Oxford Lane Capital Q1 2025 Earnings Call Transcript

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July 26, 2024

Key Takeaways

  • As of June 30, 2024, net asset value per share rose slightly to $4.91 and the company recorded GAAP total investment income of $89.8 million, with GAAP net investment income of $56 million ($0.22/share) and core net investment income of $107.2 million ($0.41/share).
  • The company’s weighted average yield on CLO debt investments increased to 17.4%, while the cash distribution yield on CLO equity investments climbed to 26.9% at quarter end.
  • Oxford Lane issued 45.9 million shares through an “at-the-market” offering, raising net proceeds of $242.1 million, deployed $216.9 million into new CLO investments and received $96.3 million from sales and repayments during the quarter.
  • Market dynamics saw U.S. loan prices soften (ending at 96.59%), CLO equity NAVs decline by about two points, a record-high $53 billion in CLO issuance, a drop in the loan default rate to 0.9%, and a rise in the distressed loan ratio to 4.4%.
  • Management continues an opportunistic, unconstrained CLO strategy—trading over $500 million of CLO equity and debt—to extend the weighted average reinvestment period from July 2026 to November 2026 and pursue long-term total return.
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Earnings Conference Call
Oxford Lane Capital Q1 2025
00:00 / 00:00

There are 6 speakers on the call.

Operator

Hello all, and welcome to Oxford Lane Capital Corp's First Fiscal Quarter Earnings Call. My name is Lydia, and I'll be your operator today. After the prepared remarks, there will be an opportunity to ask questions. I'll now hand you over to Jonathan Cohen, CEO to begin.

Speaker 1

Good morning, everyone, and welcome to the Oxford Lane Capital Corp. First Fiscal Quarter 2025 Earnings 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? Sure, Jonathan.

Speaker 1

Today's conference call is being recorded. An audio replay of the

Speaker 2

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 disclosure in this morning's press release regarding forward looking information.

Speaker 2

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. We 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. 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.com.

Speaker 2

And with that, I'll turn the presentation back over to Jonathan.

Speaker 1

Thank you, Bruce. On June 30, 2024, our net asset value per share stood at $4.91 compared to a net asset value per share of $4.90 as of the prior quarter. For the quarter ended June 30, we recorded GAAP total investment income of approximately $89,800,000 representing an increase of approximately $7,100,000 from the prior quarter. The quarter's GAAP total investment income consisted of approximately $84,000,000 from our CLO Equity and CLO Warehouse Investments and approximately $5,700,000 from our CLO Debt Investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $56,000,000 or $0.22 per share for the quarter ended June compared to approximately $51,000,000 or $0.22 per share for the quarter ended March 31.

Speaker 1

Our core net investment income was approximately $107,200,000 or $0.41 per share for the quarter ended June 30 compared with approximately $79,900,000 or $0.35 per share for the quarter ended March 31. For the quarter ended June, we recorded net unrealized depreciation on investments of approximately $14,400,000 and net realized gains of approximately $6,100,000 We had a net increase in net assets resulting from operations of approximately 47 $700,000 or $0.18 per share for the 1st fiscal quarter. As of June 30, 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 17.4%, up from 17.1% as of March 31.

Speaker 1

The weighted average effective yield of our CLO equity investments at current cost was 16.8%, down from 16.9% as of March 31. The weighted average cash distribution yield of our CLO equity investments at current cost was 26.9%, up from 23.5% as of March 31. 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 June, we issued a total of approximately 45,900,000 shares of our common stock pursuant to an at the market offering, resulting in net proceeds of approximately $242,100,000 During the quarter ended June, we made additional CLO investments of approximately $216,900,000 and we received approximately $96,300,000 from sales and from repayments. On July 25, our Board of Directors declared monthly common stock distributions of $0.09 per share for each of the months ending October, November December of 2024.

Speaker 1

With that, I'll turn the call over

Speaker 3

to our Managing Director, Joe Kupka. Joe? Thanks, Jonathan. During the quarter ended June 30, 2024, the U. S.

Speaker 3

Loan market price index opened at 96.73%, reaching 96.99% in mid May before softening in June and ending the quarter at 96.59%. The decrease in U. S. Loan prices led to an approximate 2 point decrease in median U. S.

Speaker 3

CLO equity net asset values. Additionally, due to elevated levels of repricing activity, we observed median weighted average spreads across loan pools within CLO portfolios decreased to 3 61 basis points compared to 3 68 basis points last quarter. The 12 month trailing default rate for the loan index decreased to 0.9% by principal amount at the end of the quarter from 1.1% at the end of March 2024. We note that out of court restructurings, exchanges and subpar buybacks, which are not captured in this cited default rate, remain elevated. Additionally, the distressed ratio defined as the percentage of loans with a price below 80% on par ended the quarter at 4.4% compared to approximately 3.5% at the end of March.

Speaker 3

CLO new issuance during the quarter totaled approximately $53,000,000,000 an increase of $4,000,000,000 from the prior quarter, marking the 2nd highest quarterly volume in CLO market history as CLO liabilities have continued to tighten. Oxford Lane remained active this quarter, trading over $500,000,000 notional of CLO equity and junior debt while participating in opportunistic resets and refinancings. As a function of our overall activity during the quarter, we were able to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio from July 2026 to November 2026. Our investment strategy during the quarter was to engage in relative value trading and seek to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. In the current market environment, we intend to continue to utilize our opportunistic and unconstrained CLO investment strategy across U.

Speaker 3

S. 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 a longer term view towards our investment strategy. With that, I'll turn the call back over to Jonathan. Thanks, Joe.

