Oxford Lane Capital Q2 2024 Earnings Call Transcript

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November 1, 2023

Key Takeaways

  • As of September 30, NAV per share was $4.81, up from $4.34 on June 30, with a net increase of $0.67 per share from operations in the quarter.
  • Reported GAAP total investment income of $74.4 million and core net investment income of $79.7 million (or $0.41 per share), driven by higher CLO equity and debt income.
  • Portfolio yields improved, with a weighted average cash distribution yield of 25% on CLO equity and an 18.5% yield on CLO debt, alongside $95.8 million of net unrealized appreciation.
  • Issued 20.8 million shares via its ATM program for net proceeds of $104.8 million and completed over 40 CLO transactions to pursue relative value and extend the reinvestment period.
  • The Board declared $0.08 per share monthly distributions for January through March 2024, underscoring its focus on returning capital to shareholders.
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Earnings Conference Call
Oxford Lane Capital Q2 2024
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, everyone, and welcome to the Oxford Lane Capital Corp. 2nd Fiscal Quarter Financial Results Conference Call. My name is Chach, and I'll be coordinating your call today. I'll now hand you over to your host, Jonathan Cohen, CEO to begin. Please go ahead.

Speaker 1

Thanks very much. Good morning, and welcome to the Oxford Lane Capital Corp. 2nd Fiscal Quarter 2024 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President Bruce Rubin, our Chief Financial Officer and Joe Kupka, our Managing Director. Bruce, could you open the call with a disclosure regarding forward looking statements?

Speaker 2

Sure, Jonathan. Today's conference call is being recorded. An 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.

Speaker 2

Any 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 With respect to, among other things, current future events and financial performance, we ask that you refer to our most recent filings with the SEC for important factors During this call, we'll 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.oxfordlanecapital.com. With that, I'll turn the presentation back

Speaker 1

Thank you, Bruce. On September 30, 2023, our net asset value per share stood at $4.81 compared to a net asset value per share of $4.34 as of June 30. For the quarter ended September, we recorded GAAP total investment income of approximately $74,400,000 representing an increase of approximately $3,900,000 from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately 69 $3,000,000 from our CLO Equity and CLO Warehouse Investments and approximately $5,100,000 from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income $42,000,000 or $0.24 per share for the quarter ended June 30.

Speaker 1

Our core net investment income was approximately $79,700,000 or $0.41 per share for the quarter ended September compared with approximately $75,000,000 or Approximately $10,500,000 and net unrealized appreciation on investment of approximately $95,800,000 or $0.44 per share in total. We had a net increase in net assets resulting from operations of approximately $130,100,000 or $0.67 per share for the 2nd fiscal quarter. As of September 30th, the following metrics applied. We note that none of these metrics represented total return to shareholders. The weighted average yield Our CLO debt investments at current cost was 18.5 percent, up from 18.1% as of June 30.

Speaker 1

16% as of June 30th. The weighted average cash distribution yield of our CLO equity investments at current cost was 25%, up from 24.6% as of June 30. 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 September, we issued a total of 20,800,000 shares of our common stock pursuant to an at the market offering resulting in net proceeds of approximately 104 $800,000 which resulted in net accretion to shareholders of approximately $0.07 per share of NAV for the quarter. During the quarter ended September, we made additional CLO investments of approximately 171 $7,000,000 and we received approximately $11,800,000 from sales and from repayments.

Speaker 1

On October 26, our Board of Directors declared monthly common stock distributions of $0.08 per share for each of the months ending January, February March of 2024. With that, I'll turn the call over to our Managing Director, Joe Kupka. Thanks, Jonathan.

Speaker 3

Percent as of September 30. The increase in U. S. Loan prices led to an approximate 11 point increase in median U. S.

Speaker 3

CLO equity net asset values. Median Junior over collateralization cushions declined 0.1% to approximately 4.1%. Additionally, we observed loan pools within CLO portfolios increase their weighted average spreads to 3 70 basis points compared to 3.59 The 12 month trailing default rate for the loan index decreased to 1.27% by principal amount at the end of the quarter from 1.71% at the end of June. Additionally, the distress ratio defined as the percentage of loans with a price below 80% of par ended the quarter at 4.36% compared to approximately 6% at the end of June. CLO new issuance during the quarter totaled approximately $28,000,000,000 an increase of $6,000,000,000 from the prior quarter.

