Oxford Lane Capital Corp. (NASDAQ:OXLC) Q3 2023 Earnings Call Transcript

Oxford Lane Capital Corp. (NASDAQ:OXLC) Q3 2023 Earnings Call Transcript January 27, 2023

Operator: Good morning, and welcome to the Oxford Lane Capital Corp. Third Fiscal Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. Now let me turn the call over to Jonathan Cohen, CEO to begin. So Jonathan, you may begin.

Jonathan Cohen: Thanks very much. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. third fiscal quarter 2023 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 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 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 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 Cohen: Thank you, Bruce. On December 31, 2022, our net asset value per share stood at $4.63 compared to a net asset value per share of $4.93 as of September 30. For the quarter ended December 31, we recorded GAAP total investment income of approximately $67.6 million, representing an increase of approximately $2.9 million from the prior quarter. The quarter’s GAAP total investment income from our portfolio consisted of approximately $64.3 million from our CLO equity and CLO warehouse investments and approximately $3.3 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately $41.4 million or $0.26 per share for the quarter ended December 31 compared to approximately $36 million or $0.23 per share for the quarter ended September 30.

Our core net investment income was approximately $50.1 million or $0.31 per share for the quarter ended December 31 compared with approximately $51.1 million or $0.33 per share for the quarter ended September 30. For the quarter ended December 31, we recorded net realized losses of approximately $1.5 million in net unrealized depreciation on investments of approximately $54.7 million or $0.35 per share in total. We had a net decrease in net assets resulting from operations of approximately $14.8 million or $0.09 per share for the third fiscal quarter. As of December 31, 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 16.6%, up from 15.1% as of September 30.

The weighted average effective yield of our CLO equity investments at current cost was 15.7%, down from 16.1% as of September 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 18.6%, down from 22.1% as of September 30. 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 December 31, we issued a total of approximately 7.2 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $37.2 million. During the quarter ended December 31, we made additional CLO investments of approximately $82.8 million, and we received approximately $49.5 million from sales and repayments.

On January 26, our Board of Directors declared monthly common stock distributions of $0.075 per share for each of the months ending April, May and June of 2023. And with that, I’d like to turn the call over to our Managing Director, Joe Kupka. Joe?

Joe Kupka: Thanks, Jonathan. During the quarter ended December 31, 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 91.92% of par as of September 30 to 93.06% of par as of November 16 before dropping to 92.44% of par as of December 30. During the quarter, there was significant pricing dispersion related to credit quality with BB-rated loan prices increasing 195 basis points single B-rated loan prices increasing 94 basis points and CCC-rated loan prices decreasing 603 basis points on average. The 12-month trailing default rate for the loan index decreased to 72 basis points by principal amount at the end of the quarter from 90 basis points at the end of September 2022.

Additionally, the distressed ratio defined as a percentage of loans with a price below 80% of par, ended the quarter at 7.4% compared to approximately 6% at the end of September 2022. The increase in U.S. loan prices led to an approximate 7% increase in median U.S. CLO equity net asset values. Median junior over-collateralization cushions remained flat at approximately 4.7%. Additionally, we observed loan pools within CLO portfolios, modestly increased our weighted average spreads to 354 basis points compared to 351 basis points last quarter. Oxford Lane continues to be active in the secondary market during the quarter. While most of our activity took place in the secondary market, we added two new issued CLO equity investments during the quarter.

Our investment strategy during the quarter was to engage in relative value trading and lengthened 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 continue to 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 towards our investment strategy. With that, I’ll turn the call back over to Jonathan.

Jonathan Cohen: Thanks very much, Joe. Additional information about Oxford Lane’s third quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we are happy to open the call up to any questions.

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Q&A Session

Operator: Thank you. We have our first question from Mickey Schleien of Ladenburg. Your line is now open.

Mickey Schleien: Yes. Good morning, everyone. Jonathan, it appears we’re in a more normal economic cycle, which we actually haven’t experienced in quite a while with inflation and interest rates climbing and GDP slowing down, et cetera. In that context and considering your firm’s long experience in these markets, broadly speaking, what is your outlook for the CLO market this year?

Jonathan Cohen: Well, thank you, Mickey. Good morning. As you know, we don’t take macro-based positions. We’re not really a firm which forecasts macro fundamentals and makes large directional investments based on that macro forecast. That said, I think we are looking broadly for a continuation of current macroeconomic trends, which means hopefully, inflation comes under control. But we certainly have the potentials to see an additional rise in rates. We have the potential to see additional syndicated corporate loan spread widening. But I think there’s a fair amount of uncertainty right now. So in terms of having a high degree of conviction around a specific macro outlook, I can say we are trying to remain flexible in our approach. We’re trying to remain opportunistic in our investment decisions, but those things are not generally predicated on a specific macro outlook.

Mickey Schleien: I understand. And following up on that question, Jonathan. Broadly speaking, how is the primary market behaving? And how do you see the supply €“ the equilibrium in the market developing in terms of supply of loans and demand for loans within the CLO market this year?

Jonathan Cohen: Sure, Mickey. The principal driver we see for the primary market is liability pricing which has been a bit volatile over the course of the last year or so. But let me turn it over to Joe to discuss that a little bit more broadly.

Joe Kupka: Sure. So towards the end of last year, we definitely see pretty wide liability prices with AAAs pricing wide of silver plus 200. Since the beginning of the year, we’ve seen some banks start to come into the space and have seen some price stock in deals starting to get done as tight as silver plus 175. So that’s obviously a good sign. In terms of just the supply equilibrium, we continue to see a decent amount of warehouses outstanding. And so as those look to price, that will €“ could have potentially a range bound effect on the price of liabilities. So that might bump up against the force of just continued banks coming in. So we’ll kind of see how that equilibrium plays out in the next couple of quarters.

Mickey Schleien: Yes, I understand. And I noticed €“ I can’t recall a time when yields on CLO debt investments were higher than CLO equity estimated yields, which is the case currently in your portfolio. Can you expand on what’s driving that deviation and how you can take advantage of it?