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Edited Transcript of OXLC earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q2 2020 Oxford Lane Capital Corp Earnings Call

Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Lane Capital Corp earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce L. Rubin

Oxford Lane Capital Corp. - Corporate Secretary, Treasurer, Controller & CFO

* Debdeep Maji

Oxford Lane Capital Corp. - Senior MD & Portfolio Manager

* Jonathan H. Cohen

Oxford Lane Capital Corp. - CEO & Director

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Conference Call Participants

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* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Oxford Lane second fiscal quarter earnings release and conference call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jonathan Cohen. Please go ahead, sir.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [2]

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Thank you. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter 2020 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Deep Maji, our Senior Managing Director and Portfolio Manager.

Bruce, could you please open our call this morning with the disclosure regarding forward-looking statements?

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Bruce L. Rubin, Oxford Lane Capital Corp. - Corporate Secretary, Treasurer, Controller & CFO [3]

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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. 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 respect to, among other things, future events and financial performance. We ask you to 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 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.

With that, I'll turn the call back over to Jonathan.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [4]

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Thank you, Bruce. On September 30, 2019, our net asset value per share stood at $6.63 compared to a net asset value per share of $8.01 as of June 30. Our total return generated during the quarter ended September 30 equaled a negative 12.2%. That return reflected the change in net asset value per share for the period as well as the impact of a $0.405 per share distribution.

For the quarter ended September 30, we recorded GAAP total investment income of approximately $28.5 million, representing an increase of $1.2 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $27.3 million from our CLO equity investments and $1.2 million from our CLO debt investments and from all other sources. Oxford Lane also recorded GAAP net investment income of approximately $16.7 million or $0.31 per share for the quarter ended September 30, compared to $15.8 million or $0.35 per share for the quarter ended June 30.

Our core net investment income was approximately $24.2 million or $0.45 per share for the quarter ended September 30 compared with $19.7 million or $0.43 per share for the quarter ended June 30.

During the quarter ended September 30, we issued a total of approximately 9 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $88.5 million. For the quarter ended September 30, we recorded a net realized loss of approximately $2.3 million or $0.04 per share and a net unrealized depreciation of $90.9 million or $1.70 per share. We had a net decrease in net assets resulting from operations of approximately $76.5 million or $1.43 per share for the second fiscal quarter.

As of September 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 10.4%, down from 11.8% as of June 30.

Weighted average GAAP effective yield of our CLO equity investments at current cost was 16.4%, down from 16.9% as of June 30. The weighted average cash yield of our CLO equity investments at current cost was 22%, up from 19.8% as of June 30. We note that the cash 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 30, we made additional CLO investments of approximately $108.1 million, and we received $8.6 million from sales and repayments of our CLO investments.

With that, I'll turn the call over to our Portfolio Manager, Deep Maji.

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [5]

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Thank you, Jonathan. During the quarter ended September 30, the U.S. loan market exhibited price declines across certain segments of the market and increased pricing dispersion as the market became more bifurcated from a demand perspective. As of September 30, the S&P/LSTA Leveraged Loan Index decreased to 96.34% from 96.79% as of June 30. This decline continued into the current quarter with LSTA Index declining further to 95.54% as of October 25.

To highlight the pricing dispersion and bifurcation of the U.S. loan market, the percentage of U.S. loans trading at prices of par or higher increased to approximately 34% at the end of September from approximately 8% at the end of June. However, during the same period, the percentage of loans turning at prices of 80% of par or lower also increased to approximately 4.1% from 2.5%, which has increased the sales of U.S. CLO portfolios. Although this is a 3-year high for percentage of U.S. loans trading below a price of 80%, this remains well below the post-crisis high of 12.1% in February 2016, which was caused by sector level stress within oil and gas, metals and mining and brick-and-mortar retail sectors. While there were no new U.S. loan defaults during the third quarter and the 12-month trailing U.S. loan default rate was unchanged at 1.3% by principal amount, there has been an increase in one-off idiosyncratic credit events in the U.S. loan market.

During the quarter, new issued U.S. CLO debt spreads widened and U.S. CLO manager tiering increased. And the secondary market CLO junior debt specifically BB and B rated tranches with lower market value over collateralization ratios widened meaningfully. Given this widening, we have looked to purchase these tranches opportunistically. This widening in spreads and increase in manager and deal tiering, combined with the increase in loan pricing dispersion have also laid on U.S. CLO equity pricing, which has caused a continuation of elevated risk premiums during the quarter.

We continue to generally position our CLO portfolio in longer reinvestment period equity positions, which may allow our CLO managers to take advantage of market developments like we have today. That being said, we have also selectively purchased a variety of CLO equity and junior debt profiles over the past quarter.

