will use terms defined in the earnings release and also refer to non-GAAP measures for debt.

Definitions and reconciliations to GAAP. Please refer to our earnings release posted on our website at Www Dot, Oxford Lane capital Dot com with that I'll try on the presentation back over to Jonathan.

Thanks, Bruce on March 31, 'twenty, 'twenty, one and our net asset value per share stood at $5.94 compared to a net asset value per share of $5.44 as of December 31, 2020 for the quarter ended March 31st we recorded GAAP total investment income.

Of approximately $36 $1 million, representing an increase of approximately $4 $7 million from the prior quarter.

And.

The quarter's GAAP total investment income from our portfolio consisted of $34 $7 million from our CLO equity investments and $1.4 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $21.6 million or 23 per share for the quarter ended March 31, compared to approximately $18 $9 million or 21 cents per share for the quarter ended December 31st our core net.

Investment income was approximately $44 $9 million or 47 cents per share for the quarter ended March 31, compared with approximately $33 $5 million or <unk> 37 per share for the quarter ended December 31.

During the quarter ended March 31st.

We issued a total of approximately 7.2 million shares of our common stock pursuant to an aftermarket offering resulting in net proceeds of approximately $46.4 million for the quarter ended March 31, we reported net realized losses of approximately $2 $1 million or <unk> <unk> per share we recorded and.

Net unrealized appreciation of approximately $41 $9 million or 44 cents per share.

We had a net increase and net assets, resulting from operations of approximately $61 $4 million or <unk> 65 per share for the fourth fiscal quarter.

As of March 31st following metrics applied we net that none of these metrics represented a total return to shareholders.

The weighted average yield of our CLO debt investments at current cost was 11, 2% up from 10, 5% as of December 31st.

The weighted average GAAP effective yield of our CLO equity investments at current cost was 15.7% up from 14, 5% as of December 31st.

And the weighted average cash distribution yield of our CLO equity investments at current cost was 23, 8% up from 22, 2% as of December 31.

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 at.

During the quarter ended March 31st we made additional CLO investments of approximately $175 $9 million and we received approximately $62 $5 million from sales and repayments.

On April 15th 2021, and found redeemed all of the outstanding series 2020 three term preferred stock at a redemption amount of approximately $57 $2 million or 25 point $25 seven per share.

On April 29, our board of directors declared monthly common stock distributions of six and three quarter cents per share for each of the months of July August and September of 2021 with that I'll turn the call over to our portfolio manager deep magic.

And thank you Jonathan during the quarter ended March 31, the U S. Low market continued to strengthen U S loan prices as defined by the S&P L. S. T. A leveraged loan index increased from approximately 96, 2% of par as of December 31, 2020 to approximately 97, 6% of par as of March 31 2021.

Given the rally and U S loan prices the percentage of the Lumpiness that traded and prices of 80 per cent of par or below which is a common measure of distress improved to approximately 1% as of March 31, 2021 from 2% at the end of 2020.

During the quarter, the increase and U S low market pricing and led to an increase and U S. CLO equity and net asset values. According to wells Fargo as of March 31st 2021, the media and U S. CLO equity and Navy improved to 51% of par from 43% on par as of December 30, <unk> 2020.

During the first quarter of 2021, the percentage of U S. CLO transactions failing one of their cash flow diversion test continued to show improvement quarter over quarter. According to bank of America, approximately 9% of outstanding U S. Yellows were failing at least one of their cash flow diversion test during the first quarter of 2021, which improved from approximately 17% as of the previous quarter.

Additionally, given the tightening and U S CLO debt spreads, particularly at the top of the CLO capital structure, we have seen an increase and aggregate U S. CLO activity and the primary market across new issue reset and refinancing transactions during the quarter given the attractive and you should see Latvia arbitrage, we made four new primary CLO equity investments during the quarter.

Additionally, during the past quarter three of the silos, where we held equity reset their liabilities and fixed cielo is refinanced their liabilities given the strength and loan prices. We all we also optionally redeemed and several Seattle. Those are we believed realized from these deals current NAV was the better outcome versus affecting it or refinancing a reset and we rotated this capital into new invest.

Yes.

Lastly, we opened several non mark to market CLO warehouses with tier one CLO managers and should allow these managers to aggregate loan assets patiently with a view towards CLO takeout later this year and.

And the current market environment, we intend to continue to utilize and opportunistic and unconstrained CLO investment strategy across U S. CLO equity debt and warehouses and 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 will turn the call back over to Jonathan.

Thanks, Steve we note that additional information about Oxford Lane's fourth fiscal quarter performance has been uploaded to our website at Www Dot, Oxford Lane capital Dot Com.

With that well now open the call for any questions.

Yeah.

We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone.

If you are using a speaker phone please pick up your handset before pressing the keys.

