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Edited Transcript of OXLC earnings conference call or presentation 4-Feb-20 2:00pm GMT

Q3 2020 Oxford Lane Capital Corp Earnings Call

Feb 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Oxford Lane Capital Corp earnings conference call or presentation Tuesday, February 4, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce Lawrence 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. third fiscal quarter earnings call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jonathan Cohen, CEO. 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. Third Fiscal Quarter 2020 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our CFO; 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 Lawrence 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 can 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, www.oxfordlanecapital.com.

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

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

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Thanks, Bruce. On December 31, 2019, our net asset value per share stood at $6.81 compared to net asset value per share of $6.63 as of September 30. Our total return generating -- generated during the quarter ended December 31 equaled 8.8%. That return reflected the change in net asset value per share for the period as well as the impact of $0.405 per share of distributions.

For the quarter ended December, we recorded GAAP total investment income of approximately $32.4 million, representing an increase of $4 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $30.8 million from our CLO equity investments and $1.6 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $20 million or $0.32 per share for the quarter ended December compared to $16.7 million or $0.31 per share for the quarter ended September 30. Our core net investment income was approximately $39.1 million or $0.62 per share for the quarter ended December 31 compared to $24.2 million or $0.45 per share for the quarter ended September 30.

During the quarter ended December, we issued a total of approximately 9.1 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $79.1 million. For the quarter ended December, we recorded a net realized loss of approximately $1.6 million or $0.03 per share and net unrealized depreciation of $400,000 or $0.01 per share.

We had a net increase in net assets resulting from operations of approximately $18.8 million or $0.30 per share for the third fiscal quarter. As of December 31, the following metrics applied. We note that none of these metrics represented the total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 12.4%, up from 10.4% as of September 30. The weighted average GAAP effective yield of our CLO equity investments at current cost was 16.4%, which was unchanged as -- from the figure of 16.4% as of September 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 25.2%, up from 22.1% as of September 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 December 31, we made additional CLO equity investments -- I'm sorry, CLO investments broadly of approximately $106.4 million, and we received $16.2 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 December 31, 2019, the U.S. loan market continued to exhibit price dispersion. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index, declined from 96.32% of par at the beginning of the quarter to a low of 95.35% of par at the beginning of November. This decline in loan prices seeped into U.S. CLO tranche pricing as lower loan prices caused a decrease in U.S. CLO equity net asset values as well as market value coverage ratios, which is an important valuation metric used to determine CLO debt prices. As a result, we saw an increase in secondary supply of CLO junior debt, particularly at the end of October and into November.

As the quarter progressed, U.S. loan prices began to stabilize at the end of November. By the end of the year, U.S. CLO junior debt prices increased as loan prices recovered from their decline earlier in the quarter. The S&P/LSTA Leveraged Loan Index ended the year at 96.72% of par and median U.S. CLO equity has increased from approximately 35% of par as of November 4, 2019, to 51% of par as of January 2, 2020, according to Wells Fargo Research. That being said, U.S. CLO equity yields in the secondary markets have not meaningfully tightened and remain wide to historic levels.

Thus far, in 2020, U.S. CLO debt spreads have continued to tighten. We have seen strong demand from investors for shorter-dated as well as longer-dated CLO AAA tranches -- rated tranches. With shorter-dated CLO AAAs tightening meaningfully, we have seen an increase in U.S. CLO refinancing activity as CLO equity investors look to lower their existing CLOs' weighted average cost of debt to improve future CLO equity cash flows, thereby increasing the value of their steel equity holding. We continue to evaluate and have selectively purchased a wide variety of CLO equity and junior debt profiles over the past quarter to take advantage of the current market. Given the tightening in CLO liabilities, we believe the opportunity set in the U.S. CLO equity will continue to provide us with attractive investment opportunities.

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, Deep. We note that additional information about Oxford Lane's third 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 from 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, lately, we're seeing a bit more of a risk on mentality with lower-rated credits outperforming more highly rated credits. But I do see that the portfolio's junior OC cushion declined a little quarter-to-quarter. So given that backdrop, what's your level of concern regarding the potential for CCC bucket violations in general and the potential for cash flow diversions?

