Q4 2022 Oxford Lane Capital Corp Earnings Call

Thanks, very much good morning, everyone and welcome to the Oxford Lane Capital Corp, fourth fiscal quarter 2022 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 with the disclosure regarding forward looking.

Sure Jonathan 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.

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.

I 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 public 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.

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 turn the presentation back over to Jonathan.

Thanks, Bruce on March 31, 2022, our net asset value per share stood at $6.56 compared to a net asset value per share of $6 93 as of December 31 2021 for.

For the quarter ended March 31, we recorded GAAP total investment income of approximately $55 $1 million, representing a decrease of approximately $2 $3 million from the prior quarter.

<unk> GAAP total investment income from our portfolio consisted of approximately $53 $7 million from our CLO equity and CLO warehouse investments approximately $1.3 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $32 $4 million or 24 cents per share for the quarter ended March 31, compared to approximately $35 $3 million or 29 cents per share for the quarter ended December 31.

Our core net investment income was approximately $57 $9 million or <unk> 43 per share for the quarter ended March 31, compared with approximately $53 million or <unk> 44 per share for the quarter ended December 31.

During the quarter ended March 31, we issued a total of approximately 13 million shares of our common stock pursuant to an aftermarket offering resulting in net proceeds of approximately $96.3 million for.

For the quarter ended March 31, we reported net realized losses of approximately $850000. We recorded net unrealized depreciation on investments of approximately $61 $7 million or <unk> 46 per share. We had a net decrease in net assets, resulting from operations of approximately $32 million or <unk> <unk>.

22 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 12, 5% down from 13, 3% as of December 31.

The weighted average effective yield of our CLO equity investments at current cost was 16, 2% down from 16, 3% as of December one and the weighted average cash distribution yield of our CLO equity investments at current cost was 29.7%, which was unchanged from December 30.

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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 31, we made additional CLO investments of approximately $351 $8 million and we received approximately $101 $8 million from sales and repayments.

On May 3rd our board of Directors declared monthly common stock distributions of seven five cents per share for each of the months of July August and September of 2022 with that I'll turn the call over to our portfolio manager deep magic.

Thank you Jonathan during the quarter ended March 31, 2020 to the U S loan market was fairly volatile compared to the quarter ended December 31, 2021 U S loan prices as defined by the S&P <unk> leveraged loan index started the quarter at 90, 864% of par on December 31 peaked at 99, 8% of par on January 20.

Third before then dropping to a low of $95 eight 8% of par on March 15th and ultimately recovering to 97, 6% of par on March 31.

As of May 4th the index stood at 97, 9% ACOG.

According to LCD during the quarter, there was pricing dispersion related to credit quality with double B rated loan prices decreased 79 basis points single B rated loan prices decreasing 108 basis points and Triple C rated loan prices decreasing 260 basis points on average a 12 month trailing default rate for the S&P <unk> leveraged loan index remained at a 10 year low of 19 base.

This points by principal amount at the end of the quarter. Additionally, the distress ratio defined as a percentage of loans at the price below 80% of par ended the quarter at approximately $1 five 5% compared to zero point, 99% at the end of December .

The drop in U S loan prices led to a decrease in U S. CLO equity net asset values during the quarter. We observe the median U S CLO equity and NAV declined from approximately 62% of par to approximately 52% of par.

However, median junior Overcollateralization ratios rose to approximately $4 four 2% compared to 438% last quarter. Additionally, we observed loan pools within the CLO portfolio is modestly increase the weighted average spreads to 345 basis points compared to 343 basis points last quarter.

Primary CLO issuance was slow to start the year, especially compared to the towards the pace of 2021, approximately $31 billion of new issue deals price during the quarter at March 31, compared to approximately $40 billion over the same period last year.

Only $21 billion of refinancings, and resets pricing in the primary market this quarter compared to approximately $71 billion over the same period last year.

<unk> Atlanta was very active in the secondary market during the quarter trading approximately $550 million of notional CLO equity and junior debt, while most of our activity took place in the secondary market. We continue to be active in the primary market, adding two new issued CLO equity investments during the quarter as a function of our overall activity in both markets. This quarter, we were able to lengthen the weighted average reinvestment period of Oxford.

CLO equity portfolio from December of 2024 to February of 2025 and.

In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across the U S CLO equity debt and warehouses as we look to maximize our long term 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, very much Dave 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 and with that operator, we're happy to poll for any questions.

Absolutely.

You would like to ask a question. Please press star followed by one on your touch turnkey pod if for any reason you would like to remove that question. Please press star followed by two again to ask a question press Star one.

Minder, if youre using a speakerphone. Please remember to pick up your handset before asking your question. We will pause briefly ask questions are registered.

The first question comes from the line of Mickey <unk> with Lindenberg you May proceed.

Yes, good morning, everyone.

Jonathan Theres been a lot of growth in the share of B minus rated.

Issuers, which now comprise around a quarter of the leveraged loan index, so should the economy.

Salary, which may or may not happen. This could turn into a problem in terms of the triple C. Bucket. So I'm interested to understand how CLO managers are are managing that risk in.

In your view.

Sure.

Mickey This is deep and thank you for the question.

As you can.

We mentioned that junior Overcollateralization cushions rose four bps during the quarter, but overall since you know since two.

2020 coming out of the pandemic, while you've what we've definitely noticed is that CLO managers, especially in new issue deals have been starting those deals with much higher cushions relative to prior to the pandemic. So generally speaking interest diversion cushions and Andover Junior Overcollateralization ratios.

