Oxford Lane Capital (OXLC) Q4 2021 Earnings Call Transcript

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Oxford Lane Capital (OXLC -0.10%)
Q4 2021 Earnings Call
May 11, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Oxford Lane Capital Corp. fourth-quarter 2021 earnings release conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jonathan Cohen, CEO.

Please go ahead.

Jonathan Cohen -- Chief Executive Officer

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. fourth-fiscal quarter 2021 earnings conference call.

I'm 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 open the call with a disclosure regarding forward-looking statements?

Bruce 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, which 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 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 turn the presentation back over to Jonathan.

Jonathan Cohen -- Chief Executive Officer

Thanks, Bruce. On March 31, 2021, our net asset value per share stood at $5.94, compared to a net asset value per share of $5.44 as of December 31, 2020. For the quarter ended March 31, we recorded GAAP total investment income of approximately $36.1 million, representing an increase of approximately $4.7 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $34.7 million from our CLO equity investments and $1.4 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $21.6 million, or $0.23 per share, for the quarter ended March 31, compared to approximately $18.9 million, or $0.21 per share, for the quarter ended December 31. Our core net investment income was approximately $44.9 million, or $0.47 per share, for the quarter ended March 31, compared with approximately $33.5 million, or $0.37 per share, for the quarter ended December 31. During the quarter ended March 31, we issued a total of approximately 7.2 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $46.4 million. For the quarter ended March 31, we reported net realized losses of approximately $2.1 million or $0.02 per share.

We recorded net unrealized appreciation of approximately $41.9 million or $0.44 per share. We had a net increase in net assets resulting from operations of approximately $61.4 million, or $0.65 per share, for the fourth fiscal quarter. As of March 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 11.2%, up from 10.5%, as of December 31. The weighted average GAAP effective yield of our CLO equity investments at current cost was 15.7%, up from 14.5%, as of December 31. And the weighted average cash distribution yield of our CLO equity investments at current cost was 23.8%, up from 22.2%, as of December 31. 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 March 31, we made additional CLO investments of approximately $175.9 million, and we received approximately $62.5 million from sales and repayments. On April 15, 2021, fund redeemed all of the outstanding series 2023 term-preferred stock at a redemption amount of approximately $57.2 million or $25.07 per share. On April 29, our board of directors declared monthly common stock distributions of $0.0675 per share for each of the months of July, August and September of 2021. With that, I'll turn the call over to our portfolio manager, Deep Maji.

Deep Maji -- Senior Managing Director and Portfolio Manager

Thank you, Jonathan. During the quarter ended March 31, the U.S. loan market continued to strengthen. U.S.

loan prices, as defined by the S&P/LSTA Leveraged Loan Index, increased from approximately 96.2% of par as of December 31, 2020 to approximately 97.6% of par as of March 31, 2021. Given the rally in U.S. loan prices, the percentage of the loan index that traded at prices of 80% of par or below, which is a common measure of distress, improved to approximately 1% as of March 31, 2021 from 2% at the end of 2020. During the quarter, the increase in U.S.

loan market pricing led to an increase in U.S. CLO equity net asset values. According to Wells Fargo, as of March 31, 2021, the median U.S. CLO equity NAV improved to 50.1% of par from 40.3% of par as of December 30, 2020.

During the first quarter of 2021, the percentage of U.S. CLO transactions failing one of their cash flow diversion test continued to show improvement quarter over quarter. According to Bank of America, approximately 9% of outstanding U.S. CLOs were failing at least one of their cash flow diversity tests during the first quarter of 2021, which improved from approximately 17% as of the previous quarter.

Additionally, given the tightening in U.S. CLO debt spreads, particularly at the top of the CLO capital structure, we have seen an increase in aggregate U.S. CLO activity in the primary market across new issue, reset and refinancing transactions during the quarter. Given the attractive new issued CLO equity arbitrage, we made four new primary CLO equity investments during the quarter.

Additionally, during the past quarter, three of the CLOs where we held equities reset their liabilities, and six CLOs refinanced their liabilities. Given the strength in loan prices, we also optionally reduced several CLOs where we believe that realizing these deals' current NAV was a better outcome versus affecting it or refinancing or reset, and we rotated this capital into new investments. Lastly, we opened several non-mark-to-market CLO warehouses with Tier 1 CLO managers to allow these managers to aggregate loan assets patiently with a view to a CLO takeout later this year. 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 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 toward our investment strategy. With that, I will turn the call back over to Jonathan.

Jonathan Cohen -- Chief Executive Officer

Thanks, Deep. We note that additional information about Oxford Lane's fourth-fiscal-quarter performance has been uploaded to our website at www.oxfordlanecapital.com. With that, we'll now open the call for any questions.

Questions & Answers:

Operator

[Operator instructions] And the first question comes from Mickey Schleien with Ladenburg. Please go ahead.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Yeah. Good morning, everyone. Jonathan, considering your portfolio structure in terms of the CLOs that are still within their non-call date and those that are past it, how quickly do you think managers can refinance or reset their liabilities to help offset the spread compression we're seeing on the asset side?

