Oxford Square Capital Corp.
Q4 2013 Earnings Call Transcript

Published: 10 Mar 2014

[Operator:]

Good morning, and welcome to the TICC Capital Corp. fourth quarter 2013 earnings conference call. (Operator Instructions) I would now like to turn the conference over to Jonathan Cohen. Please go ahead.

[Jonathan Cohen:]

Thank you. Good morning and welcome, everyone, to the TICC Capital Corp's fourth quarter 2013 earnings conference call. I am joined today by Saul Rosenthal, our President and Chief Operating Officer; and Patrick Conroy, our Chief Financial Officer. Patrick, could you open the call today with the discussion regarding forward-looking statements?

[Patrick Conroy:]

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 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 customer 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 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.ticc.com. With that, I'll turn it back to Jonathan.

[Jonathan Cohen:]

Thanks, Patrick. As we noted in our press release this morning, TICC reported core net investment income of approximately $0.30 per share for the fourth quarter of 2013. We reported total investment income of approximately $30.5 million for the quarter, representing an increase of approximately $3 million over the third quarter of 2013. That increase was largely due to greater interest income and distributions from our CLO equity investments during the fourth quarter. Our fourth quarter net investment income was approximately $16.9 million or $0.32 per share, which includes the impact of the capital gains incentive fee accrual reversal of approximately $700,000. Excluding the impact of that fee accrual reversal, our core net investment income was approximately $16.2 million or $0.30 per share. We also recorded net unrealized depreciation of approximately $3.2 million and net realized capital losses of approximately $700,000 for the quarter. As a result of our net investment income and our unrealized and realized net losses, we had a net increase in net assets resulting from operations of approximately $13.1 million for the quarter. At the same time, we believe that the credit quality of our portfolio remain stable. Our weighted average credit rating on a fair-value basis stood at 2.1 at the end of the fourth quarter of 2013, which remains the same when compared with the credit rating at the end of the third quarter of 2013. At December 31, 2013, net asset value per share stood at $9.85 compared with the net asset value at the end of the third quarter of $9.90. During the fourth quarter of 2013, we made additional investments of approximately $85.2 million. The additional investments consisted of approximately $46 million in corporate loans, $35.3 million in CLO equity and $3.9 million in CLO debt. It is worth noting that for the year ended December 31, 2013, we invested approximately $577.5 million, consisting of $397.2 million in corporate loans, $159.4 million in CLO equity and $20.9 million in CLO debt. For the fourth quarter, we received proceeds of approximately $92.2 million from repayments, sales and amortization payments on our debt investments. For the quarter ended December 31, 2013, TICC recorded investment income from our portfolio as follows

[Operator:]

(Operator Instructions) Our first question comes from Kyle Joseph of Stephens.

[Kyle Joseph:]

I was just hoping, if you could discuss which investment you added to non-accrual and tell us what's going on with that company?

[Jonathan Cohen:]

Sure. We had a single investment. It is a syndicated position that has gone on non-accrual by virtue of a diminished operating performance over the last several months. I don't believe we have yet announced the name, released the name of that particular company, although that maybe in the K.

[Kyle Joseph:]

And then, so the fourth quarter CLO investment income is that a good run rate going forward or do you have any CLO equity positions they aren't contributing yet?

[Jonathan Cohen:]

I believe all of the positions on our balance sheet, as of December 31, contributed to earnings and cash income with respect to the December quarter. I believe that is correct. There maybe one exception for that. So there may actually be a single position that was not the case with respect to December 31. But as these positions are aging and in the primary market as we exit sort of the first six months of holding, obviously there, we were getting the benefit of those cash flows with respect to the TICC P&L. In terms of the run rate, Kyle, we don't, as you know, provide go-forward projections, but I will say that the cash flows associated with individual CLO equity holding have been for us fairly stable recently.

[Kyle Joseph:]

And can you talk about your outlook for 2014 for the CLO market?

[Jonathan Cohen:]

Well, I think we have got opportunities in the CLO market, both in the primary market, where we've been principally active recently and also in the secondary market. So what we saw certainly in the last credit cycle was that as the primary market slowed down, the opportunity set in the secondary market became more pronounced. So if we do see a market slowdown, although we're not necessarily anticipating a meaningful slowdown from these levels and then new issuance calendar, our hope and expectation would be that the secondary market could provide us interesting opportunities.

[Kyle Joseph:]

And then, one last one, can you just talk about your thoughts on repayment activity in 2014? It was somewhat elevated in 2013 for pretty much everyone, but do you expect that to continue going forward or your thoughts there?

[Jonathan Cohen:]

More or less, we don't have a specific point estimate with respect to velocity or turnover repayment activity. We are being fairly circumspect about the prices that we pay for assets, because of the general expectation I think for continued high levels of repayment activity and continued high levels of refinancing activity within the credit markets broadly. So that is a reasonable backdrop against our investing activity at the moment.

