Oxford Lane Capital (OXLC) Q4 2021 Earnings Call Transcript

OXLC earnings call for the period ending March 31, 2022.

OXLC earnings call for the period ending March 31, 2022.

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Oxford Lane Capital (OXLC 1.93%)
Q4 2021 Earnings Call
May 06, 2022, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. Thank you for attending today’s Oxford Lane Capital Corp. fourth quarter fiscal earnings call. My name is Duquita, I will be your moderator for today’s call.

[Operator instructions] I would now like to pass the conference over to your host, Jonathan Cohen, CEO of Oxford Lane. Jonathan, please go ahead.

Jonathan CohenChief Executive Officer

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. fourth fiscal quarter 2022 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 open the call with the disclosure regarding forward-looking statements?

Bruce RubinChief Financial Officer

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 turn the presentation back over to Jonathan.

Jonathan CohenChief Executive Officer

Thanks, Bruce. On March 31st, 2022, our net asset value per share stood at $6.56, compared to a net asset value per share of $6.93 as of December 31st, 2021. For the quarter ended March 31st, we recorded GAAP total investment income of approximately $55.1 million, representing a decrease of approximately $2.3 million from the prior quarter. The quarter’s GAAP total investment income from our portfolio consisted of approximately $53.7 million from our CLO equity and CLO warehouse investments, approximately $1.3 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $32.4 million or $0.24 per share for the quarter ended March 31st, compared to approximately $35.3 million or $0.29 per share for the quarter ended December 31st. Our core net investment income was approximately $57.9 million or $0.43 per share for the quarter ended March 31st, compared with approximately $53 million or $0.44 per share for the quarter ended December 31st. During the quarter ended March 31st, we issued a total of approximately 13 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $96.3 million. For the quarter ended March 31st, we recorded net realized losses of approximately $850,000.

We recorded net unrealized depreciation on investments of approximately $61.7 million or $0.46 per share. We had a net decrease in net assets resulting from operations of approximately $30.2 million or $0.22 per share for the fourth fiscal quarter. As of March 31st, the following metrics applied. 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 12.5%, down from 13.3% as of December 31st. The weighted average effective yield of our CLO equity investments at current cost was 16.2%, down from 16.3% as of December 1st. And the weighted average cash distribution yield of our CLO equity investments at current cost was 29.7%, which was unchanged from December 31st. 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 March 31st, we made additional CLO investments of approximately $351.8 million, and we received approximately $101.8 million from sales and repayments. On May 3rd, our board of directors declared monthly common stock distributions of $0.075 per share for each of the months of July, August and September of 2022. With that, I’ll turn the call over to our Portfolio Manager, Deep Maji.

Deep MajiSenior Managing Director and Portfolio Manager

Thank you, Jonathan. During the quarter ended March 31st, 2022, the U.S. loan market was fairly volatile compared to the quarter ended December 31st, 2021. U.S.

loan prices, as defined by the S&P/LSTA Leveraged Loan Index, started the quarter at 98.64% of par on December 31st, peaked at 99.08% of par on January 23rd, before then dropping to a low of 95.88% of par on March 15th and ultimately recovering to 97.6% of par on March 31st. As of May 4th, the index stood at 97.09%. According to LCD, during the quarter, there was pricing dispersion related to credit quality with BB-rated loan prices decreasing 79 basis points, B-rated loan prices decreasing 108 basis points and CCC-rated loan prices decreasing 260 basis points on average. The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index remained at a 10-year low of 19 basis points by principal amount at the end of the quarter.

Additionally, the distressed ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at approximately 1.55%, compared to 0.99% at the end of December. The drop in U.S. loan prices led to a decrease in U.S. CLO equity net asset values.

During the quarter, we observed the median U.S. CLO equity NAV declined from approximately 62% of par to approximately 52% of par. However, median junior over-collateralization ratios rose to approximately 4.42%, compared to 4.38% last quarter. Additionally, we observed loan pools within CLO portfolios modestly increased the weighted average spreads to 345 basis points, compared to 343 basis points last quarter.

Primary CLO issuance was slow at the start of the year, especially compared to the toward pace of 2021. Approximately $31 billion of new issued deals priced during the quarter ended March 31st, compared to approximately $40 billion over the same period last year. However, only $21 billion of refinancings and resets priced in the primary market this quarter, compared to approximately $71 billion over the same period last year. Oxford Lane was very active in the secondary market during the quarter, trading approximately $550 million of notional CLO equity and junior debt.

