Q3 2023 Oxford Lane Capital Corp Earnings Call
Good morning, and welcome Chase, the Oxford Lane Capital Corp that fiscal earnings call.
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A brief question and answer session will follow with formal presentation.
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Thanks, very much good morning, everyone and welcome to the Oxford Lane Capital Corp, third fiscal quarter 2023 earnings Conference call I'm joined today by Saul Rosenthal, our President Bruce Rubin, Our Chief Financial Officer Officer, and Joe Kupka, Our managing director Bruce could you open the call with the disclosure regarding forward looking statements sure Jonathan Today's conference call.
It's being recorded and the 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. Any unauthorized rebroadcast of this call in any form is strictly prohibited at this point. Please direct your attention to the customary.
Closure in this morning's press release regarding forward looking information today's conference call include forward looking statements and projections that reflect the company's current views with respect to among other things future events and financial performance. We asked you can refer to our most recent filings with the SEC for important factors that can cause actual result.
<unk> could 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 on our website at Www Dot, Oxford Lane capital Dot Com with that I'll turn the presentation back over to Jonathan. Thank you Bruce on December 31, 2022, our net asset value per share stood at $4.63.
Third two of net asset value per share of $4 93 as of September 30th.
For the quarter ended December 31st we recorded GAAP total investment income of approximately $67 $6 million, representing an increase of approximately $2 9 million from the prior quarter.
The quarter's GAAP total investment income from our portfolio consisted of approximately $64 $3 million from our CLO equity and CLO warehouse investments and approximately $3 $3 million from our CLO debt investments and from other income.
Oxford Lane recorded GAAP net investment income of approximately $41 $4 million or 26 cents per share for the quarter ended December 31, compared to approximately $36 million or 23 per share for the quarter ended September 30th.
Our core net investment income was approximately $51 million or 31 per share for the quarter ended December 31, compared with approximately $51.1 million or <unk> 33 per share for the quarter ended September 30th.
For the quarter ended December 31, we recorded net realized losses of approximately $1.5 million and net unrealized depreciation on investments of approximately $54.7 million or <unk> 35 per share in total.
We had a net decrease in net assets, resulting from operations of approximately $14 8 million or nine cents per share for the third fiscal quarter.
As of December 31, the following metrics applied we note that none of these metrics represented a total return to shareholders.
Weighted average yield of our CLO debt investments at current cost was 16, 6% up from 15, 1% as of September 30th.
The weighted average effective yield of our CLO equity investments at current cost was 15, 7% down from 16, 1% as of September 30th.
The weighted average cash distribution yield of our CLO equity investments at current cost was 18.6% down from 22, 1% as of September 30th.
We note that the cash distribution yield is calculated at our CLO equity investments are based on the cash distributions we received or.
Or which we were entitled to receive at each respective period at <unk>.
During the quarter ended December 31, we issued a total of approximately seven 2 million shares of our common stock pursuant to an at the market offering resulting in net proceeds of approximately $37 $2 million.
During the quarter ended December 31st we made additional CLO investments of approximately $82 $8 million and we received approximately $49 $5 million from sales and repayments.
On January 26, our board of directors declared monthly common stock distributions of $7.05 per share for each of the months ending April may and June of 2023.
And with that I'd like to turn the call over to our managing director Joe Kupka, Joe Thanks, Jonathan.
During the quarter ended December 31, 2022 U S loan market was volatile U S loan prices as defined by the Morningstar L. S. P. A U S leveraged loan index increased from 91 to about 92% of par as of September 30th to 93, 6% of par as of November 16th.
Before dropping to 92 spot for 4% of par as of December 30th.
During the quarter, there was significant pricing dispersion related to credit quality with double B rated loan prices, increasing 195 basis points single B rated loan prices, increasing 94 basis points and Triple C rated loan prices decreasing 603 basis points on average the 12 month trailing default rate for the loan index.