Any time your question has been addressed and you would like to withdraw your question Press Star then two.

At this time and have a pause momentarily to assemble our roster.

And the first question comes from Mickey Schlein with Ladenburg. Please go ahead.

Good morning, everyone.

Jonathan considering your portfolio structure and terms of the <unk> that are still within their non call date and those that are passed it.

How quickly do you think managers can refinance or reset their liabilities.

To help offset the spread compression, we're seeing on the asset side.

And Mike <unk> and yet.

Hi.

We have several that are coming off of their non call date.

Some of the 2019 vintage equity debt.

Not specifically.

And the and the new issue market. So we're assessing every situation where a deal is coming rolling off and non call date and are looking to refinance or reset those liabilities if it makes sense the.

And the AAA market has widened out from the debt.

And the types that we saw on February a bit.

Yeah, we're making and kind of thoughtful decisions and and try and patient and patiently.

From these out and to enter new structures, but we do think the.

The market is attractive and to extent that makes sense, we're going to continue to affect resets and refinancings on our portfolio.

Okay. Thank you for that and and when we think of the high level activity and and Seo lows, which is attracting a new managers.

Could you help us understand how you evaluate new CLO managers before you go ahead and decided to make an investment with them.

Sure Mickey.

We have the benefit of being fairly active in this asset class for a long period of time, so when we're evaluating a transaction the.

Various elements that we consider certainly include the manager's capability and managers behavior historically, the manager's ability to accrete.

Accrete value for the benefit of the structure and for the tranche that we're investing and.

But it also includes a great many other things.

The assets within the structure.

And the liability.

Pricing and the overall structure of the indenture itself.

This is these are as you know fairly complex instruments.

And many many elements to consider.

And we don't take a sort of Oh, we hope we don't take and overly simplistic view of manager capabilities. There are certain managers that have a tendency to perform better in certain types of markets and we try to consider those nuances as we're evaluating overall structures.

It's Jonathan would it be fair to say based on on what you just explained that it would be unusual for Oxford to invest in and our managers first CLO.

It's not our common practice, it's not something that we do very frequently but that said if that managers first CLO represented represented and particularly compelling investment for us.

We would look seriously at doing that.

And one sort of last high level question Jonathan.

Even the economy's apparent strength I would suppose the fed will likely begin to raise rates and the not too distant future you know who knows exactly when but LIBOR LIBOR is now well below the typical floor and the leveraged loan. So when the fed starts to raise rates debt that will eventually cause a squeeze.

On the CLO arbitrage.

And what tactics do you expect your CLO managers will use to help alleviate that trend.

Sure.

So what you'll see happen is obviously if to extend on deals outside of its non call periods.

The CLO manager and equity holder may have the ability to refinance its liabilities and generally what we've seen historically is when rates rise often spreads will compress not only on the assets, but also on on the liabilities as well so the all in costs cost of debt for these issuers.

And will remain somewhat consistent so theres various tactics, but between and between what you would expect to happen on the liability side.

Assuming that these deals can refinance.

Yeah, we would expect to see.

A healthy level of refinancing activity and to a rising rate environment.

With the caveat and of course Mickey that.

Economic uncertainties pervade this asset classes. They do many other asset classes and predicting the future arc of either manager behavior or asset pricing or defaults or spread compression or expansion those things are extraordinarily difficult.

And to do and we're not attempting to do those things at the moment on this call in any case sure and Jonathan and based on what you just said.

Would it be reasonable then to assume that Oxford itself Wouldnt want to take a position on on the direction of interest rates in other words, you wouldn't try to hedge that through your own balance sheet weather and such.

And some sort of derivative or something like that.

We have not done that historically, Mickey we're not doing.

Serious Uh huh.

We're not undergoing serious consideration of trying to hedge interest rate risk at the moment.

But of course CLO structures by their nature are floating rate had on both the asset and the liability side and yes, we have.

The ability to.

To enjoy at least some some level depending on the structure.

On the internal.

Hedging.

Based upon that balance between assets and liabilities within the structure again.

Depending on on all sorts of other factors.

Okay.

Which as you know are difficult to predict.

Sure.

That's it for me I appreciate you taking my questions sure, making absolutely and just reverting back to your question about investing and a first time manager.

Just to be clear.

And that's something that we haven't done.

Anytime in recent history, we would be open to the prospect of it structure and deal terms, depending but but it's not something that we've done in quite some time I understand thank you for that follow up Johnson and I appreciate it.

Thank you Mickey.

I see there are no further questions. So this concludes our question and answer session I would now like to turn the conference back over to Jonathan Cohen for any closing remarks.

Thank you operator, I'd like to thank everybody, who is participating in this call or listening to the replay for their interest and Oxford Lane Capital Corp, and we 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.

Thanks.

Yeah.

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