Oxford Lane Capital Corp. (OXLC) Q2 2023 Earnings Call Transcript

Oxford Lane Capital Corp. (NASDAQ:OXLC) Q2 2023 Earnings Conference Call November 1, 2022 9:00 AM ET

Company Participants

Saul Rosenthal – President

Bruce Rubin – Chief Financial Officer

Debdeep Maji – Senior Managing Director and Portfolio Manager

Conference Call Participants

Mickey Schleien – Ladenburg

Operator

Good morning, everyone. I would like to welcome you all to the Oxford Lane Capital Corp. Second Fiscal Quarter 2023 Earnings Conference Call. My name is Birka, and I will be your event specialist operating today's call. After the speakers’ remarks, you have the opportunity to ask a question. [Operator Instructions]

I would now like to hand the call over to our host of today's call, Saul Rosenthal, to begin. So, Saul, please go ahead when you are ready.

Saul Rosenthal

Thank you, operator, and good morning, everyone. Welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter 2023 Earnings Conference Call. I'm joined today by Bruce Rubin, our Chief Financial Officer; and Debdeep Maji, our Senior Managing Director and Portfolio Manager. Jonathan Cohen, our CEO, is traveling today.

Bruce, would you please open our call with a disclosure regarding forward-looking statements.

Bruce Rubin

Sure, Saul. 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 Saul.

Saul Rosenthal

Thank you, Bruce. On September 30, 2022, our net asset value per share stood at $4.93 compared to a net asset value per share of $5.07 as of June 30, 2022. For the quarter ended September 30, we recorded GAAP total investment income of approximately $64.7 million, representing an increase of approximately $1.2 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $61.7 million from our CLO equity and CLO warehouse investments and approximately $3 million from our CLO debt investments and from other income.

Oxford Lane recorded GAAP net investment income of approximately $36 million or $0.23 per share for the quarter ended September 30 compared to approximately $38.7 million or $0.26 per share for the quarter ended June 30. Our core net investment income was approximately $51.1 million or $0.33 per share for the quarter ended September 30 compared with approximately $82.1 million or $0.55 per share for the quarter ended June 30.

For the quarter ended September 30, we recorded net realized losses of approximately $6.5 million and net unrealized depreciation on investments of approximately $25.5 million or $0.21 per share in total. We had a net increase in net assets resulting from operations of approximately $3.9 million or approximately $0.03 per share for the second fiscal quarter.

As of September 30, the following metrics applied and 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 15.1%, up from 13.1% as of June 30. The weighted average effective yield of our CLO equity investments at current cost was 16.1%, up from 15.9% as of June 30. And the weighted average cash distribution yield of our CLO equity investments at current cost was 22.1%, down from 29.4% as of June 30, primarily resulting from the loss of the benefit of LIBOR floors for the underlying assets.

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 September 30, we issued a total of approximately 8.1 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $49.2 million.

During the quarter ended September 30, we made additional CLO investments of approximately $119.4 million and we received approximately $12 million from sales and repayments. On October 27 our Board of Directors declared monthly common stock distributions of $0.075 per share for each of the months ending January, February and March 2023.

With that, I’ll turn the call over to our Portfolio Manager, Deep Maji.

Debdeep Maji

Thank you, Saul. During the quarter ended September 30, 2022, the U.S. loan market was volatile. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index increased from 92.16% of par as of June 30 to 95.5% of par as of August 12 before dropping to 91.92% of par as of September 30. According to LCD, during the quarter, there was pricing dispersion related to credit quality with BB-rated loan prices increasing 119 basis points or 1.26%, single B-rated loan prices decreasing 42 basis points or 0.45% and CCC-rated loan prices decreasing 132 basis points or 1.62% on average. 12-month trailing default rate for the Morningstar LSTA U.S. Leveraged Loan Index increased to 0.9% by principal amount at the end of the quarter from 0.28% as of – at the end of June of 2022.

Additionally, the distress ratio, defined as a percentage of loans with a price below 80% of par, ended the quarter at approximately 6% compared to 3.65% at the end of June. The drop in U.S. loan prices led to an approximate 2% of par decline in U.S. CLO equity net asset values. Median junior over-collateralization cushions remained flat at approximately 4.69% compared to 4.68% last quarter. Additionally, we observed loan pools within CLO portfolios, modestly increased in weighted average spreads to 351 basis points compared to 349 basis points last quarter.

