Oxford Square Capital Corp.
Q2 2013 Earnings Call Transcript

Published: 6 Aug 2013

[Operator:]

Good morning, and welcome to the TICC Capital Corp. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Please also note this event is being recorded. I would now like to turn the conference over to Mr. Jonathan Cohen. Please go ahead, sir.

[Jonathan H. Cohen:]

Thanks very much. Good morning. Welcome, everyone, to the TICC Capital Corp. Second Quarter 2013 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; Patrick Conroy, our Chief Financial Officer; and Bruce Rubin, our Controller and Treasurer. Bruce, could you open the call today with a discussion regarding forward-looking statements?

[Bruce L. 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 a property of TICC 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 actual results to differ materially from those 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, www.ticc.com With that, I'll turn the call back to Jonathan.

[Jonathan H. Cohen:]

Thanks, Bruce. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.25 per share for the second quarter. We reported total investment income of approximately $25.4 million for the second quarter of 2013, representing an increase of approximately $3.7 million over the first quarter. That increase was largely due to greater interest income and distributions from our CLO equity investments during the second quarter. Our second quarter net investment income was approximately $16 million or $0.30 per share, which includes the impact of the capital gains inventive fee accrual reduction of approximately $2.9 million. Excluding the impact of that accrual reduction, our core net investment income was approximately $13.1 million or $0.25 per share. We also recorded net unrealized depreciation of approximately $16.4 million and net realized capital gains of approximately $1.9 million for the quarter. As a result of those realized and unrealized gains and losses, we had a net increase in net assets resulting from operations of approximately $1.5 million for the quarter. At the same time, we believe that the credit quality of our portfolio remains stable. Our weighted average credit rating on a fair value basis stood at 2.2 at the end of the second quarter of 2013, compared to 2.1 at the end of the first quarter of 2013. At June 30, 2013, net asset values stood -- per share stood at $9.75 compared with the net asset value at the end of the first quarter of $10.02 per share. During the second quarter of 2013, we made additional investments of approximately $190.8 million. The additional investments consisted of approximately $165.4 million in corporate securities, $19.1 million in CLO equity and $6.3 million in CLO debt. It's worth noting that this quarter's activities follow a very active first quarter during which we invested approximately $216.5 million, consisting of $123.6 million in corporate securities, $87.8 million in CLO equity and $5.1 million in CLO debt. For the second quarter, we received proceeds of approximately $103.5 million from repayments, sales and amortization payments on our debt investments. For the quarter ended June 30, 2013, TICC recorded earned income from our investment portfolio as follows

[Operator:]

[Operator Instructions] Our first question comes from Mickey Schleien of Ladenburg.

[Mickey M. Schleien:]

Taking into account, Jonathan, the securities payable of, I think, $49 million, how long or when do you expect to finish investing your remaining cash or by when?

[Jonathan H. Cohen:]

Well, Mickey, on a $1.025 billion portfolio, the $50-or-so million of effective cash, which is the cash position at the end of the June quarter less the unsettled trades pending of approximately $50 million, represents just about 5% of our assets. That would typically be absorbed in the ordinary course. That's not a large enough cash position to -- for us to worry too much about, about putting that amount to work. Again, we're sort of averaging over the last several quarters about $200 million per quarter of investment. So we don't regard the cash position as overly onerous at the moment.

[Mickey M. Schleien:]

And the payable is primarily in CLOs?

[Patrick Francis Conroy:]

You mean the unsettled trades, Mickey?

[Mickey M. Schleien:]

Yes, yes.

[Jonathan H. Cohen:]

; They can be inside and outside the CLOs. So they can be on balance sheet, they can be within the CLOs.

[Patrick Francis Conroy:]

Those are just timing issues, just depending on what the trades are.

[Jonathan H. Cohen:]

Right. Sometimes these trades settle very quickly. Sometimes trades take a little longer to settle.

