Oxford Lane Capital: NAV Drops 22% In One Quarter, Do We Care?
- We had highlighted OXLC as a poor total return generator if distributions were consumed.
- The recently released NAV numbers underscore two consistent themes on OXLC.
- We highlight these and tell you where the best returns on the OXLC spectrum are.
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We have heard that NAV declines are like mind over matter. If you don't mind, it doesn't matter. It is the underlying income stream that matters and that is all you should focus on. There is some merit to ignoring temporary asset valuation changes. After all, if you are not a seller at that price, why do you care? There is also the massive delay with which some of these NAVs are released, making them useless for decision making. While all of that may be true, there is still some interesting information that can pop up from time to time in these and we look at where our CLO fund, Oxford Lane Capital Inc. (NASDAQ:OXLC) stands after the NAV release.
Income Looks Good
Net investment income (“NII”), calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), was approximately $38.7 million, or $0.26 per share, for the quarter ended June 30, 2022.
Our core net investment income (“Core NII”) was approximately $82.1 million, or $0.55 per share, for the quarter ended June 30, 2022.
Source: OXLC Press Release
Whether you looked at the NII numbers or the core net investment income numbers, you were a happy camper. The income covered the 7.5 cent monthly distribution with room to spare.
Of course the NAV numbers looked outright disastrous.
For the quarter ended June 30, 2022, we recorded a net decrease in net assets resulting from operations of approximately $189.4 million, or $1.28 per share, comprised of:
NII of approximately $38.7 million;
Net realized losses of approximately $7.5 million; and
Net unrealized depreciation of approximately $220.6 million.
During the quarter ended June 30, 2022, we made additional investments of approximately $237.8 million, and received approximately $119.3 million from sales and repayments of our CLO investments.
Source: OXLC Press Release
That $1.28 number in the press release seems a bit off compared to the actual drop shown, which was from $6.56 to $5.07 or $1.49 per share. The latter number works out to 22.7%, in one quarter. This drop while steep was about what we saw in the yield chasing space. PIMCO Corporate & Income Opportunity Fund (PTY), was down 14.88% on NAV in the same time frame while ECC delivered negative 20.25%. Yes, PTY is a high yield debt fund and OXLC is an CLO equity fund, but those two assets track each other quite closely.
So the performance was hardly unexpected for a CLO fund.
Will The NAV Come Back?
At present we think the NAV is definitely higher than what was reported for June 30, 2022. PTY which updates its NAV daily, has seen that number move up by 3.4% since end of June.
We think OXLC will likely move up a bit more on NAV terms and we think $5.30-5.45 is a reasonable guesstimate at this point. Longer term though, here is what the NAV and price look like. NAV started out near $20.00 and we are down 75%.
Practically speaking, most of that 75% drop is not coming back. There are two reasons for this. The first being that you really cannot get appreciation in these assets the way you can get losses. Yes, occasionally you can buy extremely distressed CLOs at the bottom of a crisis and things move up. While you can do that by buying OXLC at the bottom, OXLC is fully invested at all times and distributes pretty much whatever it makes (and more). So OXLC cannot buy at the bottom in any significant amounts outside of from principal repayments.
The second reason is that investors seem to almost never value this based on NAV. They always tend to be ready to buy this at a premium. Even today, we would estimate that the fund is at a 20% premium. This creates an extraordinary motivation to issue new shares. We saw this in action once again.
For the quarter ended June 30, 2022, we issued a total of approximately 4.6 million shares of common stock pursuant to an “at-the-market” offering. After deducting the sales agent’s commissions and offering expenses, this resulted in net proceeds of approximately $30.9 million. As of June 30, 2022, we had approximately 149.9 million shares of common stock outstanding.
Source: OXLC Press Release
OXLC started out with 1.825 million shares and despite the NAV per share now 75% lower, total assets have ballooned more than 24 fold.
If you issue enough shares at a price, that becomes your NAV, regardless of whether it was above or below it. So while we think issuing shares above NAV is obviously accretive, it also limits big upside moves.
OXLC remains a poor choice for income investors spending the distributions. $1,000 would be worth just $1,383.00... since inception.
Funds focused on NAV preservation do far better if you consume your distributions. Here is Nuveen Preferred & Income Securities Fund (JPS), one of the more popular preferred share funds.
Same goes for PTY.
Note that both the funds we showed paid about the same amounts of total dividends on a $1,000 investment. OXLC obviously started out higher but the withering NAV fixed that advantage.
If you do reinvest, then OXLC returns do become relatively competitive. We have to caution here that the past has been about the fund trading at a premium and OXLC being able to constantly boost NAV by share issuance. Returns would have been definitely lower in the absence of that but it is hard to calculate exactly by how much.
The current premium is a bit high considering the general market environment. We think the preferred shares for OXLC remain a good way to get solid income while getting a defensive exposure to CLO equity. In that regard, the newly issued Oxford Lane Capital Corp - 7.125% PRF REDEEM 30/06/2029 (OXLCN) are a great choice and one that would likely outperform OXLC if you consumed the distributions.
Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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