<unk> to 72 basis points by principal amount at the end of the quarter from 90 basis points at the end of September 2022.
Additionally, the distress ratio defined as the percentage of loans with a price below 80% of par ended the quarter at seven 4% compared to approximately 6% at the end of September 2022.
The increase in U S loan prices led to an approximate 7% increase in median U S CLO equity net asset values.
Median junior over Collateralization cushions remained flat at approximately four 7%.
Additionally, we observed loan pools within CLO portfolios modestly increased our weighted average spreads to 354 basis points compared to 351 basis points last quarter.
Oxford Lane continued to be active in the secondary market during the quarter, while most of our activity took place in the secondary market. We added two new issue CLO equity investments during the quarter, our investment strategy during the quarter was to engage in relative value trading and lengthened the weighted average reinvestment period of Oxford, Lane's CLO equity portfolio.
In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across U S. CLO equity debt and warehouses as we continue to 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'll turn the call back over to Jonathan.
Thanks, very much Joe.
Additional information about Oxford lanes third quarter performance has been uploaded to our website at Www Dot, Oxford Lane capital Dot Com.
And with that operator, we're happy to open the call up to any questions.
Thank you as a reminder, if you would like to ask any question. Please press star and one on your telephone keypad now.
If you change your mind pizza stocking.
We.
Our first question from.
Mickey Schlein of Ladenburg. Your line is now open.
Yes, good morning, everyone.
Jonathan.
It appears we're in a more normal economic cycle, which we actually have an experienced in quite a while.
With inflation and interest rates climbing and GDP slowing down et cetera.
In that context, and considering your firm's long experience in these markets broadly speaking what is your outlook for the CLO market. This year.
Well, Thank you Mike and good morning, as you know, we don't take a macro.
Base positions were not really a firm, which forecasts macro fundamentals and makes a large directional.
Investments based on that macro forecast.
That said I think we are looking broadly for a continuation of current macroeconomic trends, which means.
Hopefully inflation comes under control.
But we certainly have the potential to see <unk> and <unk>.
Additional rising rates, we have the potential to see additional syndicated corporate loan spread widening.
But I think there's a fair amount of uncertainty right now so in terms of having a high degree of conviction around a specific macro outlook.
I can say we are trying to remain.
Flexible in our approach we're trying to remain opportunistic in our investment decisions, but those things are not generally predicated on a specific macro outlook.
I understand and following up on that question Jonathan broadly speaking how is the primary market behaving and and how do you see the.
Supply.
The equilibrium in the market developing in terms of the supply of loans and demand for loans within the CLO market. This year.
Sure Mickey.
The principal driver, we see for the primary market is liability pricing.
Which has been a bit volatile over the course of the last year or so, but let me turn ill turn it over to Joe to discuss that a little bit more broadly sure. So towards the end of last year, we definitely see salt pretty wide liability prices with triple A's pricing wide of silver plus 200 since the beginning of year, we've seen some banks.
To come into the space and have seen some price talking deals starting to get done as tight as surplus 175.
So that's obviously a good time in terms of just the supply equilibrium, we continue to see a decent amount.
Your health is outstanding and so as those look to price that will.
Could have potentially that range range bound to act on that price of liabilities, so that might bump up against.
The force of just continued banks coming in so we'll kind of see how that.
Plays out in the next couple of quarters.
Yes, I understand and I noticed I can't recall, a time when yields on CLO debt investments were higher than CLO equity estimated yields which is the case currently in your portfolio can you expand on what's driving that deviation in how you can take advantage of it.
While CLO debt tranches Mickey have.
Fundamentally different properties from from CLO equity tranches and.
We are looking into.
Context of making these various investments at obviously the current yield but we're also looking at the interest only component. We're looking at the principal return of principal prospect.
We're looking at the operation of the waterfall with respect to the equity tranches, specifically the structure of the indenture, which in turn informs and provides a framework for the operation of that waterfall.