[Mickey M. Schleien:]

No, I understand the nature of the payable. I was just asking whether most of those payables are within the CLOs, meaning more leveraged, syndicated leveraged loans, or is it something else?

[Patrick Francis Conroy:]

Mickey, I was jumping up. I thought -- this is Patrick. If you were asking if these were CLO investments per se and they're generally not, that $40 million of the -- $49 million of pending investments. They are, as Jonathan said, investments when corporate loans is inside the various CLOs, the 2 CLOs that we run.

[Mickey M. Schleien:]

Yes, okay, fair enough. Now I understand your explanation of the impact of way of having to invest in the CLOs. But there's this countervailing force of equity distributions from your new CLO investments. And I assume that had some positive impact this quarter. Can you give us a sense of -- can you, at least in broad brush strokes, what that impact might be in the coming quarter?

[Jonathan H. Cohen:]

Well, I can give you some general guidance, Mickey. Our CLO equity holdings at the end of the June quarter amounted to $195.5 million. Of that amount, $73.3 million of fair value investments were reflected into 5 positions that we had purchased -- that we have purchased recently enough, such that they had not yet begun making payments at the end of the June quarter. So about 37.5% of our CLO equity book was nonproductive on a cash distribution basis with respect to the June quarter. And as you know, typically, it's a 2-quarter lag between purchase and initial distributions.

[Mickey M. Schleien:]

Fair enough. Can you talk a little bit, Jonathan, about the markdown? It was relatively significant and we haven't seen the Q. So what was marked down or what were the primary drivers of the markdown during the quarter?

[Jonathan H. Cohen:]

I'd want to wait for the Q, Mickey. I mean, it was different positions in different asset classes. We did see some weakness in the market in the quarter, but not dramatic. So we have mark ups, we have mark downs. We'll -- the Q should be out fairly soon, though.

[Mickey M. Schleien:]

Okay. And then last couple questions and then I'll hop off. Some color on the fee income, which was meaningful this quarter. And do you still expect to cover your dividend on a taxable basis this year?

[Jonathan H. Cohen:]

The fee income was a great number of relatively small payments. So I wouldn't say that was driven by 1 or 2 payments that represented the majority of that $2 million figure. With respect to our coverage of the dividend, the board's philosophy, I believe, is to distribute out constructively 100% or very nearly 100% of our taxable net income on an annual basis. So my belief is that their actions will be consistent over time with that philosophy.

[Mickey M. Schleien:]

Okay. And lastly, can you give us your current view on the tone of the CLO markets, given all the volatility in interest rates over the last couple of months? And is it more appealing or less appealing to you than it was a quarter ago when we last spoke on your earnings call?

[Jonathan H. Cohen:]

Sure, Mickey. We continue to see – and as you can tell by the fact that we've remained active in this space, with $10.7 million of new CLO investments at TICC in the second quarter, we continue to see opportunities within the CLO market broadly defined. We -- sorry, I apologize, Mickey. That number was in the amount of distributions. It was $19.1 million of new investments and $10.7 million of distribution that we received. So clearly, we continue to see opportunities in this space. Volatility has created opportunities. It's created challenges within that market. The pace of new CLO issuance has diminished relative to 6 months ago or 9 months ago when the market was probably more active than it is at the moment. That said, we've made purchases in the primary market, we've made purchases in the secondary market and we continue to see opportunities there.

[Operator:]

Our next question comes from John Hecht of Stephens.

[John Hecht:]

A couple questions. First of all, on the unrealized losses I know it sounded like it came from a number different kind of contributors. But can you give us sort of, was it derived primarily from the CLO assets, or did the corporate securities in CLO assets both contribute, or is one type of asset class more pressured given the volatility in the interest rate environment during the quarter?

[Jonathan H. Cohen:]

Sure, John. In terms of the preponderance of the markdowns, it was in the CLO equity holdings that we had most of the markdowns or the bulk of the markdowns during the quarter.

