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Oxford Lane Capital Corp. (NASDAQ:OXLC)
Q4 2020 Earnings Call
May 4, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Oxford Lane Capital Corp. Fourth Quarter Fiscal Quarter Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Jonathan Cohen, CEO. Please go ahead.

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Thanks very much. Good morning and welcome to the Oxford Lane Capital Corp. fourth fiscal quarter 2020 earnings conference call. I am joined today by Saul Rosenthal, our President, Bruce Rubin, our Chief Financial Officer, and Deep Maji, our Senior Managing Director and Portfolio Manager.

Bruce, could you please open the call with the disclosure regarding forward-looking statements?

Bruce L. Rubin -- Chief Financial Officer

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 to refer to our most recent filings with the SEC for important factors that could 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 return the call back over to Jonathan.

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Thanks Bruce. As previously announced by the Company, our Board of Directors had declared monthly common stock distributions through June 30th, 2020. While no decision has yet been made with regard to the Company's common stock distributions for July, August and September, we believe that the Company's Board of Directors will likely elect to reduce or suspend the Company's distributions for those months, in light of current economic and market conditions specifically as a result of the global crisis caused by the spread of the COVID-19 virus. We believe that no reliance should be placed on the prospect for any particular level of common stock distributions for those months or for any other periods.

On March 31st, 2020, our net asset value per share stood at $3.58 compared to a net asset value per share of $6.81 as of December 31st. During the quarter ended March 31st, the U.S. loan and CLO markets exhibited heightened levels of volatility. At the beginning of the quarter, U.S. loan prices as reflected by the S&P LSTA Leveraged Loan Index increased from 96.7% of par as of December 31st to a quarterly high of 97.4% as of January 22nd.

U.S. loan prices remained relatively stable throughout February. The increasingly negative sentiment associated with the economic ramifications of the rapid spread of COVID-19 led to a precipitous decline in U.S. loan prices during March with that index declining to a low of 76.2% on March 23rd, which was its lowest level since July 2009, and ending the quarter at 82.9% of par.

For the quarter ended March 31st, we recorded GAAP total investment income of approximately $33.9 million, representing an increase of approximately $1.4 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $32 million from our CLO equity investments and $1.9 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $20.4 million or $0.29 per share for the quarter ended March 31st compared to approximately $20 million or $0.32 per share for the quarter ended December 31st. Our core net investment income was approximately $32.3 million or $0.45 per share for the quarter ended March 31st compared with approximately $39.1 million or $0.62 per share for the quarter ended December 31st.

During the quarter ended March 31st, we issued a total of approximately 5.9 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $49.8 million. During the quarter, we also completed an underwritten public offering of approximately 3.7 million shares of our newly designated 6.25% Series 2027 Term Preferred Stock at a public offering price of $25 per share, raising approximately $88.7 million in net proceeds. On March 12th, we redeemed 1.2 million shares of our 7.5% Series 2023 term preferred stock.

For the quarter ended March 31st, we reported net realized losses of approximately $1.6 million or $0.02 per share, of which $1.5 million represented the acceleration of unamortized deferred issuance costs associated with the partial redemption of our 7.5% Series 2023 term preferred stock. We recorded net unrealized depreciation of approximately $242.1 million or $3.40 per share.

We had a net decrease in net assets resulting from operations of approximately $223.3 million or $3.14 per share for the fourth fiscal quarter. As of March 31st, the following metrics apply, and 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 11.6%, down from 12.4% as of December 31st.

The weighted GAAP effective yield of our CLO equity investments at current cost was 15.5%, down from 16.4% as of December 31st, and the weighted average cash distribution yield of our CLO equity investments at current cost was 20%, down from 25.2% as of December 31st. We note that the cash distribution yields calculated on our CLO equity investments are based on the cash distributions we have received or which we were entitled to receive at each respective period end.

During the quarter ended March 31st, we made additional CLO investments of approximately $127.2 million and we received $22.6 million from sales and repayments of our CLO investments.

And with that, I'll turn the call over to our portfolio manager, Deep Maji.

Debdeep Maji -- Senior Managing Director, Portfolio Manager

Thank you Jonathan. As mentioned previously, the COVID-19 pandemic caused a sharp decline in U.S. loan prices during the month of March, driving U.S. CLO debt prices across all tranches and U.S. CLO equity prices lower. CLO equity tranche pricing declined substantially as CLO equity NAVs fell sharply and the prospect for CLO equity cash flow diversion increased.