Always invested with a focus or we generally invest with a focus on CLO equity tranches as against that but I, but we are certainly looking actively at Ted CLO debt tranche investments in this environment.
And Jonathan what what's driving the difference I mean.
You would expect the CLO equity estimated yields to be higher than that given their risk profile, but dan versus happening right now at least on average what what's driving that.
Sure I think you're referring to the weighted average.
GAAP effective yield so I would just point that yes, and thats, a GAAP measure of our current portfolio.
Not necessarily a reflection of the current state of the market.
And obviously our purchase prices for those various tranches is going to drive that calculation pretty dramatically. We may have purchased an equity tranche of debt tranche.
At different moments in time, when the market was providing us with a different opportunity set.
Okay.
Jonathan the average price of the collateral and the portfolio actually increased about 75 basis points during the quarter, but the fund reported.
74 cents per share of unrealized depreciation I understand that it was a very volatile quarter and.
And that the relationship is not linear.
But what were the main factors driving down fair values during the three months ending December .
It's essentially a market prices Nicky supply and demand characteristics for the CLO equity tranches that we hold as of December 31, which during some periods may or may not as you say be particularly well correlated to the pricing of the various collateral.
Pools that reside within those CLO structures. These are simply market factors.
Okay, and Jonathan to what extent did the spread between one month and three months.
LIBOR or so for in the pace of rate increases which have been dramatic.
Impact cash flows in the fourth calendar quarter, and how do you see that dynamic affecting cash flows this year.
Sure It had a pretty meaningful effect this quarter we.
We see it tightening in a bit for the next quarter, but I see that stabilizing going forward for sure, but that's obviously a projection based just on the publicly available forward curves, but that's what we're saying.
Okay and my last question I noticed that almost a million dollars of cashless were diverted this quarter.
Which we haven't seen for a while.
To understand how large the portfolio's average triple C bucket is and how much risk do you see in managers are tripping their triple C limits this year with.
The rating agencies potentially continues a downgrade.
We now go where.
Oh I'm sorry.
Let me go ahead and answer that question for for Mickey.
We are.
As making referred to make he referenced.
We don't have a specific projection for this speed of downgrades or the speed of Triple C. Downgrades by the rating agencies for the remainder of.
2023.
That said, we're obviously sensitive to the issue of cash flow diversions, and we continue to monitor market dynamics closely.
Operator happy to go ahead with the other question now.
Okay.
Our next question comes from the line of Matthew Howlett.
Your line is open.
Okay. Thank you. Thanks for taking my question. Good morning, everybody Yeah, just to follow on that note I mean, the I was really impressed with was with the junior Oc.
Overcollateralization was was stable at 450 nanometer given the downgrades are outweighing the upgrade so we see that.
What's going on in the portfolio, it's allowing the CLO junior Oc tranches to be stable in that environment, because it just <unk>.
Reinvestment good portfolio management can you just elaborate on how thats why that staying stable.
Higher downgrade market.
Sure. So even though we are starting to see downgrade the triple CS are still within their allowable seven 5% basket. So even if you see an increase in triple theaters as long as it stays under seven 5% you won't see that impact Boc ratio. Additionally, just given this environment with a healthy discount in the leveraged loan market.
Hello managers are able to build par just by going out.
Purchasing loans at 95% 90, 697 and that that's.
A good way to just build par and build those Oc ratios.
Right and then I noticed you've extended keep extending that reinvestment.
Period does that is that something that I mean, when you look at buying you said like you said you're about two new issues in the quarter. I mean, you really set on improving continuing to lengthen that reinvestment period, you've done a great job in the last year just pushing it.
Hey al.
Sure Matt as you know we are partial to longer reinvestment periods is I think that's sort of a fundamental part of a lot of the theses that.
We invest around that.
That said where were we.
We seek to be as purely opportunistic and investors as we can be which means if there are discrete opportunities with shorter reinvestment periods or even transactions that are structures that are outside of their reinvestment periods.
