Oxford Lane Capital Corp.
Q3 2018 Earnings Call Transcript

Published: 8 Feb 2018

[Operator:]

Good day, and welcome to the Oxford Lane Capital Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I’ll now like to turn the conference over to Jonathan Cohen. Please go ahead.

[Jonathan Cohen:]

Thanks very much. Good morning and welcome, everyone, to the Oxford Lane Capital Corp. third fiscal quarter 2018 earnings conference call. I’m joined today by Saul Rosenthal, our President; and Bruce Rubin, our Chief Financial Officer and Treasurer. Bruce, could you open the call today with a discussion regarding forward-looking statements.

[Bruce Rubin:]

Sure, Jonathan. Today’s call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was released 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. I’d also like to call your attention to the customary disclosure in our press release this morning regarding forward-looking information. Today’s conference call includes forward-looking statements and projections, and we ask that you refer to our most recent filings at the SEC for important factors that could cause our actual results to differ materially from these projections. We do not undertake to update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website at www.oxlc.com. With that, I’ll turn the call back over to Jonathan.

[Jonathan Cohen:]

Thanks very much, Bruce. At December 31, 2017, our net asset value per share stood at $10.02 compared with a net asset value per share at September 30, 2017, of $9.71. We generated a total return of approximately 7.3% for shareholders during the quarter ended December 31, 2017. That return reflects the change in net asset value per share for the period as well as the impact of the $0.40 dividend. For the quarter ended December 31, we reported GAAP total investment income of approximately $19 million, representing an increase of approximately $1.5 million when compared to the quarter ended September 30, 2017. Third quarter’s GAAP investment income from our portfolio was produced as follows

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Mickey Schleien with Ladenburg. Please go ahead.

[Mickey Schleien:]

Thank you and good morning Jonathan. I see that your CLO equity cash yield for the quarter was about stable versus the previous quarter. But I imagine that that return was still impacted by the CLO refinancings and resets that you mentioned in the prepared remarks. Can you give us a sense of what the yields may have been without those costs in the quarter?

[Jonathan Cohen:]

It would have been a bit higher, Mickey. We don’t have a figure now. We may be able to give you a little bit more precision on that. But we don’t have that number prepared for this call, I’m sorry.

[Mickey Schleien:]

All right. I’ll follow-up then. And just looking at this year then, so far we’re seeing that, at least, on the asset side of CLO balance sheets, loan spreads seem to be stabilizing, but LIBOR is obviously climbing meanwhile as you mentioned, CLOs continue to reset and refinancing that activity from what I’ve read remains very elevated this year and AAA discount margins are trending down again. In that environment, overall, what is your view on the outlook for yield for CLO equity this year in general, at least, directionally?

[Jonathan Cohen:]

Yes, I think, constructive. We’ve been clearly the beneficiary of this elevated level of refinancings and resets across the CLO market. We’ve been actively involved to effect many of those resets and refinancings. And it is only beneficial to us as these various structures continue to grind down their costs of capital, everything else held constant. And as you mentioned, we seem to be in a period of stability with respect to leveraged loan pricing and leveraged loan yields. So we are fairly constructive on the asset class at the moment.

[Mickey Schleien:]

Jonathan if I could just follow up, then. Just very broadly speaking, and I realize the market is very large. But can you give us a sense perhaps of how much more refinancing and resetting you expect? And how long that will take, assuming everything else remains equal?

[Jonathan Cohen:]

Sure, Mickey. As long as the market for CLO liabilities keeps grinding tighter, we expect to continue to see, and we’ll continue to try to catalyze as much activity across refinancings and resets as we possibly can. And again, we think there’s a fairly clear path for a good amount of additional activity over the next several quarters. But, again, that assumes the market more or less stays where it is. But at the moment, we are quite constructive on the prospect for tightening in the liabilities market.

[Mickey Schleien:]

Okay. A couple more questions, if I may. Were the higher effective yield assumptions in the quarter due to more optimism about the economy and perhaps lower default rates? Or was something else underlying those assumptions?