Speaker 3

Additional information about Oxford Lane's Q1 results

Speaker 1

has been uploaded to our website at www.oxfordlanecapital.com. And with that, the operator will now poll for any questions.

Operator

Thank Our first question today comes from Mickey Schleien with Ladenburg. Your line is open. Please go ahead.

Speaker 4

Yes. Good morning, everyone. Jonathan, there's been a leveraged loan repricing wave with over a third of the market trading above par and due to higher expectations of a soft landing. That trend can impact loan spreads and I do see that the average spread in your CLO equity portfolio declined 8 basis points, which can pressure the CLO equity arbitrage. And I also see that your average AAA liability spreads were about stable.

Speaker 4

So what caused your CLO cash yields to increase so much this quarter?

Speaker 3

Hey, Mickey. So a lot of that was due to so you're looking at the January versus April payments. So there's a bit of lag in those numbers. So we've seen managers continue to build spread up till this quarter. The July payments did take a dip down from the April payments, so you'll continue to see that repricing wave hit.

Speaker 3

So there's a lag there. Additionally, we did have some first time payments come on, which bolstered that cash yield number for this quarter.

Speaker 4

Okay. That's helpful. Thank you. And what are your expectations for the remaining ability to refinance or reset liabilities in your CLO equity portfolio to help defend yields against the loan spread compression we're seeing?

Speaker 1

Sure, Mickey. We really don't make public projections or pronouncements about those kinds of forward looking activities. But certainly, we see the state of the CLO liability market, which looks to be generally constructive still.

Speaker 4

Okay. And Jonathan, the ratings agencies haven't seemed to accept the higher odds of a soft landing or the amount of capital available to lower quality borrowers. So the downgrade to upgrade ratio is still meaningfully above 1x, which can pressure CCC buckets. So how are your portfolio managers dealing with that trend?

Speaker 3

Yes. So one data point we've seen is actually just due to the elevated amount of reset activity. Managers have been proactively cleaning up these CCC baskets in anticipation of looking to reset into a cleaner deal. So we've seen CCC baskets in that sense declining a bit. But you're right, it's going to be a continuing battle for these managers to proactively manage around these CCC baskets.

Speaker 3

But they do have healthy OC cushions even if they do bump up against the limit. VOC ratios are still remaining relatively healthy.

Speaker 4

Yes, I saw that. And my last question on the balance sheet, The fund doesn't carry particularly high leverage even with the recent notes offering. So what's your appetite to issue additional debt or preferred shares to help lower your weighted average cost of capital?

Speaker 1

Our appetite, Mickey, is at this moment principally predicated on pricing. So to the extent that we think there's a sufficiently robust arbitrage available to us, we would look to add additional selectively look to add additional debt, but only at pricing that we found to be compelling.

Speaker 4

Okay. Any sort of target leverage that you have in mind, Jonathan?

Speaker 1

Not that we've shared with the world at large, no.

Speaker 4

Okay. Those are all my questions this morning. Thank you.

Speaker 1

Thank you, Mickey, very much.

Operator

Our next question is from Eric Zwick with Lucid Capital Markets. Your line is open.

Speaker 5

Good morning, everyone. Hope you're all doing well. Good morning. I wanted to start with a question on just that good morning on the sales and repayments activity during the quarter. Was it the highest that we've seen in over the past 5?

Speaker 5

So just wondering if that's reflective of market activity or some portfolio specific factors?

Speaker 1

I think it's largely, Eric, a function or significantly a function of just the size of the fund that has grown substantially over the course of the last year or 2. So larger scale begets more repayment activity and more sales activity. We have been and remain committed to running an actively managed portfolio, which should generate significant trading activity. So we did about $500,000,000 worth of notional CLO trading in the quarter. But I wouldn't call that either unusual or necessarily unprecedented.

Speaker 5

Thanks for the color there. And just with regard to the quarter over quarter increase in expenses, any color you can provide there, whether there was anything kind of one time in nature or just kind of a more kind of normal inflationary creep here?

Speaker 1

Are you referencing a percentage based increase, Eric, or a dollar based increase?

Speaker 5

A dollar based increase, if I recall correctly.

Speaker 1

Just the size of the fund most likely just the size of the fund. We raised an enormous amount of capital, not only this quarter, but in the immediately preceding quarters. So everything else held constant that would likely lead to that dollar denominated number being higher.

Speaker 5

And then a question just on credit. You mentioned that out of court restructurings remain elevated. You've seen some increase in distressed prices in the market as well. Looking at your industry exposure, you have a view into a broad slice of the U. S.

Speaker 5

Economy. I guess, are there any areas where you're seeing any stress or weakness? And it seems that the odds of a soft landing recession are becoming more probable at this point, but there's still, I think, some concerns in certain areas. So I guess from the ability that you have to look into your portfolio, are there any areas where you see some stress at this point? And if so, how are you seeking to manage that?

Speaker 1

Nothing, Eric, that is readily apparent outside of sort of the perception in the mainstream right now about economic activity. I think there's continued concern within the U. S. Economy about consumer behavior, the state of the consumer. There's an ongoing question mark around certain parts of the economy that we're aware of and sensitive to.

Speaker 1

But in terms of the perspective that we've got on the U. S. Economy as a result of the investing that we do, I don't think that we've got an insight that isn't sort of outside of the popular perception.

Speaker 5

Excellent. That's all for me today. Thanks for taking my questions.

Speaker 1

Thank you, Eric, very much.

Operator

Thank you. We have no further questions in the queue. So I'll now turn the call back to Jonathan Cohen for any closing comments.

Speaker 1

Thank you all. We appreciate your interest and your time today on this conference call. And we certainly look forward to speaking to you again soon. Thank you all very much for participating.

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