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Edited Transcript of TICC earnings conference call or presentation 28-Feb-19 2:00pm GMT

Q4 2018 Oxford Square Capital Corp Earnings Call

Greenwich Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Square Capital Corp earnings conference call or presentation Thursday, February 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce L. Rubin

Oxford Square Capital Corp. - CFO, Treasurer & Secretary

* Debdeep Maji

Oxford Square Capital Corp. - Senior MD & Portfolio Manager

* Jonathan H. Cohen

Oxford Square Capital Corp. - CEO & Interested Director

* Kevin P. Yonon

Oxford Square Capital Corp. - MD & Portfolio Manager

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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 Square Capital Corp. Fourth Quarter 2018 Earnings Conference 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 Square Capital Corp. - CEO & Interested Director [2]

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Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp. Fourth Quarter 2018 Earnings Conference Call.

I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; Kevin Yonon, Managing Director and Portfolio Manager; and Deep Maji, Senior Managing Director and Portfolio Manager.

Bruce, could you open the call today with the disclosure regarding forward-looking statements?

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

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Sure, Jonathan.

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

To obtain copies of our latest SEC filings, please visit our website at www.oxfordsquarecapital.com.

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

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

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Thanks, Bruce.

We note that the fourth quarter of calendar 2018 was characterized by significant volatility in global equity and debt markets. The S&P/LSTA Leveraged Loan Index fell from 98.6% of par on September 30 to 93.8% of par on December 31. Against that backdrop, the fair value of our portfolio fell during that period. While Oxford Square saw a meaningful mark-to-market base decline in our net asset value in the December quarter, we remain comfortable with the credit quality of the portfolio. Moreover, we note that the S&P/LSTA Leveraged Loan Index has rebounded significantly since December 31 from 93.8% of par to 97% of par as of February 27, 2019. That recent performance has been reflected in the market that we participate in, with greater liquidity and higher prices since the end of last year.

On December 31, our net asset value per share stood at $6.60 compared to a net asset value per share of $7.49 as of September 30. Our total return generated during the quarter ended December 31 was a negative 9.2%. That total return reflected the change in net asset value per share for the period as well as the impact of a $0.20 per share distribution.

For the fourth quarter, we recorded GAAP net investment income of approximately $8.5 million or approximately $0.18 per share, which was roughly flat with the quarter ended September 30. In the fourth quarter of 2018, we recorded a net unrealized depreciation on investments of $39.8 million and a net realized loss of approximately $2.8 million. In total, we had a net decrease in net assets from operations of $34.1 million or $0.71 per share.

On February 22, 2019, our Board of Directors declared a $0.20 per share distribution for the first quarter to shareholders of record as of March 15, 2019. We also moved to monthly distributions as follows: $0.067 per share for the months ended April, May and June of 2019. Additional details regarding record and payment date information can be found in our press release that was issued earlier this morning.

We note that the $25 million stock repurchase program we've previously announced has now been fully utilized. Under that program, we repurchased approximately 3.8 million shares of our common stock at a weighted average share price of $6.53 per share. That program produced an accretion to NAV of approximately $0.08 per share.

We note that, as of December 31, we continued to have no investments on nonaccrual status.

With that, I'll turn the call over to our senior portfolio managers, Kevin Yonon and then Deep Maji.

Kevin?

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Kevin P. Yonon, Oxford Square Capital Corp. - MD & Portfolio Manager [5]

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Thank you, Jonathan.

The quarter-ended December 31 presented the first meaningful period of volatility in the loan market since 2016. We believe the move lower in U.S. loan prices during the fourth quarter of 2018 was principally driven by large outflows out of the U.S. loan mutual funds and ETFs. According to Leveraged Commentary & Data, also known as LCD, a service provided by S&P Global, from the middle of November 2018 to the end of 2018, U.S. loan mutual fund and ETFs experienced approximately $16 billion of outflows.

We believe that fundamentals across the U.S. loan market continue to be stable. The U.S. loan default rate remains low. According to LCD, the trailing 12-month default rate on the S&P/LSTA Leveraged Loan Index was approximately 1.4% of principal amount as of February 12. This is the lowest the default rate has been over the past 17 months and remains below its historical average of approximately 3%, according to LCD. Second, the loan maturity wall continues to be termed out and there are limited near-term maturities as a percentage of the overall S&P/LSTA Leveraged Loan Index. According to LCD, there are $33 billion of loans coming due before the end of 2020. In 2021, there are approximately $70 billion of loans scheduled to be repaid. This aggregate amount represents approximately 10% of the overall size of the S&P/LSTA Leveraged Loan Index, according to LCD.

Third, corporate interest coverage ratios continued to be strong. According to LCD, interest coverage on a weighted average basis across the constituents of the S&P/LSTA Leveraged Loan Index was 4.6x in the third quarter of 2018. According to LCD, a 100 basis point rise in 3 months LIBOR would cut interest coverage for its loan issuer by approximately 0.5x, all else equal.

Lastly, the current corporate loan market continues to be stable. The share of performing loans in the S&P/LSTA Leveraged Loan Index priced below 80% of par was 2.7% in December 2018, according to LCD. In January 2019, this figure has decreased to 2.5% with the increase in U.S. loan prices. This remains well below the post-crisis high of 12% in February 2016.

With that, I will turn the call over to Deep.

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

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Thank you, Kevin.