Speaker 3

However, the $84,000,000,000 of year to date issuance as of quarter end trouser the $106,000,000,000 of issuance for the same period in 2022. Oxford Lane continued to be active during the quarter, transacting in both the primary and secondary markets. Overall, we executed over 40 transactions in the quarter, adding 16 new CLO equity investments and 2 new CLO debt investments. Our investment strategy during the quarter was to engage in relative value trading and to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. In the current market environment, we intend to utilize an opportunistic and unconstrained CLO investment strategy across U.

Speaker 3

S. CLO Equity, Debt and Warehouses As we look to maximize our long term charter churn 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.

Speaker 1

Thanks, Joe. Additional information about our 2nd quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that operator, we're happy to open the call for any questions.

Operator

Thank Our first question comes from Mickey Schulen from Ladenburg. Please go ahead.

Speaker 4

Yes, good morning, everyone. Jonathan, I want to start by asking you how you would describe How the managers in your CLO portfolios responded to take advantage of the strength In the low and CLO markets during the Q3 in terms of the opportunity to refinance or reset liabilities?

Speaker 3

Hey, Mickey. This is Joe. Yes, we saw some limited activity in terms of Refis and some resets around the margin, the liability market was quick moving during the quarter. So Just given the amount of supply out there, we tend to see like a push and pull pretty quickly. We also see some called deals, But there wasn't that wave of refis and resets that are waiting in the wings, but we did see some around margins.

Speaker 4

And I imagine that given the war in the Middle East and the weakness in the markets in October, If anything, that opportunity is lower now than it was in the Q3. Would you agree with that?

Speaker 3

Yes, I think that's fair to say.

Speaker 4

Okay. My next question, with inflation still above target, the consensus seems to be building around higher So curious to understand how managers are dealing with that risk in terms of the stress to their issuers' interest coverage ratios and the potential for more downgrades to CCC.

Speaker 3

Yes, I think that's definitely been at the top of managers' mind for several quarters now. So I think they've had time to prepare And manage their portfolios appropriately. We've seen some managers take proactive measures in terms of limiting their CCCs, limiting their Single B exposure just at the just for the potential of further downgrades to manage those tests. Also have seen managers limiting certain sectors where they see

Speaker 5

Less of

Speaker 1

an ability to pass through price increases, Mickey, where demand elasticity is lower, We've seen a push for managers to make those smaller positions inside of their collateral portfolios.

Speaker 4

I understand. You've reported net realized losses Pretty consistently every quarter. I want to understand, to what extent is your goal of defending Folio's average reinvestment period driving exits from post reinvestment periods CLOs, Those prices have been relatively weak. And are those what's leading to the loss, the realized losses?

Speaker 1

I don't think in a meaningful way Mickey. I mean we are trading the portfolio on a relative value basis. So in instances where we see the ability to sell something and buy something at a better price With a better reinvestment period or a cleaner portfolio or more stronger cash flows or a diminished probability of a future diversion, we will likely engage in those trades. But there's no wholesale effort To sell positions either at losses or gains, simply with the sole objective of extending the reinvestment period. That is one objective, but it is not the driving objective beyond all of our trading activity.

Speaker 4

Okay. So these consistent realized losses have been proactive decisions on relative trades In the portfolio, is that am I understanding you correctly?

Speaker 1

Yes, that is a Truthful and fair statement Mickey, yes.

Speaker 4

Okay. That's it for me this morning. I appreciate your time as always.

Speaker 1

Thank you, Mickey.

Operator

The next question on the line is from Matthew Howlett from B. Riley Financial. Please go ahead.

Speaker 3

Good morning, Matt. You may be on mute.

Speaker 5

Sorry about that. Good morning, Jonathan. Hi, Joe. Hey. Good morning.

