Oxford Lane Capital Corp. (NASDAQ:OXLC) Q2 2024 Earnings Call Transcript

Oxford Lane Capital Corp. (NASDAQ:OXLC) Q2 2024 Earnings Call Transcript November 1, 2023

Jonathan Cohen: Thanks very much. Good morning and welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter 2024 Earnings Conference Call. I’m joined today by Saul Rosenthal, our President, Bruce Rubin, our Chief Financial Officer, and Joe Kupka, our Managing Director. Bruce, could you open the call with a disclosure regarding forward-looking statements?

Bruce Rubin: Sure, Jonathan. Today’s conference call has been 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 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. During this call, we’ll 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 Cohen: Thank you, Bruce. On September 30, 2023, our net asset value per share stood at $4.81, compared to a net asset value per share of $4.34 as of June 30. For the quarter ended September, we recorded GAAP total investment income of approximately $74.4 million, representing an increase of approximately $3.9 million from the prior quarter. The quarter’s GAAP total investment income from our portfolio consisted of approximately $69.3 million from our CLO equity and CLO warehouse investments and approximately $5.1 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $44.8 million or $0.23 per share for the quarter ended September, compared to approximately $42 million or $0.24 per share for the quarter ended June 30.

Our core net investment income was approximately $79.7 million or $0.41 per share for the quarter ended September, compared with approximately $75 million or $0.43 per share for the quarter ended June 30. Quarter ended September, we recorded net realized losses of approximately $10.5 million and net unrealized appreciation on investment of approximately $95.8 million or $0.44 per share in total. We had a net increase in net assets resulting from operations of approximately $130.1 million or $0.67 per share for the second fiscal quarter. As of September 30, 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 18.5% up from 18.1% as of June 30.

The weighted average effective yield of our CLO equity investments at current cost was 16.3%, up from 16% as of June 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 25%, up from 24.6% as of June 30. We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we’ve received or which we were entitled to receive at each respective period end. During the quarter ended September, we issued a total of approximately 20.8 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $104.8 million, which resulted in net accretion to shareholders of approximately $0.07 per share of NAV for the quarter.

During the quarter ended September, we made additional CLO investments of approximately $171.7 million and we received approximately $11.8 million from sales and from repayments. On October 26, our Board of Directors declared monthly common stock distributions of $0.08 per share for each of the months ending January, February and March of 2024. With that, I’ll turn the call over to our Managing Director, Joe Kupka.

Joe Kupka: Thanks, Jonathan. During the quarter ended September 30, 2023, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leverage Loan Index, increased from 94.24% as of June 30 to 95.55% as of September 30. The increase in U.S. loan prices led to an approximate 11 point increase in median U.S. CLO equity net asset values. Median junior overcollateralization positions declined 0.1% to approximately 4.1%. Additionally, we observed loan pools within CLO portfolios increased their weighted average spreads to 370 basis points compared to 359 basis points last quarter. The 12-month trailing default rate for the loan index decreased to 1.27% by principal amount at the end of the quarter from 1.71% at the end of June.

Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 4.36% compared to approximately 6% at the end of June. CLO new issuance during the quarter totalled approximately $28 billion, an increase of $6 billion from the prior quarter. However, the $84 billion of year-to-date issuance as of quarter end trialed $106 billion of issuance for the same period in 2022. Oxford Lane continued to be active during the quarter, transacting in both the primary and secondary markets. Overall, we executed over 40 transactions in the quarter, adding 16 new CLO equity investments and two new CLO debt investments. Our investment strategy during the quarter was to engage in relative value trading and to lengthen the weighted average reinvestment period of Oxford Lane’s CLO equity portfolio.

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

Jonathan Cohen: Thanks, Joe. Additional information about our second quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, Operator, we’re happy to open the call for any questions.

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Q&A Session

Operator: [Operator instructions] Our first question comes from Mickey Schleien from Ladenburg. Please go ahead.

Mickey Schleien: Yes, good morning, everyone. Jonathan, I want to start by asking you how you would describe how the managers in your CLO portfolios responded to take advantage of the strength in the low-end CLO markets during the third quarter in terms of the opportunity to refinance or reset liabilities.

Joe Kupka: Hey, Mickey, this is Joe. Yeah, we saw some limited activity in terms of refis and some resets around the margin. The liability market was quick moving during the quarter, so just given the amount of supply out there, we tend to see like a push and pull pretty quickly. We also see some call deals, but there wasn’t that wave of refis and resets that are waiting in the wings, but we did see some around the margins.

Mickey Schleien: And I imagine that given the war in the Middle East and the weakness in the markets in October, if anything, that opportunity is lower now than it was in the third quarter. Would you agree with that?

Joe Kupka: Yeah, I think that’s fair to say.

Mickey Schleien: Okay. My next question, with inflation still above target, the consensus seems to be building around higher interest rates for longer, so curious to understand how managers are dealing with that risk in terms of the stress to their issuers’ interest coverage ratios and the potential for more downgrades to CCC.

Joe Kupka: Yes, I think that’s definitely been at the top of managers’ minds for several quarters now. So I think they’ve had time to prepare and manage their portfolios appropriately. We’ve seen some managers take proactive measures in terms of limiting their CCCs, limiting their single B exposure — just for the potential of further downgrades to manage those tests. Also have seen managers limiting certain sectors where they see…

Jonathan Cohen: Less of an ability to pass through price increases, Mickey. Where demand elasticity is lower, we’ve seen a push for managers to make those smaller positions inside of their collateral portfolios.