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

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Mickey, CCC baskets are one element that we monitor closely and that we consider as we're looking to purchase CLO junior debt and equity in the secondary market or when we're looking to sell CLO equity in the secondary market as well. We -- I wouldn't say that we are overly concerned at this moment with the prospect for widespread CCC basket violations across the landscape or across our portfolio. Generally speaking, it is a parameter that we think will be able to be managed reasonably well by our respective collateral managers.

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

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Okay. I appreciate that, Jonathan. And I realize my next question is going to be difficult to answer, but to what extent do you believe the coronavirus could impact the fundamentals of the leveraged loan market and, therefore, the CLO market?

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

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Sure, Mickey. I think that the prospects for a coronavirus pandemic are serious and worthy of consideration. I wouldn't say that we have sufficient information at this point in the virus' progress to make an informed decision about the broader economic impacts that the virus might ultimately cause.

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

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All right. A couple more questions, if I can. What were the main factors that caused the large quarter-to-quarter increase in the CLO equity adjustments used to calculate core NII?

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [7]

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Mickey, so there are a couple of things that drove the higher core. So we had one of our larger positions, as you can look at the presentation in the previous quarter, we had a fair amount that kind of made its initial payment this quarter. Given the capital-raising prospects that we also did during the third quarter, some of those investments -- or sorry, during the quarter ended September 30, many of those investments came online in the quarter ending December 31. So I think it was mostly timing. There was a little bit of a nuance. The payments that we received in October tended to be higher than the payments we had seen the previous quarter. That was a little bit due to some 1-month, 3-month mismatch in liabilities, which favored equity in the October distributions. We've seen that kind of become a little bit more normalized in some of the January payments. But I would say most of the driver in the higher core was from the inaugural distributions from one of our larger primary investments that we did earlier in the year as well as some of the secondary investments that we made in the previous quarter.

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

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So given what you said and all of the moving parts involved, is a core NII -- a quarterly core NII of roughly $0.60 a sort of run rate that the portfolio can generate? Or directionally, would this be sort of above average, in your opinion?

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

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Well, it's certainly above historical averages, Mickey. In terms of our prospects for similar levels of cash flows and similar levels of core NII, we generally don't make those kinds of projections.

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

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All right. My last question, Jonathan. Just looking at January of this year, how would you characterize the trading patterns and the performance of CLO equity at this point? Just looking at the last month.

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Jonathan H. Cohen, Oxford Lane Capital Corp. - CEO & Director [11]

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Strong, strong. Deep, do you want to expand on that?

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Debdeep Maji, Oxford Lane Capital Corp. - Senior MD & Portfolio Manager [12]

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Sure. I would say that the increase in loan prices that we saw into the end of December continued into the beginning of January. That being said, the last week or so has been a little bit sideways, just given, I think, some of the impacts of, as you mentioned, the coronavirus sort of broader kind of macro volatility. But I would say, generally speaking, January has been a strong month.

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

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Yes.

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

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So taking that into consideration, and I'll stop here, Jonathan, last -- calendar 2019 was obviously volatile and interesting. The broader loan market, in general, did quite well. CLO equity seems to have persistently lagged for several quarters. Do you think we're sort of in a situation where CLO equity investors are getting more comfortable and we are seeing sort of a catch-up of CLO equity to the broader loan market?

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

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It may be the case, Mickey. CLO equity and junior debt investing, which we've been involved in now for a very long time, has historically been a less liquid, less efficient, more easily dislocated asset class than the broader credit market or even the syndicated corporate loan market. So some of that dislocation and some of that inefficiency, those are things that we feel can benefit us and which we feel have benefited us over time. But yes, you may have a point which is that this market continues to become somewhat more efficient. Capital inflows have increased. And to the extent that the CLO market broadly, becomes a more mature market, a more sophisticated market, a more liquid market, our hope is that we will continue to participate in the same ways that we have historically, but perhaps on a larger scale.

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Operator [16]

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This concludes our question-and-answer session. 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 [17]

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All right. Well, operator, thank you. I'd like to thank everybody on this call for their interest in Oxford Lane, and we look forward to speaking to you again soon. Thanks very much.

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Operator [18]

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