Oxford Lane Capital Q1 2024 Earnings Call Transcript

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July 31, 2023

Key Takeaways

  • As of June 30, 2023, NAV per share declined to $4.34 from $4.61 at March 31.
  • GAAP total investment income rose to $70.5 million and GAAP net investment income reached $42 million ($0.24/share), while core NII jumped to $75 million ($0.43/share) vs. $37.5 million the prior quarter.
  • The portfolio recorded net realized losses of $1.3 million and net unrealized depreciation of $55.5 million ($0.32/share), leading to a $14.8 million ($0.08/share) decrease in net assets from operations.
  • Key yield metrics improved, with weighted average effective yield on CLO equity climbing to 16% and cash distribution yield surging to 24.6%, while current cost edged up to 18.1%.
  • During the quarter, Oxford Lane issued 12.1 million new shares for net proceeds of $60.2 million, deployed $111.9 million into CLO investments, declared a monthly distribution of $0.08/share, and added 12 new CLO equity and 2 debt positions amid stronger secondary market conditions.
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Earnings Conference Call
Oxford Lane Capital Q1 2024
00:00 / 00:00

There are 5 speakers on the call.

Operator

Hello, everyone, and welcome to the Oxford Lane Capital Corporation First Fiscal Quarter 20 24 Earnings Call. My name is Emily, and I'll be coordinating your call today. I'll now turn you over to our host, Jonathan Cohen, CEO of Oxford Lane Capital. Please go ahead, Jonathan.

Speaker 1

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. 1st Fiscal Quarter 2024 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President Bruce Rubin, our CFO and Joe Kafka, our Managing Director.

Speaker 1

Bruce, could you open the call with a disclosure regarding forward looking statements? 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 At this point, please direct your attention to customary disclosure in this morning's press release regarding forward looking 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.

Speaker 1

We answer you referred 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 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.oxfordlanecapital. With that, I'll turn the presentation back over to Jonathan.

Speaker 1

Thanks, Bruce. On June 30, 2023, our net asset value per share $4.34 compared to a net asset value per share of $4.61 as of March 31, 2023. For the quarter ended June, we recorded GAAP total investment income of approximately 70 point $5,000,000 representing an increase of approximately $4,000,000 from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $66,200,000 from our CLO Equity and CLO Warehouse Investments and approximately $4,300,000 from our CLO Debt Investments And from other income. Oxford Lane recorded GAAP net investment income of approximately $42,000,000 or $0.24 per share for the quarter ended June compared to approximately $37,400,000 or $0.22 per share for the quarter ended March.

Speaker 1

Our core net investment income was approximately $75,000,000 or $0.43 per share for the quarter ended June compared with approximately $37,500,000 or $0.22 per share for the quarter ended March 31. For the quarter ended June 30, we recorded net realized losses of Approximately $1,300,000 and net unrealized depreciation on investments of approximately $55,500,000 or $0.32 per share. We had a net decrease in net assets resulting from operations $14,800,000 or $0.08 per share for the 1st fiscal quarter. As of June 30, the following metrics current cost was 18.1%, up from 18% as of March 31. The weighted average effective yield of our CLO equity investments and current costs were 16%, up from 15.8% as of March 31.

Speaker 1

The weighted average cash distribution yield of our CLO equity investments at current costs grew 24.6%, up from 16.5% as of March. We note that the cash distribution yields calculated on CLO equity investments are based on cash distributions we received for which we were entitled to receive at each respective period end. During the quarter ended June 30, we issued a total of approximately 12,100,000 shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $60,200,000 During the quarter ended June 30, we made additional CLO Investments of approximately $111,900,000 and we received approximately $69,700,000 From sales and from repayments. On July 27, our Board of Directors declared monthly common stock distributions of $0.08 per share I'll turn the call over to our Managing Director, Joe Kupchak. Joe?

Speaker 2

Thanks, Jonathan. During the quarter ended June 30, 2023, U. S. Loan market performance improved versus the prior quarter. U.

Speaker 2

S. Loan prices, as defined by the Morningstar LSPA U. S. Leveraged Loan Index, increased from 93.38 percent apart as of March 31 to 94.24 percent apart as of June 30. According to LCD, during the quarter, there were some pricing dispersion with BB rated loan prices increasing 69 basis points, Single B rated loan prices increasing 134 basis points and CCC rated loan prices increasing 212 basis points on average.

Speaker 2

The 12 month trailing default rate for the loan to index increased to 1.71% by principal's roll amount at the end of the quarter From 1.35 percent at the end of March. We note that the percentage of the bulks within U. S. CLOs, which are actively managed, remains lower than the index. The increase in U.

Speaker 2

S. Loan prices led to an approximate 9 point increase in median U. S. CLO net equity values. Median junior over collateralization cushion declined 0.3% to approximately 4.2%.

