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

Q1 2019 Oxford Square Capital Corp Earnings Call

Greenwich May 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Oxford Square Capital Corp earnings conference call or presentation Tuesday, April 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

* 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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* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* 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. First Quarter 2019 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, CEO. Please go ahead.

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

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Thank you very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp. First Quarter 2019 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Kevin Yonon, 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 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 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. 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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Thank you, Bruce. On March 31, 2019, our net asset value per share stood at $6.67 compared to a net asset value per share of $6.60 as of December 31. Our total return generated during the quarter ended March 31 was 4.1%. 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 first quarter, we recorded GAAP net investment income of approximately $8.4 million or approximately $0.18 per share compared to $8.5 million or $0.18 per share for the quarter ended December 31.

In the first quarter of 2019, we recorded a net unrealized depreciation on investments of $5.7 million and a net realized loss of approximately $1.3 million. In total, we had a net increase in net assets from operations of $12.7 million or $0.27 per share.

On April 3, 2019, we completed an underwritten public offering of $42.5 million in aggregate principal amount of 6.25% unsecured notes due 2026. On April 9, we issued an additional $2.3 million in aggregate principal amount of the 6.25% notes pursuant to the underwriters' partial exercise of their overallotment option. These notes will mature on April 30, 2026. The 6.25% notes are listed on the NASDAQ Global Select Market under the trading symbol OXSQZ.

On April 23, 2019, our Board of Directors declared monthly distributions of $0.067 per share for the months ending July, August and September 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 as of March 31, we continue to have no investments on nonaccrual status.

And with that, I'll turn the call over to our Managing Director and 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 ending March 31, the loan market exhibited strength versus the end of 2018. We believe the move higher in U.S. loan prices during the first quarter of 2019 was principally driven by increased CLO issuance, slower U.S. loan mutual fund and ETF outflows and lower loan primary market issuance.

According to Leveraged Commentary & Data, also known as LCD, a service provided by S&P Global, during the first quarter of 2019, U.S. loan mutual funds and ETFs experienced approximately $10 billion of outflows. Despite this, the loan secondary market was supported by strong new U.S. CLO issuance of approximately $28 billion and a year-over-year decline in primary market loan supply of approximately 40% driven by lackluster in new issuance and lower refinancing activity. These factors resulted in the S&P/LSTA Leveraged Loan Index increasing to 96.41 at the end of the first quarter of 2019 from 93.84 at the end of the fourth quarter of 2018.

In this environment, we continue to focus on portfolio management strategies designed to maximize our total return, focusing on both the first- and second-lien corporate loans as well as CLO equity. 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 first quarter performance has been posted to our website at www.oxfordsquarecapital.com.

And operator, with that, 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) The 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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I have a couple of questions today. Given the portfolio's CLO investments, could you walk us through why we didn't see more appreciation in NAV per share given that in the first quarter leverage loan prices recuperated almost all of their decline from the fourth quarter?

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

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Sure, Mickey. We did have reasonably strong appreciation, principally unrealized appreciation, in our CLO equity book that was partially offset by marks to market on the leverage loan book.

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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 within the leverage loan book, was there a discrepancy between marks on first and second or first-lien versus second-lien investments?

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

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Not especially so, Mickey, no.

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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. My final question is could you give us a sense of where you see optimal leverage for the company in the current market environment?

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

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We have not yet published a target leverage figure for Oxford Square, Mickey. We think that the capital that we raised in the form of this baby bond insurance will be productive for us. We think that it goes a considerable way towards getting us to a more optimal leverage ratio. But in terms of the ultimate leverage ratio, we don't have a specific number in mind. It is certainly a lower figure than it would have otherwise been in the absence of our participation in the CLO equity market.

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

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Understand. And in terms of the proceeds from the recent debt offering, do you expect meaningful amount of that to go toward paying down the credit facility?

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

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No, Mickey, we don't. We have actually principally targeted that for new investment.

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Operator [10]

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The next question comes from Christopher Testa with National Securities Corp.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [11]

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Just a little bit touching on what Mickey was asking, obviously, CLO equity prices haven't rebounded the way loan prices have. Jonathan, just wondering if you could give some color on how much CLO equity opportunity you're seeing in the secondary market that's maybe still marked under 50%?

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

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A considerable amount, Chris. The dislocation that we saw in the syndicated corporate loan market towards the end of the fourth quarter of 2018 has continued to sort of reverberate around the CLO equity market and particularly the secondary market for CLO equity. So we continue to see a considerable number of opportunities across that asset class. Priced below 50%, there is a fair amount that's obviously paid for that's outside of its reinvestment period that has, or it has shorter reinvestment period remaining inside of that structure, but there is a fair amount out there that continues to be -- I'm not sure I'd use the word dislocated, but opportunistically available.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [13]

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Got it. Okay. And staying on that Jonathan, do you think that there -- has there been anything you've observed in terms of more divergence between kind of what you'd consider a Tier 1 collateral manager versus Tier 2 and Tier 3, given that the market still seems a little skittish despite the loan price rebound?

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [14]

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Very much so, Mickey -- Chris, excuse me. That's a good observation. We have seen a continuation of a trend that was very much in evidence towards the end of last year, which is this divergence in liability spreads between first, second and third tier managers, the managers that are perceived to be in the first, second and the third tiers. So yes, that dynamic persists.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [15]

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Got it. And I know the GAAP yield was down quarter-over-quarter on the CLOs, which is expected. The cash yield was actually up quarter-over-quarter. Is this simply a function of fewer resets and refis and onetime upfront cash cost during the quarter?

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

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Sure, Chris. It's principally a function of the assumptions and the methodology that goes into the calculation of affected deals and the composition of our various profiles across our portfolio.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [17]

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Yes. No, I know the effect of yield. I was just referring to the cash yield being up quarter-over-quarter. Was that just because you had fewer onetime costs in the first quarter pertaining to, let's say, resets or refis?

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

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Yes, Chris, absolutely. So we had some resets and refis in previous quarters that just, as you say, have now rolled off.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [19]

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Got it. And was there anything else contributing to that, any part losses or call deals?

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

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Sure. I think one trend, Chris, that's worth focusing on is that managers, particularly the best CLO collateral managers have been building spread over the last several months availing themselves of opportunities in the secondary syndicated loan market. So that's a trend that again is a fairly important one.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [21]

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Got it. Yes, that's helpful. And last one for me if I may, and then I'll hop back in the queue. There continues to just be consistent loan fund outflows. Obviously, they're not nearly as extreme as what they were in the fourth quarter, but the outflows continue. Just wondering why you think this isn't laying on loan prices which just seems to continue to be rallying. And if you think that if this trend does continue that it will eventually weigh on loan prices, at least to some smaller degree than what it did in the fourth quarter?

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Jonathan H. Cohen, Oxford Square Capital Corp. - CEO & Interested Director [22]

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Sure, Chris. I think it's a combination of the CLO new issuance market being fairly healthy and soaking up supply in the primary and secondary market for syndicated loans, U.S. syndicated corporate loans, and also just various other pockets of capital emerging to take up supply of loans. There's a persistent demand yield in the marketplace.

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Operator [23]

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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 Square Capital Corp. - CEO & Interested Director [24]

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

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Operator [25]

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