We will look very broadly across the asset class.
Okay.
Opportunistic.
At that time and time again.
Okay.
Hi, Mark.
Okay.
Thanks, John .
Equity market rally.
Year to date, two there's been a lot of pressure ports on these leverage loans hung hung on these investment bank balance sheets from J P. Morgan has asked about the call and he said yes.
Alicia would you foresee any.
Issue with the banks.
Going forward with some of the stuff on their balance sheet does that create opportunity for Oxford lane that they need to securitize. It get them out and then three did I hear you that the credit curve steepening.
Is that good for Oxford Lane do you like to see.
The credit curve steepened or does it are you indifferent to it.
Yes.
Sure Matt I think the first question. The first part of your question was a little bit garbled do you mind repeating that.
Yes on the leverage loan prices today.
Oh sure. So so since year end.
S T a syndicated corporate U S loan index is up roughly 160 basis points, we're just a little bit over 94 on the index right now which is obviously.
Generally good news.
More collateral pools that reside within U S CLO structures.
In terms of yes. So I think your other question was about the pressure on some of these investment banks, who have yes.
These warehouses nowhere.
Individual loans, so I mean, Matt our view is that to the extent that those loans or.
Significant numbers of those loans begin to see their way into <unk>.
U S CLO collateral pools.
They're going to enter those collateral pools at prices that reflect the current risk reward of both that particular loan that corporate obligations.
Risk return characteristics as well as the current state of the market. So it's not anything that we've sort of.
Worried about broadly is that as a market trend.
Got you and then the last one the credit curve I mean is that does that Steepening am I hearing you correctly.
Correctly that there has been some widening the triple as single B's triple seasons, and it will be.
Yeah.
So are you referring to the higher rated loans catching a bid wall the triple fees.
<unk> decreased this quarter.
Yes, yes.
So that's that.
That's definitely a challenge for CLO, just because they are somewhat constrained in terms of.
The ability to add onto these triple piece, how it's definitely something we're keeping a close eye on and are in discussions with our manager, but as long as they are still able to.
This environment still move up in quality and bill build par we think they.
They will be able to manage it right.
Obviously, Matt as you know.
CLO structures ability too.
Harvest opportunity in the Triple C marketplaces is gonna be structurally limited.
Right got you and I guess just the last question is first of all I mean, great job covering the dividend with the NII It was really.
I'm very pleased to see that.
That improvement in the coverage and given where your stock's trading that's just.
Really impressive and the yield with Trillium question that you're covering it there's nothing on the balance sheet. There's just really nothing you really need to do but you don't really have any any near term debt.
Everything's fixed rate long term, so there's really no need to open any of those series have been generally in terms of balance sheet management you feel like you can just some really good shape. It just keep on.
Moving along.
Sure, Matt I think look it's always a challenge to striking the right balance between raising incremental equity capital raising additional indebtedness.
The cost of that indebtedness the duration maturities of those various pieces of indebtedness that we have on our balance sheet and striking the right balance between the liability side of our balance sheet and the asset side of our balance sheet. So.
That for US is an ongoing process, it's something that we need to think about all the time.
But.
But in that in that regard, we're reasonably comfortable with the current state of our balance sheet, yes.
Yeah, I would just point.
Further.
And asset prices very well.
See the other side of it so I would just obviously commend you on a great job managing the balance sheet and look forward to.
The company Thanks for taking my questions.
Thank you very much.
Thank you.
We have no further questions. So I'd now like to hand, the call back to Keith.
Our CES.
Jonathan Cohen for his final remarks.
Thank you very much operator, I'd like to thank everyone on the call today, everyone listening to this call on replay for their interest in Oxford Lane Capital Corp. We look forward to speaking to you again soon thanks very much.
Thank you for joining that does conclude today's call. Please have a lovely day and you may now disconnect your lines.
[music].
Yeah.