[John Hecht:]

Okay. And you mentioned that about 37.5% of the CLO assets, or I guess, CLO equities that you hold are not cash flowing right now. Do you have a sense for the timing of that and/or do you [indiscernible] effective yield that you'd expect on that would be?

[Jonathan H. Cohen:]

John, just to be clear, it's not that they're not cash flowing. The vehicles are cash flowing, John. They're just not -- they haven't, by contract, started their distributions to the equity tranches yet. That's all.

[Saul Barak Rosenthal:]

And in the typical of new CLO, the vehicle doesn't distribute. It doesn't make its first distribution for 2 quarters. And we a bought a bunch of primaries relatively recently. And so a bunch of those don't just sort of come online until the third quarter as opposed to the second quarter. That's what's Jonathan's saying, but it's very, very different than saying they're not cash flowing, which is not the case at all.

[John Hecht:]

Yes, that's -- just to clarify what I was asking is, at what point do you think the cash flows to equity use would occur and what kind of effective yield you think you would get on that?

[Jonathan H. Cohen:]

Well, I mean, we're buying CLO equity in the market right now, primary and secondary markets with the objective of obtaining teens returns, low teens, mid-teens returns, typically, highly dependent upon the assumptions that we're basing those models on. Some reasonable percentage of our CLO holdings, the $73.3 million of holdings that haven't distributed cash to us to the equity in the second quarter could begin to distribute cash in the third quarter.

[John Hecht:]

Okay. And then a final question is, the distressed investment, can you talk about it? Has there been any progress in restructuring capital structure there, or it's generally in progress and healing that situation?

[Jonathan H. Cohen:]

Sure, John. I mean, we're obviously under nondisclosure with respect to our direct corporate investments. So there's not a great deal we can say about that, but there'll be some disclosure in the Q.

[Operator:]

Our next question comes from Greg Mason of KBW.

[Greg M. Mason:]

I wanted to talk a little bit more on the dividend coverage. I appreciate the comments that you expect to cover it from taxable income for the full year. Is there a meaningful difference in the GAAP versus tax treatment of the CLO income? Essentially, the bottom line of my question is wondering if and when we're going to see kind of core GAAP net operating income covering the $0.29 dividend?

[Patrick Francis Conroy:]

Greg, this is Patrick. With regard to the proximity of the ultimate tax basis, net investment income versus what we -- the way we record income currently, there always will be a delta., there'll be some differential, but our belief is that the cash, effectively the cash dividend style accounting, when we receive a dividend on record date and we record it, we believe that's the best proxy for the ultimate cash basis net investment income that we're required to recognize and distribute. As we've said before on these calls, the problem -- the issue with these investments is the so-called PFIC statement process is very, very long and coming. And we're currently in receipt of most of the PFIC statements we're required to receive. We are in the process of finalizing our tax return, won't be done for another 6 weeks or roughly 6 weeks, 5 weeks from now. And at that point, we'll get a very clear idea of the impact of each individual PFIC and, in terms of pass-through, what it means to us in our net investment income. And obviously, we do internally have a feel for the third quarter and the fourth quarter. But when we see the results of these PFIC statements, we'll get a much clearer picture of where we think the year is going to wind up. And as you know, if we think there's going to be return of capital, we'll be required to disclose that with the dividend notices to the best of our knowledge at the time that we make those distributions. So we think that our current method of accounting is the best proxy for the ultimate tax basis accounting that we're required to do for distribution purposes and reporting purposes, and that's the best we can tell you right now, frankly.

[Greg M. Mason:]

Okay. So to put that in layman's terms, it sounds like there shouldn't be a ton of difference between the GAAP method you're using and the tax. So would that imply that you ultimately do expect the NOI, the GAAP NOI core to cover the $0.29 dividend?

[Jonathan H. Cohen:]

I don't think there's any implication, one way or the other, to be drawn from Patrick's comments.

[Greg M. Mason:]

Okay. And then can you talk a little bit about your appetite for raising additional equity capital, given that your balance of what you're seeing in the market versus where the stock price is and the current yield on the stock?