For the reasons Kevin just discussed and according to Wells Fargo's CLO research team, the median U.S. CLO equity net asset value has recovered with the increase in loan prices. After bottoming on January 2, 2019, at 24.5% of par, Wells Fargo's CLO research team estimates that median U.S. CLO equity net asset value was 43.3% of par as of February 1, 2019. We believe that this is an attractive environment for CLO equity.

At the present time, according to LCD, only approximately 1% of the S&P/LSTA Leveraged Loan Index trades at a price at par or higher. This environment may allow CLO managers to buy performing loan assets in the secondary market at discounts to par, which may build CLO asset values and spreads over time, ultimately accruing to the benefit of CLO equity. In general, we position our CLO portfolio on longer-reinvestment-period equity positions to allow our CLO managers to take advantage of the market environments like we have today.

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

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

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Thanks very much, Deep and Kevin.

Additional information about Oxford Square Capital Corp.'s fourth quarter performance has been posted to our website at www.oxfordsquarecapital.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) At this time, there are no -- I'm sorry. There is one question. I'm sorry. The first question comes from Mickey Schleien of 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, since we haven't had a chance yet to look at the 10-K, could you give us a sense of the breakdown of the main drivers of the realized and unrealized losses for the fourth quarter?

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

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So on a percentage basis, Mickey, the very substantial majority of the marks to market were on our CLO equity portfolio. CLO equity during the quarter saw meaningful volatility as a multiple essentially of the substantial volatility we saw on the corporate lending -- corporate syndicated loan market.

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

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And what about that realized loss, Jonathan, what drove that?

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

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That was principally CLO equity trades on that side of the book, Mickey.

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

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Okay. And sticking to CLO equity, you mentioned some percentage of par figures for this year. Where was that figure on September 30 of last year? I'm just trying to get a sense of how much has been recuperated so far.

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

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So NAVs. I mean, without speaking directly to our portfolio, Mickey, I think that the CLO market has seen a meaningful increase in equity NAVs since the beginning of the year. It's highly profile dependent, so I wouldn't want to put a particular figure on the market overall, but as we've seen loan prices increase substantially since the beginning of the year, since December 31 of last year, there's been a concurrent increase in CLO equity net asset values, certainly.

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

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Do you think CLO equity, broadly speaking, is near its levels of September of last year?

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

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Probably not quite, Mickey, no.

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

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Not quite, okay. I wanted to talk a little bit about leverage. In October, you borrowed about $37 million on the credit facility, but then in December you repaid a similar amount and there was a little more repayment in January. Were these repayments something required under the facility itself?

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

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They were, indeed, Mickey, yes.

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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, so there must -- there's a leverage covenant somewhere in there.

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

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No, there's a mandatory cash sweep as a component of the facility, Mickey.

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

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Okay. So looking forward, what kind of trends can we expect in the company's leverage? And do you have a target leverage you're attempting to reach?

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

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We haven't published or discussed publicly a target level for leverage, Mickey. I think that, given the composition of our assets, some additional leverage at the right cost of capital with the right terms around it would likely be appropriate for us, but we've not announced anything yet.

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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 could that facility allow you to reborrow to get a little bit more liquidity?

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

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That facility does not, but a new facility would.

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

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Okay. And lastly, Jonathan, I'd like to ask how the board is thinking about the dividend. It hasn't been covered from NII for many years. And last year, you reported that about 1/3 of your distributions were return of capital, which I suppose is probably due to all the CLO refis and resets. Is there a scenario where you or the management team and the board see Oxford Square earning the dividend from NII?

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

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Sure, Mickey. In terms of GAAP NII coverage of the distribution, you're right. The number has not equaled the distribution for some time. The board looks at the entirety of the company's financial performance in determining the quarterly and the monthly distributions. They look at the actual cash flows that we've received, separate and apart from the GAAP recognition of the company's income. They look at the economic return we have and continue to generate on our leverage loan book and on our CLO equity portfolio. They look at the ability to preserve net asset value or to grow net asset value over a significant period of time, if appropriate. So all of those things go into that decision-making process. GAAP NII is certainly a component of that, but it's not the sole component.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [20]

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And looking at taxable income, am I right to assume that the difference between the distribution taxable income last year had something to do with expenses related to the CLO refis and resets?

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

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You are exactly correct about that, yes.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [22]

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Okay. So looking at this year, taking it into account where spreads are now, it seems that, that opportunity, at least right now, is not nearly as opportune as it was last year or even the year before that. So if we were to remain in this sort of environment, would you expect your taxable income to get closer to the distribution in 2009? I know it's hypothetical but based on what I just laid out.

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [23]

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Sure. I mean there are so many different components, Mickey, to the determination of taxable income. There's the PFIC income that we recognize from our CLO equity positions. That is, by its nature, inherently difficult to project. There are obviously lots of other elements, so I wouldn't want to say that in any particular hypothetical the taxable income will be higher or lower than it is currently. But the PFIC income specifically makes that number fairly difficult to project.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [24]

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Do you agree with my assessment, though, that the refi and reset opportunity within CLOs, at least right now, is not very meaningful?

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [25]

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It is certainly much less meaningful than it would have been a year ago. Yes, I agree with that assessment.

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Operator [26]

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I don't see any further questions. I would like to turn the conference back over to Mr. Cohen for closing remarks.

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [27]

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Great. Well, I'd like to thank everybody on the call and everybody listening to the replay for their interest in Oxford Square Capital Corp. We look forward to speaking to you again very soon. Thank you.

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Operator [28]

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