Speaker 2

Additionally, we observed loan pools within CLO portfolios modestly increased our weighted average spreads to 3 59 basis points compared to 3 57 basis points last quarter. With the primary market arbitrage remaining challenging, Oxfordland continued to be active in the secondary market during the quarter. We added 12 new CLO equity investments and 2 new CLO debt investments during the quarter. Our investment strategy during the quarter was to engage in relative value trading We continue to utilize an opportunistic and unconstrained CLO investment strategy across U. S.

Speaker 2

CLO equity, debt and warehouses As we look to maximize our long term total return and as a permanent capital vehicle, we have historically been able to take the longer term view towards our investment strategy. With that, I'll turn the call back over to Jonathan.

Speaker 1

Thanks, Joe. You note that additional information about Oxford Lane's Q1 performance has been uploaded to our website at www.oxfordcapital.com. And with that, operator, we're happy now to poll for any questions.

Operator

Thank The first question today comes from the line of Mickey Schlemm with Ladenburg. Mickey, please go ahead. Your line is now open.

Speaker 3

Yes. Good morning, everyone. Hello, Vincent. This is

Speaker 1

Marshall Juste. Good morning.

Speaker 3

Yes. Good morning. You hear me okay? Jozin, we do. I think Joe just mentioned that Okay.

Speaker 3

I think Jocelyn, Joe just mentioned that the primary markets in CLO equity are still challenging. I'm just curious Whether you've seen at the margin any improvements in the trends and CLO equity trading, either primary or secondary, with this Since that maybe an economic soft landing is actually more probable than we might have thought.

Speaker 1

We have, Nicky, yes. I would say since quarter's end, we've seen upturn both in the Tone of the secondary market and also prospectively the arbitrage in the primary market. So yes, I would say things have Just in the past month or so, strengthened across our asset class.

Speaker 3

Okay. Last quarter, Joe mentioned that managers have some ability to reinvest Even past the end of the CLO's official reinvestment period. And just counting this morning, The positions you're showing in the presentation, it looks like about a third of the portfolio has passed its reinvestment period. So could you maybe help us understand or describe the parameters that managers have to follow in that situation to continue to Invest after the end of the reinvestment period?

Speaker 1

Sure, Mickey. It's essentially a function of The four corners of the indenture itself, but Joe will speak more specifically to that. Sure. Like Jonathan mentioned, a lot of it Depends

Speaker 2

on the exact tests in the indenture, and these vary by manager to manager and even deal by deal. And that's a big part of where we believe We deliver value decomposing those inventories and finding the managers who are able and willing to continue to reinvesting. So it has various tests like Weighted average life, WARF, diversity score, the various OC tests, and they can vary from At the end of the reinvestment period or maintain or improve. So there's a wide range, I would say, no deals Exactly alike. And that's part of just analyzing the individual deals.

Speaker 2

Yes.

Speaker 3

Okay. My last question. There has been some spread tightening, I believe, in the CLO liabilities. But Looking at the portfolio's average AAA spread at 128, it looks like there's still a long ways to go before it's economical So we don't see more significant spread tightening, then There could be more pressure on Oxford's cash flows as more reinvestment periods end. So how are you managing that risk Without having to take losses in the secondary market to trade out of those positions that are in that predicament.

Speaker 1

Sure. As you say, Mickey, we are an active trader across this asset class. And the issue for us isn't whether we happen to

Speaker 3

take a loss on a particular position

Speaker 1

or not. The issue for us is optimizing the portfolio as aggressively as we can for the best possible risk adjusted return. So we are, I don't believe, heavily reliant on the assumption of refis or resets Across the portfolio, we're looking at cash flows, we're looking at interest income, and we're looking at the prospect And the quantity of likely return of principal. All of those things are set against the arbitrage that exists between the use of proceeds and the cost of capital On a deal by deal basis and our ability and desire to trade out of things and into new things in the secondary market, just as you say.

Speaker 3

Okay. Those are all my questions this morning. I appreciate your time. Thank you.

Speaker 1

Thank you, Mickey, very much.

Operator

Our next question comes from Stephen Bavaria with Inside the Income Factory. Steven, please go ahead. Your line is now open.

Speaker 1

Thanks. Hi, guys. Hey, you're doing a great job and We're just trying to understand it and explain what's still a pretty complex asset class to a lot of the retail investors. And there's a lot of concern expressed about how your NAV, which I understand sometimes can move Opposite to your business prospects. I mean, it seems to me like as loans drop On the secondary market to the point where you can then collect at par and reinvest at 92% par or whatever and then collect again at par when those loans mature.

