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

Q1 2020 Oxford Lane Capital Corp Earnings Call

Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Lane Capital Corp earnings conference call or presentation Thursday, August 1, 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 day, and welcome to the Oxford Lane Capital Corp. First Fiscal Quarter Earnings Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jonathan Cohen, Chief Executive Officer. Please go ahead.

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

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Thanks very much. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. First 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 the call today 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 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. 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 return -- turn the call 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 June 30, 2019, our net asset value per share stood at $8.01 compared to a net asset value per share of $8.32 as of March 31. Our total return generated during the quarter ended June 30 equaled a positive 1.14%. That return reflected the change in net asset value per share for the period as well as the effect of a $0.405 per share distribution. For the quarter ended June 30, we've recorded GAAP total investment income of approximately $27.3 million, representing an increase of $3.8 million from the prior quarter. The quarter's GAAP total investment income from our portfolio was approximately $26.3 million from our CLO equity investments and $1 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $15.8 million or $0.35 per share for the quarter ended June 30 compared to $13.5 million or $0.34 per share for the quarter ended March 31. Our core net investment income was approximately $19.7 million or $0.43 per share for the quarter ended June 30 compared to $20.8 million or $0.53 per share for the quarter ended March 31. In the quarter ended June 30, we issued a total of approximately 7.2 million shares of our common stock pursuant to an at-the-market offering resulting in net proceeds of approximately $72.8 million. For the quarter ended June 30, we recorded a net realized loss of approximately $600,000 or $0.01 per share and net unrealized depreciation of $25.2 million or $0.56 per share.

We had a net decrease in net assets resulting from operations of approximately $10 million or $0.22 per share for the first fiscal quarter.

As of June 30, the following metrics apply. 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 11.8%, up from 11.7% as of March 31. The weighted average GAAP effective yield of our CLO equity investments at current cost was 16.9%, up from 15.7% as of March 31. And the weighted average cash yield of our CLO equity investments at current cost was 19.8%, which was down from 20.3%, again, as of March 31. 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 June 30, we made additional CLO investments of approximately $138.5 million, and we received $51.1 million from sales and repayments of our CLO investments.

And with that, I'd like to 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 June 30, the U.S. loan market as measured by the S&P/LSTA Leveraged Loan Index increased from a price of 96.41% of par to 96.79% of par. During the quarter, U.S. loan prices were supported at the margin by increased U.S. CLO new issuance, several large loan paydowns and a limited forward primary loan calendar. Consistent with our view last quarter, we believe that fundamentals across the U.S. loan market continue to be stable. Having mentioned this, U.S. CLO equity and debt pricing in January, continued to lag the broader market rally. And according to Wells Fargo's CLO Research, the median U.S. CLO equity net asset value is estimated to be 49.9% of par as of July 2, 2019, which remains approximately 20 points below its October 1, 2018, level of 70.9% at par.

Despite a continued challenging new issue CLO equity arbitrage, U.S. CLO new issuance volumes remains supported by investment strategy constrained CLO equity investors, which may only be focused on the primary market as well as by CLO managers and/or affiliates retaining the CLO equity in their own transactions. According to LCD, nearly 80% of new issues, U.S. CLO equity this year has been sold to accounts understood to be primarily CLO managers themselves. As such, we continue to find interesting opportunities in the secondary CLO market, which is where we are primarily focused. As we mentioned last quarter, we believe that this is an attractive environment for CLO equity. According to LCD as of June 28, 2019, approximately 8% of the S&P/LSTA Leverage Loan Index traded at par or higher, which is down from April's intra-year high of 27%. This environment may allow CLO managers to buy performing loan assets in the secondary market at discounts par, which may build CLO asset value and spread over time ultimately accruing to the benefit of CLO equity.

We continue to generally position our CLO portfolio in longer reinvestment period equity positions, which may allow our CLO managers to take advantage of the market environments that we have today. That being said, we have selectively purchased a variety of CLO equity profiles recently.

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 very much, Deep. We note that additional information about Oxford Lane's first fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, we're happy to open the discussion 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 Ladenburg.

