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Edited Transcript of TICC earnings conference call or presentation 30-Jul-19 1:00pm GMT

Q2 2019 Oxford Square Capital Corp Earnings Call

Greenwich Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Square Capital Corp earnings conference call or presentation Tuesday, July 30, 2019 at 1:00:00pm 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

* Michael Testa

Oxford Square Capital Corp. - Controller & VP of Finance

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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 Square Capital Corp. Second Quarter 2019 Earnings Release and Conference Call for today, July 30, 2019. (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 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. Second Quarter 2019 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; Kevin Yonon, our Managing Director and Portfolio Manager.

Bruce, could you please open the call 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. On June 30, 2019, our net asset value per share stood at $6.31 compared to a net asset value per share of $6.67 as of March 31. Our total return during the quarter ended June 30 was negative 2.4%. That total return reflected the change in net asset value per share for the period as well as the impact of the monthly $0.067 distributions.

For the second quarter, we recorded GAAP net investment income of approximately $12.8 million or approximately $0.27 per share compared to $8.4 million or $0.18 per share for the quarter ended March 31. That increase was primarily due to the recognition of approximately $6.3 million of payment-in-kind cumulative dividends associated with the preferred equity position held by the company.

In the second quarter of 2019, we recorded net realized and unrealized depreciation on investments of approximately $20.3 million or $0.43 per share. In total, we had a net decrease in net assets from operations of approximately $7.5 million or $0.16 per share compared to a net increase of $12.7 million or $0.27 per share for the prior quarter. We note that as of end of June 30, we continued to have no investments on nonaccrual status.

During the second quarter of 2019, we made new investments of $46.4 million, and we had principal repayments and sales of $30.9 million.

On April 3, 2019, the company completed an underwritten public offering of $44.8 million in aggregate principal amount of our 6.25% unsecured notes, which will mature on April 30, 2026. The 6.25% notes are listed on the NASDAQ Global Select Market under the trading symbol OXSQZ.

On July 25, 2019, our Board of Directors declared monthly distributions of $0.067 per share for the months ending October, November and December of 2019. Additional details regarding record and payment date information can be found in our press release that was issued earlier this morning.

And with that, I'd like to turn the call over to our Portfolio Manager, Kevin Yonon.

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

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Thank you, Jonathan. During the quarter ended June 30, the loan market exhibited stability relative to the prior 6 months. We believe the stability was principally driven by U.S. loan mutual fund and ETF outflows offset by new CLO issuance and lower loan primary market new issuance.

According to Leveraged Commentary & Data, also known as LCD, a service provided by S&P Global, during the second quarter of 2019, U.S. loan mutual funds and ETFs experienced approximately $7 billion of outflows. Despite this, the loan secondary market was supported by new U.S. CLO issuance of approximately $34 billion and a year-over-year decline in primary market loan supply of approximately 53% driven by lower LBO, M&A, refinancing and dividend recapitalization volumes.

These factors resulted in the S&P/LSTA Leverage Loan Index modestly increasing to 96.79 at the end of the second quarter of 2019 from 96.41 at the end of the first quarter of 2019. In this environment, we continue to focus on portfolio management strategies designed to maximize our total return and, as a permanent capital vehicle, we historically have been able to take a longer-term view towards our investment strategy.

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

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Kevin, thanks very much. We note that additional information about Oxford Square Capital Corp.'s second quarter performance has been posted to our website at www.oxfordsquarecapital.com.

And with that, operator, we're happy to open the call 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 today will come 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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I'd like to start about asking about the broad loan market. In the prepared remarks, you talked about how CLO demand is offsetting the retail outflows. So I'd like to understand how you expect CLO issuance to progress as the Fed begins to cut rates, which now seems likely.

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

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Sure, Mickey. Thank you. CLO issuance in the primary market is currently tracking at record numbers. So -- at record amounts. So the demand and the attendant supply in the new issue market for CLO structures, which, in turn, obviously, takes demand from the primary and, to a lesser extent, the secondary syndicated corporate loan market continues to begin to look for the near term anyways to be quite strong.

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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 Jonathan, do you think that trend will hold as rates come down? In other words, there has been strong demand and until the end of last year, everyone was looking for rates to go up. I'm just trying to understand whether the mindset of the market will switch at some point and this demand will dissipate?