Speaker 1

Your business prospects probably improve When the loan market drops, at the same time that your own, the CLO equity in theory probably drops Because their loans are worth less, but their debt is still worth the same. How do you am I interpreting that appropriately? And then when people see that they're earning 17% yields on your very secured distribution at the moment, How much realistically should they regard that as perhaps A certain erosion of NAV that's inevitable over time and how much of that 17% is real Sort of total return they get to keep. Sure, Steve. Thank you for those questions.

Speaker 1

As you say very correctly, it's a complex asset class. In terms of Our assumption or our presumption about the total return we are looking to receive over an

Speaker 2

We're not

Speaker 1

managing across all periods to any specific rate of return. We are looking for the best possible Risk adjusted return, risk adjusted total return over each period that we're managing to. So at this moment, we are enjoying the benefit of relatively high cash flows In the secondary market, we are not participating, especially actively in the primary market by virtue of the very challenged arbitrage As Mickey referenced in his earlier question, and we're not projecting out Any number of years into the future in terms of a targeted total return. Instead, we would Focus on how we've done historically. Oxford Lane has been in existence since 2011, And our track record is certainly in the public record.

Speaker 1

We're, I would say, generally enthusiastic About the current state of this market, but this is also a fairly volatile market, as you correctly know. Got it. Thank you. Thank you, Steve.

Operator

Our next question comes from Matthew Howlett with B. Riley. Matthew, please go ahead. Your line is now open.

Speaker 4

Hi, good morning everybody. Hey, Jonathan. Good morning, Matt. Good morning. Thanks for taking my question.

Speaker 4

The core NII, The pickup, if you could just go over, what explains the really dramatic pickup in the core net investment income quarter over quarter?

Speaker 2

Sure, Matt. Sure. There were 2 main components. So just again, when we're looking at this quarter over quarter increase, we're Mainly comparing the payments in April to the payments in January last quarter. The payments in January were historically depressed, Mainly driven by the 1 month, 3 month LIBOR mismatch basis that we've spoken about a few times.

Speaker 2

In addition for our portfolio, in particular, we've also had some first time large payers tick on this quarter, which Rolled that number up further.

Speaker 4

Got you. And you say that's sort of CL Equity starting to cash flow immediately? When you say first time payer, is that?

Speaker 2

Yes, either a large position we had purchased in the secondary or A large primary position we had purchased several quarters ago who have just now finished ramping up and made their first payment.

Speaker 4

Got you. I know you disclosed sort of what's in the ramp process on your presentation. I appreciate that. And that doesn't really move the needle clearly. My second question is on credit curve.

Speaker 4

I You're actually showing higher debt yield versus equity yields. I mean, I know there's some accounting phenomenon in that. But I mean, what It occurs flat here where you could actually go up in credit and pick up yield or Look, up the capital stack and pick up. What are you seeing with the BB versus equity yield? And how are you playing it?

Speaker 4

Yes.

Speaker 2

So I think there are 2 components to that. First, what you see there is the current, like you said, the GAAP accounting yield. So that's just a function of the accounting standards we apply, and it's not necessarily What we project going forward, what we could buy out in the market. That said, I believe the credit curve has flattened a bit, And we have seen some other equity players move to their BBs, for instance, because they can't quite pick up the yield they come in equity, but Pick up a definitely elevated yield in BB, for instance. So I wouldn't say flip, but definitely has compressed you

Speaker 1

look at certain tranches. Yes. The vast majority of our book, Matt, is still CLO Equity. But as you say, we've been looking a bit more carefully at Single B and BB opportunities.

Speaker 4

Right. Exactly. I know it creeped up a little bit the percentage to CLO debt, but Interesting to see how that moves going forward. And if you could comment, I know you don't give July any of your last day of the month, but I mean, You've seen a strong rally in the markets here. Is there a sense, I mean, you gave some numbers in the beginning, I don't know if that was For July, but any sense of what went on July assuming the trajectory with your NAV was positive given

Speaker 1

Sure. Without commenting on our Portfolio or our balance sheet and just speaking to the market broadly, I would say in the month of July, the Market for CLO equity broadly is probably sort of mid high single digits.

Speaker 4

For CLI Equity, that is. Yes. Great. Thanks. That's interesting.

Speaker 4

And when will you put up that July interview? A week or so? I think now.

Speaker 1

Hopefully, a bit sooner than that. We'd like to say probably later this week.

Speaker 4

Great. We look forward to that. Thanks, John. Thanks for taking my questions.

Speaker 1

All right. Thanks very much, Matt.

Operator

There are no further questions at this time. So I will now turn the call back over to Jonathan Cohen, CEO.

Speaker 1

Operator, thanks very much. We'd like to thank everyone who participated in this call and who listened to the call on replay. We look forward to speaking to you soon, and thank you again for your interest in Oxford Life. Thank you.

Operator

Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

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