I have started at a higher point that provides additional cushion from triple C downgrades.

They exceed the bucket of generally seven 5%.

Notwithstanding.

Mickey we remain sort of alert and focused on the issue that you raised which is that in a decelerate a autonomy.

Could be characterized by.

The increased rate of downgrades to U S syndicated corporate loans triples.

Triple C baskets could become.

Point of concern.

Yes, and actually Jonathan that leads to my next question then in the in the prepared remarks, you mentioned.

Defaults are at record lows, which certainly helps support performance today, but looking ahead what are the trends in the proportion of the collateral pool trading.

Trading, let's say below 85, what some people call the distress ratio and do you share be set to more technical issues or are we starting to see some deterioration in credit and whats your outlook for defaults.

I think both of those issues are relevant technical.

Technical issues as well as fundamental issues Mickey we don't have a published estimate for U S syndicated corporate loan default rates or recovery rates, either inside or outside of U S. CLO structures.

But similar to the issue that you raised with Triple C. Baskets. These are potential.

Potential points of sensitivity.

Across the CLO universe that we remain sensitive to.

Okay.

I understand my last question.

So now we're seeing as a sharp rise in short term rates with the fed tightening.

Just want to understand how that lag between the repricing of CLO collateral and CLO liabilities in terms of these rising rates is impacting the cash flows and estimated yields and what are your expectations for those trends.

Sure.

So as you know we always have been modeling the forward LIBOR curve and now the Ford.

For curve, so to the extent that.

Those.

No. So far LIBOR rises above the floor levels that have historically been and U S. Clo's, we lose the benefit of the floors, which we are which now has occurred this has been modeled for some time period, but we're starting to we're starting to see that loss of benefit from LIBOR floors and silver floors occur for.

The outward quarters.

It's something that we've been attuned to and mindful on for the last several quarters, but it's finally arrived.

Yes, I do understand the depot was referring to the lag in the timing of the repricing of the assets and the liabilities is that of a big issue given those the scope of the rate increases.

Yes, so I think what Youre seeing right now is just the overall volatility in the market.

Yes, we haven't seen as many repricing and refis for loan assets.

We have historically, just given the volatility and generally speaking the loan market has been at a discount to par you tend to see more repricing activity on the loans when a lot of.

Meaningful percentage of the loan market it trades above par.

Right, Okay I understand that's it for me. This morning. Thank you for your time.

Thank you. Thank you very much.

Yes.

Thank you.

The next question comes from the line of Matthew Howlett with B Riley you May proceed.

Oh, Hey, everyone. Thanks for taking my question and congrats.

On the on the.

Quarter, Congrats on really that is hitting the balance sheet up from really higher interest rates I mean, all of that fixed rate that youre well positioned so my question.

Really centers on hearing in the CLO space and you guys know all the managers that to you.

When the largest biggest track records in the space how important is carrying among CLO managers today.

Any forward would you look to just focus on the best.

Is there a difference in pricing just tack to touch on a little bit about that.

Sure tearing us definitely.

Meaningfully differentiated.

Coming out of Covid cover it so I think where that where we've really seen the impact from charing as where these CLO managers have been able to price their triple A's and correspondingly the rest of their capital structures. So in the CLO market CLO debt investors and particularly AAA investors are really differentiating from.

Top tier versus second tier versus third tier managers and.

It's very important and something that we really focus on especially in the primary market when we're looking to warehouse with certain.

CLO managers.

Definitely something that we think about a lot and Madden in response to your question about where we will tend to focus and where we have focused historically, we've generally taken a very expansive view I mean deep phrased it correctly. When he said that we're mostly focused on warehousing and primary market activity with tier one.

Managers, but if you look down our schedule of investments, especially historically youll see that we take a very wide.

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In terms of the deals we're willing to look at at the right price, we absolutely will purchase CLO equity.

Managed by a second or third tier manager again at the right price.

Absolutely. This is part of your underwriting you have your own internal scores and rankings dialogues with these managers. So you know the one July June ones, you don't like the once the markets may be mispricing and.

And so forth.

Very much so Matt yes.

Yes.

Great and then Jonathan.

You did a tremendous job with the balance sheet all of these yeah looking at all of these.

Long duration fixed rate.

Preferred an unsecured note is there.

Is there anything to do there.

A question because we'll know the rates are higher I mean, you still are a top tier insurer, but.

<unk> four news you sure the balance sheet, just sort of well positioned it.

Yeah.

To take advantage of some of these longer fixed rate coupons, you had been placed on the liability side.

Sure, Matt I mean, I think as you say that the $100 million of new five year, 5% capital that we've raised just very recently.

Was well timed and we're very pleased with that issuance. We are very pleased with the totality of our balance sheet right now given the fix.

The fixed rate relatively low cost financing that we have in place given that the opportunities of the market seems to be providing us presently.

We feel very much.

Along the lines that you just referenced.

Look well congratulations really.

Appreciate all the work you've done and thanks for taking my question.

Alright, thanks, very much we appreciate it.

Yes.

Thank you.

Hi, Joe There are no further questions with that I will turn the call back over to Jonathan Cohen CEO .

Thanks, very much operator, and we'd like to thank everybody who has participated in this call or listening to the replay.

For their interest and attention to Oxford Lane Capital Corp. Thank you very much we look forward to speaking again soon.

That concludes the Oxford Lane Capital Corp, fourth quarter fiscal earnings call. Thank you for your participation you may now disconnect your lines.

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