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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, I noticed that CLO effective yields at Oxford Lane were up quarter-to-quarter, but they were down in Oxford Square, which surprised me a little bit. Can you walk us through that dynamic, please?

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

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Sure, Mickey. You'll note that Oxford Lane, unlike Oxford Square, had a considerable volume of new purchases during the quarter. The 2 companies are affiliates by virtue of common managements -- management teams and affiliated advisors. So that was really -- the biggest issue for Oxford Lane, Mickey, was that we did a substantial amount of portfolio turnover during the quarter. And as a result, you saw that rise in effective yield.

One thing that's also worth noting is that if you look at Page 5 of the investor presentation that was posted to the website this morning, you'll see that we're currently, which is as of June 30, carrying $102.3 million worth of noncash income-producing CLO equity. This is CLO equity that we've purchased, but which has yet to make its inaugural distribution to us as an owner. $55.6 million of that is expected to make initial distribution by 9/30, and $46.7 million is expected to make its inaugural distribution to us by December 31, 2019.

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

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That's really helpful. So directionally, at Oxford Square, it was down, there was not as much turnover. Was the decline in Oxford Square -- I'm just trying to understand sort of the base case here. Was that due to deterioration of the LIBOR forward curve? Or what would cause the effective yields there to go down as compared to Oxford Lane where you have the turnover?

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

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Sure, Mickey. We'd probably like to confine our remarks to Oxford Lane on this Oxford Lane earnings conference call. We're happy to discuss any of our other funds offline. But for Oxford Lane, Deep, would you like to talk about the increase in effective yield quarter-over-quarter?

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [6]

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Sure. So as we focus on the secondary market, our active portfolio management strategy allowed us to rotate the portfolio pretty significantly in addition to investing the additional proceeds that we raised during the quarter. We found a range of attractive profiles in the secondary market, especially as risk premiums increased towards the latter half of the quarter, which allowed us to buy things at very attractive levels and again, at a weighted average -- a weighted average effective yield that was meaningfully higher than the current portfolio.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [7]

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Right. Okay. I...

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [8]

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I think a part -- a big part, Mickey, of the driver of our ability to rotate the portfolio at Oxford Lane during the quarter was the at-the-market capital raises that we were able to effect.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [9]

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I understand. Jonathan, in terms of valuation, I have heard that there are a group of CLO managers who are accepting lower yields, effective yields on their equity tranches but getting wider spreads on the AAA. Do you expect that situation to unwind at some point? And perhaps the market will return more to an equilibrium state.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [10]

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Sure. I mean I think, Mickey, what you're referencing is really the challenging aspect of the primary new issuance market for CLO equity and CLO structures overall, which we agree with. Deep has been talking about this for some time. He has spoken at some conferences about this, and we agree. New issue equity generically is a challenging asset class. We have participated in some new issues, but most of our activity really over the course of the last year, 1.5 years has been in the secondary market where we see better opportunities.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [11]

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And this challenging primary market, I think, Deep mentioned that CLO equity is somewhere around -- I think you said $0.49 on the dollar, give or take, down meaningfully from late last year. Is that down given the dynamic? Is there a spillover from the primary into the secondary that's causing that situation?

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [12]

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Sure. That number that you referenced, Mickey, that wasn't fair value. That's a weighted average net asset value for CLO equity tranches across the market.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [13]

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Okay. And is that decline relative to the previous year, a function -- is there a spillover from what's going on in the primary market into the secondary market?

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [14]

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No, that's -- that was driven mostly by the move in the fourth quarter -- a fourth calendar quarter of 2018, where our loan prices dropped meaningfully. They have retraced some of that move back, but it hasn't been the full amount.

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Operator [15]

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That will conclude our question-and-answer session. I'll turn it back over to you, Jonathan Cohen, for any closing remarks.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [16]

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Thank you very much. I'd like to thank everybody on the call and everyone listening to the replay for their interest in Oxford Lane Capital Corp., and we look forward to speaking to you again soon. Thank you.

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Operator [17]

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