[Jonathan Cohen:]

The higher effective yields, Mickey, are what you’re referring to?

[Mickey Schleien:]

Yes, yes, the ones that you posted for the quarter were higher than they were the previous quarter?

[Jonathan Cohen:]

Right. I think that was less a function, Mickey, of any changes made and assumptions about the economy or the market and much more a function of simply benefiting from prior quarters’ refinancings and resets, which do have a lag in terms of taking effect.

[Mickey Schleien:]

Sure. I understand. And Jonathan, I noticed that you lowered your position in CLO debt. I actually thought that that was becoming a more interesting asset. Can you give us the rationale for that, at least for this quarter?

[Jonathan Cohen:]

Sure, Mickey. As those assets are – you’re right. We have and continue to believe that the BB market is presenting us with some interesting opportunities. But if those opportunities or those positions get pulled to par, we will inevitably rotate into opportunities – BB opportunities or B opportunities where we see greater upside. So I would say that’s more a function of simply sourcing opportunities in the market as opposed to a philosophical shift away from CLO debt.

[Mickey Schleien:]

Okay. So that allocation could actually go back up if you see interesting opportunities?

[Jonathan Cohen:]

Certainly, yes.

[Mickey Schleien:]

Okay. And my last question, maybe the crux of the matter. Core NII per share has declined to a historical low and now is actually below the dividend. So I’d like to understand what the nature of the $2.1 million adjustment to GAAP NII is to calculate core NII? And can you give us a sense of perhaps where taxable income stood for the quarter, which ultimately underlies the dividend?

[Jonathan Cohen:]

Sure. We don’t break out taxable, Mickey, on a quarterly basis. Taxable is really an annual concept. And as you know, very heavily dependent on the P6 statements we don’t receive until the subsequent calendar year. So we can’t give too much guidance in terms of tax. In terms of core, as you know, when we participate in the primary market, which we’ve been doing a fair amount of lately, there is a gap between the time that we invest those proceeds and the first payment that we receive that we recognize within our core income. So that’s certainly a piece of it. If you look at the presentation, and specifically Page 5 of the presentation we posted this morning to our website, you can see that we’re holding currently or as of December 31, we were holding just under $37 million of CLO equity expected to make its initial distribution by March 31, 2018. And an additional $39 million of CLO equity expected to make its additional distribution by 6/30/2018. So in total, we’re holding about $84 million worth of CLO equity that is not being included currently in addition to $25 million of non-cash income producing warehouse investments based on our original cost. So over $100 million of our assets are not currently, but will presumably very shortly, start producing core NII.

[Mickey Schleien:]

I understand what you’re saying, Jonathan. But you’ve historically held significant amounts of CLO equity that has yet to make its inaugural distribution. But the adjustment to get to core NII has generally been a positive adjustment as opposed to a negative adjustment this quarter. So what was different about this quarter than previous quarters?

[Jonathan Cohen:]

Sure, Mickey. Absolutely. So there were two additional elements besides the non-cash producing investments that we’re holding on the balance sheet. The first, are called deals, deals that have essentially reached the end of their productive lives, in which we or another market participant has called, that results in a GAAP return of capital as opposed to monies that are credited to core NII. The second piece, again, are these refinancings and resets, where there is a period of time, during which we’re not collecting the same level of core NII that we will in subsequent quarters. So it was really the combination of all of those things. Probably the biggest deltas, Mickey, were the last two things mentioned; the called deals and the refis and resets.

[Mickey Schleien:]

I understand. That’s very helpful. Those are all my questions. I appreciate your time this morning.

[Jonathan Cohen:]

Thank you, Mickey. Thanks very much for your questions.

[Operator:]

I am showing no further questions. I would like to turn the conference back over to Jonathan Cohen for any closing remarks.

[Jonathan Cohen:]

Thank you very much, operator. I’d like to thank everyone for their interest and for their participation in this call. And we look forward to speaking to you all again very shortly. Thanks very much.

[Operator:]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.