While most of our activities took place in the secondary market, we continue to be active in the primary market, adding two new issued CLO equity investments during the quarter. As a function of our overall activity in both markets this quarter, we were able to lengthen the weighted average reinvestment period of Oxford Lane CLO equity portfolio from December of 2024 to February of 2025. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across U.S. CLO equity, debt and warehouses as we look to maximize our long-term total return.

And as a permanent capital vehicle, we have historically been able to take a longer-term view toward our investment strategy. With that, I’ll turn the call back over to Jonathan.

Jonathan CohenChief Executive Officer

Thanks very much, Deep. We note that additional information about Oxford Lane’s fourth fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we’re happy to poll for any questions.

Questions & Answers:

Operator

Absolutely. [Operator instructions] The first question comes from the line of Mickey Schleien with Ladenburg. You may proceed.

Mickey SchleienLadenburg Thalmann and Company — Analyst

Yes. Good morning, everyone. Jonathan, there’s been a lot of growth in the share of B- rated issuers, which now comprise around a quarter of the leveraged loan index. So should the economy decelerate, which may or may not happen, this could turn into a problem in terms of the CCC bucket.

So I’m interested to understand how CLO managers are managing that risk in your view.

Deep MajiSenior Managing Director and Portfolio Manager

Sure. As you can — Mickey, this is Deep, and thank you for the question. As you can see — we mentioned that junior over-collateralization cushions rose four bps during the quarter. But overall, since kind of 2020, coming out of the pandemic, what you’ve — what we’ve definitely noticed is that CLO managers, especially in new issued deals, have been starting those deals with much higher cushions relative to — prior to the pandemic.

So generally speaking, interest diversion cushions and over — junior over-collateralization ratios have started at a higher point, and that provides additional cushion from CCC downgrades should they exceed the bucket of generally 7.5%.

Jonathan CohenChief Executive Officer

Right. Notwithstanding, Deep — sorry, Mickey, we remain sort of alert and focused on the issue that you raised, which is that in a decelerating economy, which could be characterized by an increased rate of downgrades to U.S. syndicated corporate loans, CCC baskets could become a point of concern.

Mickey SchleienLadenburg Thalmann and Company — Analyst

Yeah. And actually, Jonathan, that leads to my next question. In the prepared remarks, you mentioned defaults are at record lows, which certainly helps support performance today. But looking ahead, what are the trends in the proportion of the collateral pool trading, let’s say, below 85%, which some people call the distress ratio? And do you attribute that more to technical issues? Or are we starting to see some deterioration in credit? And what’s your outlook for defaults?

Jonathan CohenChief Executive Officer

I think both of those issues are relevant, technical issues as well as fundamental issues, Mickey. We don’t have a published estimate for U.S. syndicated corporate loan default rates or recovery rates, either inside or outside of U.S. CLO structures.

But similar to the issue that you raised with CCC baskets, these are potential points of sensitivity across the CLO universe that we remain sensitive to.

Mickey SchleienLadenburg Thalmann and Company — Analyst

OK. I think I understand. My last question. So now we’re seeing a sharp rise in short-term rates with the Fed tightening, and I just want to understand how that lag between the repricing of CLO collateral and CLO liabilities in terms of these rising rates is impacting the cash flows and estimated yields.

And what are your expectations for those trends?

Deep MajiSenior Managing Director and Portfolio Manager

Sure. So as you know, we always have been modeling the forward LIBOR curve and now the forward SOFR curve. So to the extent that those SOFR and LIBOR rise above the four levels that have historically been in U.S. CLOs, we lose the benefit of the fours, which we — which now has occurred.

This has been modeled for some time period, but we’re starting to see that loss of benefit from LIBOR floors and SOFR floors occur for the outward quarters. It’s something that we’ve been attuned to and mindful of for the last several quarters, but it’s finally arrived.

Mickey SchleienLadenburg Thalmann and Company — Analyst

Yes, I do understand that, Deep. I was referring to the lag and the timing of the repricing of the assets and the liabilities. Is that a big issue given the scope of the rate increases?