[Operator:]

Our next question comes from the line Ryan Lynch of KBW.

[Ryan Lynch:]

My first one, can you guys just provide some color on the current returns you guys are seeing in new issued or secondary market purchases of CLO equity?

[Jonathan Cohen:]

There is an enormous disparity within the CLO equity market, both the secondary market and primary market, by virtue of the fact that as you know new issue deals tend to be priced within a fairly broad range. So obviously our return expectation is very different if we're paying 90 than if we're paying 82 for a particular piece of equity. Also the return expectations for new issue CLO equity tend to be enormously driven by assumptions. The fall rate assumptions we're using, recovery rate assumptions we're using. I will say that the cash returns we've generated off of the CLO equity strategy continues to meet or exceed our expectations.

[Ryan Lynch:]

Then can you give us update on RBS Holding? I know it had a nice ride up last quarter. Can you guys give any update on how that business is performing?

[Jonathan Cohen:]

I believe we held in this most recent period, the value of that investment relatively flat. I don't think there was meaningful or a very substantial movement up or down. I can't speak directly to the operating performance of the business by virtue of the fact that it's a private company and we're under a non-disclosure agreement. But from a valuation perspective, that value was reasonably steady after the large ride up that you noted.

[Ryan Lynch:]

And then on the new originations you guys made this quarter, can you give a breakdown of what percentage of those were in CLO equity and debt investments versus other just debt investments like middle market or broadly syndicated debt investments?

[Jonathan Cohen:]

Sure. In the quarter ending December 31, 2013, total CLO activity, which was equity focused, represented face value purchases of $42.7 million in cash outlay of $39.2 million, meaning that we purchased at about 91.6% of par. On the loan side, we purchased $46.5 million of face value loans at a purchase price of approximately $46 million, meaning we purchased at just a little under 99% of par.

[Operator:]

Our next question comes from Mr. Chris York of JMP Securities.

[Chris York:]

What recent behavior did you see in both or either the primary or secondary market as a response to the Volcker rule?

[Jonathan Cohen:]

I don't think we've seen a meaningful shift in the CLO primary market or really the secondary market yet. I think those shifts or those changes are at the moment probably somewhat prospective.

[Chris York:]

So what kind of shifts would you expect, I guess maybe potentially in the latter part of this year?

[Jonathan Cohen:]

Well, I think the most obvious one that people are talking about is the diminishment or the elimination of bond bucket provisions in various CLO new issue structures.

[Chris York:]

And then kind of tangential with that, I've heard of a couple of banks that have started placing CLO investments as available for sale and are shopping their portfolios in the market. Could any of these portfolios be of interest to you in this secondary market?

[Jonathan Cohen:]

Yes. They could.

[Operator:]

And our next question comes from Ron Jewsikow of Wells Fargo Securities.

[Ron Jewsikow:]

Just had a few questions about your CLO positions, kind of following-up on what some other people said and some of the underlying collateral. What percentage of this collateral on your CLO investments carry a LIBOR floor and what impact would this have on the weighted average rates you're receiving on your CLO collateral of 26% today?

[Jonathan Cohen:]

Certainly, a meaningful percentage of the underlying collateral within the various CLO structures, where we hold equity, maintain the provision for a LIBOR floor. And all else held equal, meaning, that in the absence of a widening of corporate spreads, concurrent with an increase in 30-day LIBOR, three months LIBOR rather, we would necessarily expect a diminishment in our cash return on the basis of an increase in LIBOR.

[Ron Jewsikow:]

Have you guys done any work on the sensitivity to rising rates within the portfolio, like for every 100 basis points is there somewhere where that could be provided?

[Jonathan Cohen:]

Well, we have models that we run internally. They're highly assumption dependent. And again, they sort of are heavily influenced by other assumptions outside of increase in LIBOR. So an increase in LIBOR on its own is relatively straightforward to model. But if you are assuming changes in corporate spreads, and risk premiums and corporate costs of capital along with other variables such as an increase potentially in default rates or a diminishment in recovery rate, concombinant with an increase in three months LIBOR, some modeling, as you can imagine, gets more complex.

[Ron Jewsikow:]

And then just one final question, kind of looking at the trustee reports you guys have provided on your CLOs, it looks like one of the CLOs was out of line on the diversification limits for Caa collateral. Are there any implications for this being out of line?

[Jonathan Cohen:]

No immediate implications. The CCC test is a maintain or improve parameter. Meaning, you're only required to the extent that it trips to not make any additional investments that would make the CCC basket bigger.

[Operator:]

And this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Jonathan Cohen for any closing remarks.

[Jonathan Cohen:]

No additional remarks, but just to say, thank you all very much. We appreciate your interest in TICC Capital. And we look forward to talking to you at the next quarterly call. Thanks very much.

[Operator:]

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