Speaker 5

Thanks for taking my question. Good morning. Just your thoughts on relative value. I mean, you look at primary versus secondary, you look at The credit curve, you look at tiering among managers, are things becoming more pronounced to that where you could really look at value between those sort of metrics or just I'd love to hear your thoughts on relative value within the CLO market today?

Speaker 1

Joe? Yes. So I

Speaker 3

think it's very quick moving. As you said, manager tiering is especially top of mind for us. We've seen that basis Grow and shrink throughout the year. It's pretty wide at the moment. So that's a potential avenue for some relative value in terms of primary and secondary.

Speaker 3

That's moved around a bit, probably not to the extent as the manager tiering. But selectively, We've participated in the primary in a few instances this year, but the bulk of it has been in the secondary just given that's where we see the relative value. But yes, I think Like you said, there's a lot of opportunities just given the large bases between managers, between lengths And between primary and secondary, right.

Speaker 5

Yes, you seem like you guys are finding a lot of value. Is that the yields all went up on The GAAP yield and the core yield on the equity and the debt, is that from the new purchases that you're Finding deeper value or is that just from improvement in existing holdings? Just curious on That upward movement in yield, we'd like to see that.

Speaker 3

Yes, it's a combination of both.

Speaker 1

It's a bit of both, Matt. So Obviously, when we're turning the portfolio by definition, we're seeking better total returns, better risk adjusted returns The positions we held historically, but this was a strong quarter. We saw a meaningful improvement in NAV certainly, Driven by strength in the underlying collateral pool, so very much so.

Speaker 5

Great. Look, it Shows the benefits of the active management and congratulations to everyone on the team on that. And then I guess the final question is that the balance sheet You haven't really issued any new preferred or unsecured notes in some time. I know there's One small maturity mid next year, but with the growth in the equity base, the improvement in the NAV, how I mean can you just give us an update On those markets and when potentially you'd look to tap them, I mean we've seen that markets open up, that 5 year market open up to some other people. Just curious that As your equity base your common equity base grows, how willing would you be to

Speaker 1

be able to tap those markets? It seems to be very accretive to shareholders. Sure, Matt. Absolutely. We're always open to that possibility, but at a price.

Speaker 1

So we need to be very mindful of the differentials between our uses of proceeds and our cost of capital. And the 5 year, for example, dollars 25 par market that you just referenced is certainly a wider market than it was a year or 2 ago. And so we're watching those markets. We're sort of always As you say, we haven't chosen to in a while.

Speaker 5

Absolutely. And it's nice that you guys are paying attention to price. Just as the balance sheet continues to improve and improve, it just seems like even with these putting on some higher yields, it could be enormous accretive if you put on something in the 8% range call it and we were to go into market and buy sale equity yielding high teens or whatever. Just seems just the math would make a lot of sense at some point, when you're ready to explore.

Speaker 1

Absolutely, Matt. It's a dynamic we're Very much focused on, certainly.

Speaker 5

Great. Well, congrats on a great quarter. That's all I have.

Speaker 1

Thank you, Matt, very much.

Operator

We have a follow-up question from Mickey Schveen from Ladenburg. Please go ahead.

Speaker 4

Jonathan, I just wanted to follow-up on the relative value trades and the realized losses. Do you as a practice triangulate the prices that you're getting on these exits When you consider your estimated yields, in other words, on these exits, could you argue that the estimated yields were too Not enough return of capital was booked and that led to the realized loss or am I misinterpreting that trend?

Speaker 1

I'm not sure, Mickey. It's a somewhat technical accounting question. We can go through it with Our internal accounting group and get back to you. I'm not sure.

Speaker 4

Okay. That's it. Thank you.

Speaker 3

Thanks, Mickey.

Operator

I show no further questions on the Thank

Speaker 1

you. All right. I'd like to thank everybody for their interest and for their participation In our 2nd fiscal quarter earnings call, we look forward to speaking with you again soon. Thanks very much.

Operator

Thank you for joining today's conference call. You may now disconnect your lines and enjoy the rest of your day.

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