Deep MajiSenior Managing Director and Portfolio Manager

Yes. So I think that what you’re seeing right now is just the overall volatility in the market. We haven’t seen as many repricings and refis for loan assets as we have historically just given the volatility. And generally speaking, the loan market has been at a discount to par.

You tend to see more repricing activity on the loans when a lot of — a meaningful percentage of the loan market trades above par.

Mickey SchleienLadenburg Thalmann and Company — Analyst

Right. OK. I understand. That’s it for me this morning.

Thank you for your time.

Jonathan CohenChief Executive Officer

Thank you, Mickey very much.

Operator

Thank you. The next question comes from the line of Matthew Howlett with B. Riley. You may proceed.

Matt HowlettB. Riley Financial — Analyst

Hey, everyone, thanks for taking my question and congrats on the quarter. Congrats on really the — you’re setting the balance sheet up to really higher interest rates. I mean with all that fixed rate debt, you’re well positioned. So my question really centers on tiering in the CLO space.

And you guys know all the managers, obviously, the largest, biggest track records in this space. How important is tiering among CLO managers today? Going forward, would you look to just focus on the best? Is there a difference in pricing? Just talk to me a little bit about that.

Deep MajiSenior Managing Director and Portfolio Manager

Sure. Tiering is definitely meaningfully differentiated coming out of COVID. So I think where that — where we’ve really seen the impact from tiering is where these CLO managers have been able to price their AAAs and, correspondingly, the rest of their capital structures. So in the CLO debt market, CLO debt investors and particularly AAA investors are really differentiating from top-tier versus second-tier versus third-tier managers.

And it’s very important. It’s something that we really focus on, especially in the primary market when we’re looking to warehouse with certain CLO managers, that’s definitely something that we think about a lot.

Jonathan CohenChief Executive Officer

And Matt, in response to your question about where we will tend to focus and where we have focused historically, we have generally taken a very expansive view. I mean Deep phrased it correctly when he said that we’re mostly focused on warehousing and primary market activity with Tier 1 managers. But if you look down our scheduled investments, especially historically, you’ll see that we take a very wide perspective in terms of the deals we’re willing to look at. At the right price, we absolutely will purchase CLO equity managed by a second- or third-tier manager, again, at the right price.

Matt HowlettB. Riley Financial — Analyst

Absolutely. And this is part of your underwriting, you have your own internal scores and rankings and dialogues with these managers. So you know the ones you like, the ones you don’t like, the ones the markets may be mispricing and so forth?

Jonathan CohenChief Executive Officer

Very much so, Matt. Yes.

Matt HowlettB. Riley Financial — Analyst

Great. And then, Jonathan, you did do a tremendous job at the balance sheet, all these — I’m looking at all these long-duration, fixed-rate preferred and unsecured notes. Is there anything to do there? I guess the question becomes now that the rates are higher, you still are a top-tier issuer, but going forward, is there sort of — the balance sheet is sort of well positioned and really just take advantage of some of these long fixed-rate coupons you have in place on the liability side?

Jonathan CohenChief Executive Officer

Sure, Matt. I mean I think, as you say, that the $100 million of new five-year, 5% capital that we’ve raised just very recently was well-timed. And we’re very pleased with that issuance. We are very pleased with the totality of our balance sheet right now.

Given the fixed rate, relatively low-cost financing that we have in place, given that the opportunity set of the market seems to be providing us presently, we feel very much along the lines that you just referenced.

Matt HowlettB. Riley Financial — Analyst

Congratulations. Really appreciate all the work you’ve done in. Thanks for taking my question.

Jonathan CohenChief Executive Officer

All right, Matt. Thanks very much. We appreciate it.

Operator

Thank you. I show there are no further questions. With that, I will turn the call back over to Jonathan Cohen, CEO.

Jonathan CohenChief Executive Officer

Thanks very much, operator, and we’d like to thank everybody who’s participated in this call or listening to the replay for their interest and attention to Oxford Lane Capital Corp. Thank you very much. We look forward to speaking again soon.

Operator

[Operator signoff]

Duration: 93 minutes

Call participants:

Jonathan CohenChief Executive Officer

Bruce RubinChief Financial Officer

Deep MajiSenior Managing Director and Portfolio Manager

Mickey SchleienLadenburg Thalmann and Company — Analyst

Matt HowlettB. Riley Financial — Analyst

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