Mickey Schleien: Yeah, I understand. You’ve reported net realized losses pretty consistently every quarter. I want to understand, to what extent is your goal of defending the portfolio’s average reinvestment period driving exits from post-reinvestment periods, CLOs? Those prices have been relatively weak and are those what’s leading to the realized losses?

Jonathan Cohen: I don’t think in a meaningful way, Mickey. I mean, we are trading the portfolio on a relative value basis. So in instances, where we see the ability to sell something and buy something at a better price with a better reinvestment period or a cleaner portfolio or more stronger cash flows or a diminished probability of a future diversion, we will likely engage in those trades. But there’s no wholesale effort to sell positions, either at losses or gains, simply with the sole objective of extending the reinvestment period. That is one objective, but it is not the driving objective beyond all of our trading activity.

Mickey Schleien: Okay. So these consistent realized losses have been proactive decisions on relative trades in the portfolio. Am I understanding you correctly?

Jonathan Cohen: Yes, that is a truthful and fair statement, Mickey, yes.

Mickey Schleien: Okay, that’s it for me this morning. I appreciate your time, as always.

Jonathan Cohen: Thank you, Mickey.

Operator: The next question on the line is from Matthew Howlett from B. Riley Financial. Please go ahead.

Jonathan Cohen: Good morning, Matt. You may be on mute.

Matthew Howlett: Sorry about that. Good morning, Jonathan. Hi, Joe. Hey, thanks for taking my question. Good morning. Just your thoughts on relative value. When you look at primary versus secondary, you look at the credit curve, you look at tiering among managers, are things becoming more pronounced now where you could really look at value between those sort of metrics? Or just I’d love to hear your thoughts on relative value within the CLO market today.

Jonathan Cohen: Joe?

Joe Kupka: Yes, I think it’s very quick moving. As you said, manager tiering is especially top of mind for us. We’ve seen that basis grow and shrink throughout the year. It’s pretty wide at the moment, so that’s a potential avenue for some relative value. In terms of primary and secondary, that’s moved around a bit, probably not to the extent of the manager tiering, but selectively, we’ve participated in the primary in a few instances this year, but the bulk of it has been in the secondary, just given that’s where we see the relative value. But, yes, I think, like you said, there’s a lot of opportunities just given the large bases between managers, between lengths and between primary and secondary.

Matthew Howlett: Yes, you seem like you guys are finding a lot of value. The yields all went up on the GAAP yield and the core yield on the equity and the debt. Is that from the new purchases that you’re finding deeper value, or is that just from improvement in existing holdings? Just curious on that upward movement in yields we’d like to see that.

Joe Kupka: Yes, it’s a combination of both.

Jonathan Cohen: It’s a bit of both, Matt. So obviously, when we’re turning the portfolio, by definition, we’re seeking better total returns, better risk-adjusted returns than the positions we held historically. But this was a strong quarter. We saw a meaningful improvement in NAV, certainly, driven by strength in the underlying collateral pool. So very much so.

Matthew Howlett: Great. Look, it shows the benefits of active management, and congratulations to everyone on the team on that. And then I guess the final question is, like, the balance sheet is just in terrific shape. You haven’t really issued any new preferred or unsecured notes in some time. I know there’s one small maturity in mid-next year, but with the growth in the equity base, the improvement in the NAV, can you just give us an update on those markets and when potentially you’d look to tap them? I mean, we’ve seen that market open up to some other people. Just curious, is your equity base, your common equity base, grows? How willing would you be to be able to tap those markets? It seems to be very critical to shareholders.

Jonathan Cohen: Sure, Matt, absolutely. We’re always open to that possibility, but at a price. So we need to be very mindful of the differentials between our uses of proceeds and our costs of capital. And the five-year, for example, $25 par market that you just referenced is certainly a wider market than it was a year or two ago. And so we’re watching those markets. We’re sort of always in internal discussion about the viability and desirability of issuing more debt, but as you say, we haven’t chosen to in a while.

Matthew Howlett: Absolutely. And it’s nice that you guys are paying attention to price. It’s just that the balance sheet continues to improve and improve. It just seems like even with these putting on some higher yields, it could be enormously accretive if you put on something in the 8% range, call it, and go into market and buy a sale equity yielding high T’s or whatever. It just seems so that the math would make a lot of sense at some point when you’re ready to explore.

Jonathan Cohen: Absolutely, Matt. It’s a dynamic we’re very much focused on, certainly.

Matthew Howlett: Great. Well, congrats on a great quarter. That’s all I have.

Jonathan Cohen: Thank you, Matt, very much.

Operator: We have a follow-up question from Mickey Schleien from Luddenburg. Please go ahead.

Mickey Schleien: Jonathan, I just wanted to follow-up on the relative value trades and the realized losses. Do you, as a practice, triangulate the prices that you’re getting on these exits when you consider your estimated yields? In other words, on these exits, could you argue that the estimated yields were too high and not enough return of capital was booked and that led to the realized loss? Or am I misinterpreting that trend?

Jonathan Cohen: I’m not sure, Micky. It’s a somewhat technical accounting question. We can go through it with our internal accounting group and get back to you. I’m not sure.

Mickey Schleien: Okay. Thank you.

Operator: I show no further questions on the question key.

Jonathan Cohen: All right. I’d like to thank everybody for their interest and for their participation in our second fiscal quarter earnings call. We look forward to speaking with you again soon. Thanks very much.