With that, I will turn the call back over to Jonathan.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [6]

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Thanks, Steve. We note that additional information about Oxford Lane's second fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we're happy to open the call up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mickey Schleien with Landenburg.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [2]

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Jonathan, bear with me. There's a lot of volatility in the market. So I do have several questions.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [3]

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Sure, Mickey.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [4]

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I'd like to start by asking the following. We've seen that your CLO equity cash flows have remained very good at over 22% in terms of yield, and core NII is covering the dividend, but those cash yields are a lot higher than the average estimated yield, which I see was 16.4% and down a little bit from the previous quarter. I know that CLO equity estimated yields take into account a lot of assumptions. But the weighted average spread on the collateral has been stable, maybe climbing a little bit. And loan defaults are low, so that should support those yields. And CLOs are also match funded. So they're generally protected from LIBOR movements. So I'd like to ask, what are the main metrics that are changing when you forecast cash flows that are reducing estimated yields?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [5]

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It's essentially -- mostly, Mickey, liquidation prices -- estimated liquidation prices of loans within these various collateral pools in a market where the LSTA Index is hovering right around 95.5. That's the principal assumption. Keep in mind that the effective deal calculations are drawn on the basis of a hold-to-maturity or final call assumption, which we may or may not ultimately affect. So given our trading history and the fact that we do trade the portfolio actively that is another factor for consideration.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [6]

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So, Jonathan, those terminal values that you're referring to, they effectively take into account the assumptions that I just talked about and other things like default rates and recovery rates and -- et cetera. So what's changed? What's changing quarter-to-quarter that's driving down those terminal values?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [7]

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Sure, Mickey. The composition of the loan portfolio, the underlying collateral loan portfolios have certainly shifted over time. Our cost basis has changed. The cost basis affects all of these things or certain of these things. So the effective yield -- the delta in the effective yield was not particularly dramatic during the quarter. And the cash flows were essentially as we had modeled. So there were no real surprises on that basis.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [8]

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Okay. Let me move on. It's been widely reported that there's been a sharp increase in the share of B- loans with a negative outlook, and that's despite a relatively benign economic environment. And so there's concern out there that these loans could put the CCC buckets at risk. Do you believe that, that CCC bucket risk is what is mainly driving down CLO equity prices? And what do you think is the actual outlook for that process?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [9]

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Sure, Mickey. I think that may be a part of the reason why CLO equity pricing was weak in the third calendar quarter. I don't think that represents the majority of the reason. The fact, I think that is much more related to flows of funds. So there's a supply-demand characteristic for this market as there is for all markets. And during the last 6 months or so, we have seen pools of capital exiting and entering this asset class but probably more exiting than entering for a variety of reasons. So I think this is more of a supply-demand issue than it is specifically related to a particular concern about the risk of CLO baskets. But that's just my view.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [10]

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So net, if folks are exiting, if it's not the CCC bucket, what's the catalyst for the exit?

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [11]

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I think Jonathan is referring to participants in the CLO market. I think that it could be their type of capital. There may be people who don't have permanent capital like we do at Oxford Lane. I think within -- CLO managers themselves have raised significant amount of capital. And we've seen more participation from them. And yes, and just on the back of the capital that they raised for risk retention. And I think that if you look at the participants today, it's a much different basket than it was several years ago.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [12]

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Okay. If I can move on. Over a CLO's life, the cash and estimated yields should converge, all else equal. So based on your experience, when we're late in the cycle, which we appear to be in now, how do CLO equity cash and estimated yields tend to track in relation to one another?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [13]

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It's highly profile dependent, Mickey. We hold all sorts of CLO profiles within Oxford Lane. We've historically held new issue. We've held primary. We look at doing warehouse. We hold post reinvestment equity. We've got majority tranches. We've got minority pieces. We hold late-stage equity, that's very near the end of its life cycle. So it really depends pretty heavily on what the nature of the underlying collateral looks like and what the nature of the CLO structure itself is within its life cycle. But there's no sort of overarching answer that I could give that would really cover all of those elements.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [14]

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All right. I think in the prepared remarks, you mentioned that the leveraged loan market has continued to be weak in October. I see the LSTA was down -- is down about 1%. So that indicates continued stress in the loan market. I'd like to ask how that's translating into CLO equity trading this month?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [15]

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I think that was a part of the reason, Mickey, that loan prices or CLO equity prices were weak during the last 3 months, certainly.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [16]

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And how about -- how weak had they been in October?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [17]

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It's hard to generalize. I would say that they haven't been dramatically down, but they've been probably weak month-to-date.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [18]

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All right. Last question, and I'll probably take the rest off-line. Looking at your dividend yield as a percentage of NAV, it's now over 24%. So the market seems to be implying that the dividend is not sustainable. But the Board has maintained the dividend through March. And I suspect that, that reflects the healthy cash flow profile of the portfolio. So what risks do you think the market may be misinterpreting, and that's causing these severe mark-to-market adjustments that we're seeing?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [19]

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I wouldn't want to speculate, Mickey, on the market's misinterpretation. I couldn't speculate on that.

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Operator [20]

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I'm showing no further questioners. So I would like to turn the conference back over to Jonathan Cohen for any closing remarks.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [21]

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All right. I'd like to thank everybody on the call and listening to the replay for their interest and their participation. And we look forward to speaking to you again soon. Thank you very much.

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Operator [22]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.