The CLO primary market continues to be challenged, with AAAs continuing to widen out, passover plus 200 basis points after temporarily tightening during the quarter. CLO new issuance reached approximately $110 billion compared to approximately $140 billion over the same period last year. Given widening liabilities and the challenging new issue arbitrage along with limited new issue loan calendar, CLO issuance is expected to be limited through the end of the year and is expected to come in well below last year’s issuance level of approximately $180 billion.

Oxford Lane continues to be active in the secondary market during the quarter, trading over $170 million notional of CLO equity and junior debt. While most of our activity took place in the secondary market this quarter, we added one new issued CLO equity investment during the quarter. As a function of our overall market activity in both markets, we were able to lengthen the weighted average reinvestment period of Oxford Lane CLO equity portfolio from July of 2025 to September 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, as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy.

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

Saul Rosenthal

Thanks, Deep. Additional information about Oxford Lane’s second fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com.

Operator, we’ll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Mickey Schleien of Ladenburg. Please go ahead when you’re ready.

Mickey Schleien

Yes. Good morning, everyone. Saul, you mentioned that the portfolio’s distress ratio climbed to 5.8%, and obviously, the loan prices were weak during the quarter, but junior OC cushions actually went up a little bit in your portfolio. So can you maybe help us understand what CLO managers are doing with their portfolios in this really volatile environment to improve their cushions?

Saul Rosenthal

Sure. Good morning, Mickey. I’ll let Deep answer that question.

Deep Maji

Sure. I think in this environment, clearly, there are – downgrades are occurring and I think CLO managers are looking at making relative value swaps and trying to clean up their portfolio a little bit. So far we haven’t seen CCCs, really elevate to some of the same levels that we saw during COVID. I think managers are taking the time in this current environment to – start to clean up their portfolio and maybe sell certain stress names and make swaps into other names that they think are going to perform better over the long term in our estimation.

Mickey Schleien

I understand. Thanks for that. And Deep, the debt-to-EBITDA ratio and leverage loans hit a high of 5.5 times in the third quarter. So when you look at that ratio and you think about the likelihood that interest rates will likely go higher over the next few quarters, and there’s already existing pressure on borrowers EBITDA margins, what’s your view on how CLO equity cash flows will trend going into next year?

Deep Maji

Sure. I think that clearly interest rates are going higher and interest coverage ratios are something that we are very mindful of. I think that CLO managers are assessing their portfolios across various industries and within each industry to kind of assess the borrower’s ability to pass through costs and be able to kind of meet their interest – meet their debt service. So I think that we feel confident that our managers are kind of making the right assessments in this sort of environment about those. But clearly there is stress in the system [ph] and everyone’s mindful of the inflation and is impact on input costs as well as rising rates impact on interest coverage ratios.

Mickey Schleien

I understand. My last question is we’ve seen the leverage loan downgrade to upgrade ratio accelerate. I believe it’s hit 2.3 times and defaults. I think as you mentioned in your prepared remarks have climbed to almost 1% from virtually nothing a few months ago. So with that in mind, where do you see defaults trending? And how do you think that will affect cash flow divergence going into next year?

Saul Rosenthal

Yes, Mickey, yes, of course. And again, just to reference back, it was – the default rate was 28 basis points, 0.28% in June – at June 30, and it’s now as of September 30, 0.9%. So just to get the numbers there. But yes, we’re certainly aware of it. The collateral managers are aware of it. We really don’t want to make projections. We can pull 20 economists for where they think the economy and recession and interest rates and so forth are going and you’ll get different answers. And we’re just not – we’re not taking a position there. We’re just aware of the fact that this is the case and obviously, more importantly, the collateral managers that we’re investing with are aware of it and try to position their portfolios accordingly.

Mickey Schleien

Okay. Appreciate that. That’s it for me this morning. Thank you for your time.

Saul Rosenthal

Okay, sure. Thank you, Mickey.

Operator

Thank you, Mickey. I would now like to turn the call back to Saul Rosenthal for some closing remarks.

Saul Rosenthal

Thank you, operator. And thank you everyone for joining today’s conference call and we’ll look forward to discussing next quarter’s results on our next call. Thank you, operator.

Operator

Thank you. That does conclude today’s call. Thank you all again for joining. You may now disconnect your lines.