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

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Sure, Mickey. It's a very fair point. And certainly, to your point, we've seen CLO liability spreads widen out over the course of this year, which has been and should continue to be a dampener to new issuance. Nonetheless, new issuance continues to be very, very strong and deals continue to be printed in part on the back of capital pools that have raised, risk retention capital pools and other types of pools of capital that have been raised for the express purpose of investing in structures like these. So that has been an offset.

But we'll see, we don't have a strong view as to what CLO issuance is likely to be over the course of the next 12 or 24 months, but certainly it's tracking at a very strong level right now.

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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. I understand. And Jonathan, given that CLOs on a relative basis compared to retail are a higher proportion of demand, how is that affecting CLO terms and structures in the primary market?

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

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So we've seen, Mickey, some pushback on some aspects, both in terms of the CLO structures themselves and also in terms of loan covenants that continues. But the market I would categorize as reasonably stable with respect to the terms and conditions attached to these various indenture structures, both the syndicated corporate loan indenture structures and the CLO indentures themselves.

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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. I want to switch gears to CLO equity values. In the prepared remarks, you mentioned that the loan market was relatively stable, and it's recuperated from the most part from the fourth quarter selloff. But CLO equity values seem to be really lagging and I do see that your effective yields were down pretty meaningfully this quarter. So what factors -- what are the factors that are affecting CLO equity values that is not impacting the broader loan market?

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

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Sure, Mickey. I'm going to turn this question over to Deep Maji.

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Debdeep Maji, Oxford Square Capital Corp. - Senior MD & Portfolio Manager [10]

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So what we've seen in CLO equity pricing is that over the last 3 months, there's been some widening in kind of risk premium associated with CLO equity, which has caused some level of markdown just because people are associating a greater level of yield necessary to invest in CLO equity structures.

That's been primarily due to -- while the overall loan market has been stable, there have been a handful of loans what we would view as kind of idiosyncratic events, where there have been a couple loans that have defaulted in the industry over the last 3 months.

So as we look at the tails of our portfolios or loans within our CLO structures that are trading at prices of 80 or -- below 80 or 85, there's been a modest uptick in that. And that's caused some level of additional risk premium associated with CLO equity tranches, which has caused bid/ask to widen out.

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

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So if I could paraphrase, are you saying that CLO equity investors are simply being more pessimistic about the outlook for the loan market than the loan market itself?

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

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I wouldn't necessarily ascribe that thinking to CLO investors. I think that risk premium as Deep -- premia, as Deep mentioned, has increased over the course of the last quarter or 2. But these things, in our experience, Mickey, have tended to ebb and flow. Risk aversion or the embracing of risk tends to go back and forth during any particular part of any particular cycle. I should mention, Mickey, that we had no diversion of any cash flows to equity in any of our CLO structures at Oxford Square during the quarter.

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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. Just a couple more questions, if I might, more sort of a housekeeping items. What were the main drivers of your unrealized depreciation this quarter?

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Michael Testa, Oxford Square Capital Corp. - Controller & VP of Finance [14]

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Sure. Mickey, it's Mike Testa. I'm the Controller here. Go on the details of unrealized depreciation. It was primarily CLO equity investments that drove that. We also had the reversal of the -- or the turnaround impact of that $6.3 million dividend income PIK capitalization, but those are the 2 main drivers there.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [15]

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And then in terms of that PIK dividend, who -- which borrower is that from?

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

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Sure, Mickey. There is only, as of the last quarter and consistent with this quarter, there's only a single preferred equity position on our balance sheet, and that's Unitek.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [17]

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Unitek. Okay. And Jonathan, since we don't have the schedule of investments, what -- where does Premiere Global stand? Those -- the first and the second lien were pretty -- were marked at pretty distressed levels last quarter. How is that progressing and what's the outlook?

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [18]

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Sure, Mickey. The [SOI] will be out with the Q tomorrow, but that -- those line items didn't move appreciably in the second quarter.

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Operator [19]

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This will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Jonathan Cohen for closing remarks.

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [20]

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Thanks very much. And I'd like to thank everyone on the call for their continued interest in Oxford Square Capital Corp. We look forward to speaking to you again soon. Thanks.

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Operator [21]

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The conferences has now concluded. We thank you for attending today's presentation. You may now disconnect.