Q4 2021 Oxford Square Capital Corp Earnings Call

Thank you very much Adam good morning, everyone and welcome to the Oxford Square Capital Corp, fourth quarter 2021 earnings conference call I'm joined today by Saul Rosenthal, our President Bruce Rubin, our Chief Financial Officer, and Kevin Yacht, and our managing director and portfolio manager Bruce could you open the call with the disclosure regarding forward looking statements sure Jon and today's conference call.

It's being recorded in audio replay of the conference call will be available for 30 days replay information is included in our press release that was issued this morning. Please note that this call is the property of Oxford Square 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.

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.

<unk> events and financial performance, we ask that you refer to the 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 to uptake to obtain copies of our latest SEC filings. Please vickie.

Website at Www Dot, Oxford square capital Dot Com with that I'll turn the presentation to Jonathan. Thank you Bruce for the quarter ended December 31st Oxford Square as net investment income was approximately $4 $5 million or nine cents per share and our net asset value per share stood at $4.92.

This compares to net investment income of approximately $4 million or <unk> <unk> per share and our net asset value per share of $5 three.

For the prior quarter.

That increase in net investment income was principally driven by higher interest income, partially offset by lower CLO effective yield income.

For the FERC fourth quarter of 2021, we reported total investment income of approximately $10 $2 million as compared to approximately $9 $8 million in the prior quarter.

In the fourth quarter of 2021, we recorded net unrealized depreciation on investments of approximately $700000 or one <unk> per share compared to net unrealized appreciation on investments of approximately $5 $6 million or <unk> 11 per share for the prior quarter.

In the fourth quarter of 2021, we reported realized losses on investments of approximately $3 $7 million or eight cents per share compared to realized gains of $1 $7 million or <unk> <unk> per share for the prior quarter.

The fourth quarter of 2021, our investment activity consisted of purchases of approximately $23 $3 million sales of approximately $10.3 million and repayments of approximately $1.6 million.

As of December 31, we held cash and equivalents of approximately $9 million.

On March 1st 2022, our board of directors declared monthly distributions of $3.05 per share for each of the months ending April may and June of 2022.

Additional details regarding record and payment date information can be found in our press release that was issued this morning with that I will turn the call over to our portfolio manager, Kevin Yana to discuss the loan market Kevin. Thank you Jonathan.

During the quarter ended December 31, 2021 U S loan market exhibited stability versus the quarter ended September 32021 U.

U S loan prices as defined by the S&P <unk> leveraged loan index slightly increased from 90, 860% of par as of September 30 to 90, 864% of par as of December 31.

According to LCD during the quarter pricing dispersion related to credit quality occurred with double B rated loan prices decreasing 12 basis points B rated loan prices decreased 25 basis points and Triple C rated loan prices decreasing 144 basis points on average.

12 month trailing default rate, but the S&P <unk> leveraged loan index decreased 0.29% by principal amount at the end of the quarter after starting the quarter at 0.35%.

Note that this rate was just 14 basis points above the all time low.

Additionally, the distress ratio defined as a percentage of loans with a price below 80% of par ended the quarter at approximately zero point, 99% compared to $2 one 7% at the end of December 2020, and $3 seven 5% at the end of December 2019.

During the quarter ended December 31 primary market issuance was approximately 113 billion, bringing 2021 primary market issuance to an all time high of approximately 598 billion versus 289 billion during 2020.

This was driven by strong refinancing M&A and LBO activity. Moreover, U S loan funds as measured by Lipper.

Approximately $7 9 billion.

For the quarter ended December 31st, bringing 2021 total inflows to approximately $33 8 million versus total outflows of approximately $19 billion during 2020.

We continue to focus on portfolio management strategies designed 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. Thanks.

Thanks, very much Kevin.

We note that additional information about Oxford squares fourth 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 call up for any questions.

Thank you as a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now when the parents or ask a question. Please ensure you had said it's fully plugged in and on muted locally that star followed by one on your telephone keypad.

The first question today comes from Mickey <unk> from Ladenburg Mickey. Please go ahead. Your line is open.

Good morning, Jonathan and hope you're doing well.

Thanks, Jonathan given.

Good morning, given your long experience of investing in the CLO market I think it would be helpful. If you could describe how in your experience CLO equity cash flows have historically behaved in periods of rising interest rates, which obviously is what's expected for the coming year.

Yeah.

Generically Mickey what has happened historically is that initially you begin to lose the benefit of the LIBOR floors, which will now become the sofa floors, but then over time.

The higher rates manifest in higher returns on the on the equity component of the overall capital structure, that's sort of the historic norm.

Jonathan.

Digging a little deeper when these rates have risen in the past have you seen any stress develop in terms of borrowers abilities to fund there.

To service their debt.

Sure Mickey I'm going to turn the call over for a moment to deep Maggi, who you know who's our chief portfolio manager on our CLO investment side.

Hi, Mike how are you good morning deep good good so.

So what you've seen in certain.

Instances in the past.

When rates rise is often you'll see the coupon or the spread above the index.

Potentially decrease because if the all in cost to borrowers is too high no. They just will choose not to finance themselves in the loan market so and in other periods.

Like we've seen in the past when LIBOR. The previous index was that much higher levels oftentimes the coupons above that LIBOR, what were at lower levels and that commensurately caps kind of all in cost to borrowers relatively stable, but the.

This cycle could be different.

I understand and deep.

Regard when you look at borrowers revenues and margins trend.

This year over the last year.

Any insight into house.

They're doing in terms of revenue and margin growth and can they how exposed are they to the rising commodity prices that we're seeing.

It's very difficult to say Mickey I mean this this period is relatively new in terms of rising.

Prospect for rising rates, the prospects for rising commodity prices inflation permeating markets broadly.

As a new enough phenomenon that I'm not sure we're quite ready or prepared to comment on how that's manifesting at the borrower level.

Okay couple more questions Jonathan you mentioned.

LIBOR floors, which will become so for <unk> can you give us an idea of what's the average floors are in the loan portfolio and in the CLO portfolio.

I mean broadly for the market Mickey it's probably right around 50 to 75 bps.

Okay and my last question is.

As related to effective yields in the CLO book versus cash yields I'm trying to understand why at Oxford square.

The effective yield is of around 9% is less than half of its cash yields which are over 20% and I'm asking because that other CLO funds, including Oxford Lane.

Those CLO equity yields are well into the teens. So the effect at Oxford Square is as you know to book less to income and more to the cost of the investment.

Sure Mickey keep in mind of course, there are different portfolios with different inception dates.

Different final maturities and different different levels of aging across those two portfolios.

It doesn't mean that that one profile is necessarily superior or inferior to the other but from an effective perspective as you know there is a meaningful difference.

So it's more idiosyncratic than anything else Jonathan.

It's more a function of timing and age.

And just a follow up I mean, when I see an effective yield of nine and a cash yield of 20, we know that overtime cash and GAAP and tax I'll have to.

Combined that can take a long time to happen, but does the fact that the effective yield is so much lower than the cash yield imply that those cash yields are likely to come down over the future.

I wouldn't necessarily draw a linear implication on that basis.

Okay. Thanks, Jonathan those are all my questions for this morning I. Appreciate your time. Thank you.

Of course, making thank you.

I'm showing no further questions and with that I will turn the call back to Mr. Jonathan Cohen CEO .

Alright, I would like to thank everybody for their interest and participation in Oxford Square Capital Corp.

We appreciate your interest in this call and we look forward to speaking soon thanks very much.

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

Yes.

Okay.

Yeah.

Yes.

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