[Jonathan H. Cohen:]

Well we're, I think, adhering to the same philosophy that we've embraced historically, which is that we seek to raise additional capital when we feel we can put it to productive use and generate a positive return on risk-adjusted basis to the common equity. We don't have any immediate plans to raise a substantial amount of additional capital. We've raised a fair amount of capital over the last 12 months. We've, I think, deployed it well. We're happy with the current state of the portfolio. So it's an opportunistic approach, I think, more than anything else.

[Operator:]

Our next question comes from Christopher York of JMP Securities.

[Christopher York:]

Most of my questions on -- my questions on the dividend and additional equity have been asked so I guess I would have to switch to some housekeeping items. What were nonqualified assets as a percentage of the investment portfolio?

[Jonathan H. Cohen:]

I don't think it's going to be radically different from the prior quarter. It will be in the Q, but it wouldn't have moved very much from last quarter, I don't believe.

[Christopher York:]

Okay. And then looks like G&A jumped somewhat meaningfully in the quarter. Can you provide a little insight on that one?

[Patrick Francis Conroy:]

On G&A, that holds a lot of various expenses, some of which are very ordinary directors' fees, custodian fees, accounting fees, transfer agent fees. The significant uptick this year goes to printing and to proxy solicitation. You may have seen, if you followed our filings, that there were issues – there were anomalies around the voting requirements and we reconvened our annual meeting twice in the initial holding of the meeting before we can get enough votes in. So there is a substantial expense unfortunately incurred. The only unusual expense in there really was proxy and printing -- proxy solicitation and printing. But that line item holds a whole host of other -- market data pieces and that was, relatively significant expense to us, as I said, director fees, transfer agent, custodian fees and even some of those frankly are increasing as we increase the size of the company. Custodian fees are up. Even accounting fees are up because we have 2 CLOs that are effectively accounted for as separate funds, if you will, within the consolidated group. So there's some increment over the past couple of years certainly, but as I said, the big outlier is the proxy solicitation.

[Christopher York:]

Sure. Okay, that's helpful. I guess I'll just follow up really quickly here on equity with growth as our context. How are you guys thinking about the portfolio and your views for growth over the next couple quarters?

[Jonathan H. Cohen:]

Well I'd give the same answer, I think, Chris, that I gave to the prior question -- the prior questioner's question, which is our views on raising equity capital, which again, as I've always been, I think, opportunistic and have changed according to both the opportunity set that we see in the market on any given moment and also, the cost of capital that we're incurring by raising equity. So it's an ongoing discussion, it's an ongoing analysis and I don't think our thinking or our philosophy on the issue has really changed meaningfully over the last several years.

[Operator:]

Our next question and pardon the pronunciation comes from Boris Pialloux of National Securities.

[Boris E. Pialloux:]

Just a brief question about the lending environment. Do you see the competition of all the level loan funds? I assume that they have raised over $40 billion this year. So is that -- does that have an impact on CLOs or direct lending?

[Jonathan H. Cohen:]

Yes, it does. The market, Boris, as you say, has certainly become more competitive. There are more assets chasing, admittedly, probably more deals. But the ratio, I don't think is particularly favorable on a trending basis. That said, we tend to focus more on middle market transactions, small or broadly syndicated deals and middle-market transactions. And we try to pick our spots and pick good deals that make sense on a risk-adjusted basis. That said, from a macro perspective, the absolute number of dollars looking to deploy themselves within these markets represents an ongoing competitive challenge that we have to be sensitive to.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the conference back over to our leaders for any final remarks.

[Jonathan H. Cohen:]

We'd just like to thank everybody very much for their ongoing interest in TICC Capital Corp. and for your interest in this call. Thank you, all, very much. We appreciate it.

[Operator:]

Thank you very much for your time, gentlemen, and this concludes today's conference. We thank you, all, for attending today's presentation. You may now disconnect your lines.