Deep Maji -- Senior Managing Director and Portfolio Manager

Hey, Mickey, this is Deep. Yeah, hi, we have several that are coming off of their non-call date, yeah, some of the 2019 vintage equity that we bought specifically in the new issue market. So yeah, we're assessing every situation where a deal is coming, rolling off its non-call date and looking to refinance or reset those liabilities, if it makes sense. The AAA market has widened out from the tights that we saw in February a bit.

So we're making kind of thoughtful decisions and trying patiently to turn these out into new structures, but we do think the market is attractive. And to the extent that makes sense, we are going to continue to affect resets and refinancings on our portfolio.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Okay. Thank you for that, Deep. And when we think of the high-level activity in CLOs, which is attracting new managers, could you help us understand how you evaluate new CLO managers before you go ahead and decide to make an investment with them?

Jonathan Cohen -- Chief Executive Officer

Sure, Mickey. We have the benefit of being fairly active in this asset class for a long period of time. So when we're evaluating a transaction, the various elements that we consider certainly include the managers' capability, the managers' behavior historically, the manager's ability to create value for the benefit of the structure and for the tranche that we're investing in. But it also includes a great many other things: the assets within the structure, the liability, the pricing and the overall structure of the indenture itself.

This is -- these are, as you know, fairly complex instruments with many, many elements to consider. And we don't take a sort of -- we hope we don't take an overly simplistic view of manager capabilities. There are certain managers that have a tendency to perform better in certain types of markets. And we try to consider those nuances as we're evaluating overall structures.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Jonathan, would it be fair to say, based on what you just explained, that it would be unusual for Oxford to invest in a manager's first CLO?

Jonathan Cohen -- Chief Executive Officer

It's not our common practice. It's not something that we do very frequently. But that said, if that manager's first CLO represented a particularly compelling investment for us, we would look seriously doing that.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

OK. One sort of last high-level question, Jonathan. Given the economies of parent strength, I would suppose the fed will likely begin to raise rates in the not-too-distant future, who knows exactly when. But LIBOR is now well below the typical floor and a leveraged loan.

So when the fed starts to raise rates, that will eventually cause a squeeze on the CLO arbitrage. What tactics do you expect CLO managers will use to help alleviate that trend?

Jonathan Cohen -- Chief Executive Officer

Sure. So what you'll see happen is, obviously, if a deal is outside of its non-call period, the CLO manager and equity holder may they have the ability to refinance its liabilities. And generally, what we've seen historically is when rates rise, often, spreads will compress, not only on the assets but also on the liabilities as well. So the all-in cost, cost of debt for these issuers will remain somewhat consistent.

So there's various tactics. But between what you would expect to happen on the liability side, assuming that these deals can refinance, we would expect to see a healthy level of refinancing activity into a rising rate environment. With the caveat, of course, Mickey, that the economic uncertainties pervade this asset class as they do many other asset classes and predicting the future arc of either manager behavior or asset pricing or defaults or spread compression or expansion, those things are extraordinarily difficult to do. And we're not attempting to do those things at the moment, yeah, on this call, in any case.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Sure. And Jonathan, based on what you just said, would it be reasonable then to assume that Oxford itself wouldn't want to take a position on the direction of interest rates? In other words, you wouldn't try to hedge that through your own balance sheet, whether some sort of derivative or something like that?

Jonathan Cohen -- Chief Executive Officer

We have not done that historically, Mickey. We're not doing a serious -- we're not undergoing serious consideration of trying to hedge interest rate risk at the moment. But of course, CLO structures, by their nature, are floating rate on both the asset and the liability side.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Yeah.

Jonathan Cohen -- Chief Executive Officer

And we have the ability to enjoy at least some level depending on the structure of internal hedging based upon that balance between assets and liabilities within the structure. Again, depending on all sorts of other factors, which, as you know, are difficult to predict.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Sure. That's it for me. I appreciate you taking my questions.

Jonathan Cohen -- Chief Executive Officer

Sure, Mickey. Absolutely. And just reverting back to your question about investing in a first-time manager, just to be clear, that's something that we haven't done any time in recent history. We would be open to the prospect of it, structure and deal terms, depending.

But it's not something that we've done in quite some time.

Mickey Schleien -- Ladenburg Thalmann -- Analyst

Understood. Thank you for that follow-up, Jonathan. I appreciate it.

Jonathan Cohen -- Chief Executive Officer

Thank you, Mickey.

Operator

I see there are no further questions. So this concludes our question-and-answer session. I would now like to turn the conference back over to Jonathan Cohen for any closing remarks.

Jonathan Cohen -- Chief Executive Officer

Thank you, operator. I'd like to thank everybody who's participating in this call or listening to the replay for their interest in Oxford Lane Capital Corp. And we look forward to speaking to you again soon. Thanks very much.

Operator

[Operator signoff]

Duration: 17 minutes

Call participants:

Jonathan Cohen -- Chief Executive Officer

Bruce Rubin -- Chief Financial Officer

Deep Maji -- Senior Managing Director and Portfolio Manager

Mickey Schleien -- Ladenburg Thalmann -- Analyst

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