While we are concerned about a likely increase in defaults, our major near-term concern remains the vast amount of ratings migration occurring within U.S. CLO portfolios. The rating agencies have increased the pace of downgrades for U.S. corporations in light of the slowdown in global and corporate earnings. This increase in ratings migration by S&P and Moody's has led to a substantial increase in triple-C or below rated assets, which has caused the median triple-C exposure within U.S. CLO portfolios to increase to approximately 8% to 12% broadly. This has caused over-collateralization and interest diversion test cushion levels to decline, which has increased the risk of CLO equity cash flow diversion.

According to industry research, through April 24th in approximately 900 U.S. CLOs that had published their April 2020 quarterly payment date reports, there were 187 U.S. CLOs that were failing at least one over-collateralization or interest diversion test.

While CLO equity cash flow diversion risk has increased in the near to medium term, the current environment does create a wide set of opportunities for the CLO managers of the CLO vehicles in which we are invested to reinvest into higher yielding loans at meaningful discounts to par. This may allow these CLO managers to increase their over-collateralization ratios to provide additional cushion to mitigate future CLO equity cash flow diversion caused by additional loan defaults and ratings downgrades.

In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across U.S. CLO debt and equity tranches, looking to maximize our long term total return, and as a permanent capital vehicle, we have historically been able to take a longer term view toward our investment strategy.

With that, I will turn the call back over to Jonathan.

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Thanks very much, Deep. With that, Operator, I think we're happy to poll for any questions.

Questions and Answers:

Operator

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

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Yes, good morning everyone. Jonathan, under normal circumstances even for the quarter you just announced, cash yields on CLO equity in their reinvestment period tend to be a lot higher than their GAAP estimated yields, taking into account their typical life cycle and what we've seen historically as low default rates. We know the economy is going to have a horrible second quarter, but there are some signs that things could improve in the second half of the year, but obviously with huge uncertainty.

Could we see a situation develop this year where CLO equity GAAP estimated yields are actually higher than their cash yields, since cash yields should reflect what is happening right now in the near-term, but GAAP estimated yields take a longer term view and may have assumptions that are not as harsh as what we're seeing right now in the market?

Jonathan H. Cohen -- Board Member and Chief Executive Officer

I think that could be a possibility, Mickey. It's just very difficult to say with any real certainty. It depends on diversion, it depends on a number of other factors. So the answer to the question is yes, it's a possibility, but I wouldn't put any specific probability on it.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

All right. Well, in terms of estimated yields, what assumptions are you making on average for defaults and recoveries and migration to triple-C in your estimated yield forecasts?

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Sure, Mickey. Well, we don't publish estimated yield forecasts, so as a result we don't generally put out the parameters to determine those estimations.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Jonathan, you had a very active quarter for investing of $127 million. Could you give us a sense of how much of that was made prior to the appearance of the COVID-19 risk?

Jonathan H. Cohen -- Board Member and Chief Executive Officer

It would have been, well, it depends what date we're using for the emergence of that risk. It wasn't really a phase shift in terms of the world or the U.S. economy's focus on it. It was more of a day by day. I would say, we did the majority of that trading activity prior to the closing at the state and federal levels.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

Okay. And broadly speaking, gentlemen, how has CLO equity traded in April, and do you believe Oxford Lane has now dropped below the minimum regulatory asset coverage ratio?

Jonathan H. Cohen -- Board Member and Chief Executive Officer

CLO equity has traded on a fairly dislocated basis, Mickey, but as spreads have widened out, liquidity in the secondary market has diminished. And in terms of the second part of the question, we haven't historically and we're not current providing financial guidance.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

My last question is -- well, your debt to equity was almost one to one, so you're very close. What are your expectations for the potential to repay the Nomura facility given the level of balance sheet leverage?

Bruce L. Rubin -- Chief Financial Officer

Sure Mickey. It's something that we're very aware of, just the quality and the nature of the liability stack in our balance sheet, but in terms of giving those kinds of projections, we haven't undertaken to do that.

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

All right, those are all my questions this morning. Thank you.

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Thank you, Mickey, very much.

Operator

At this time, I am showing no further questions. And with that, I'll turn the conference back to Mr. Jonathan Cohen for any closing remarks.

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Thanks very much, Operator. I'd like to thank everyone on the call for their continued interest in Oxford Lane Capital Corp., and we look forward to speaking to you again very soon. Thanks very much.

Operator

[Operator Closing Remarks].

Duration: 15 minutes

Call participants:

Jonathan H. Cohen -- Board Member and Chief Executive Officer

Bruce L. Rubin -- Chief Financial Officer

Debdeep Maji -- Senior Managing Director, Portfolio Manager

Mickey M. Schleien -- Ladenburg Thalmann -- Analyst

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