Oxford Lane Capital (OXLC) Q3 2021 Earnings Call Transcript

Oxford Lane Capital (OXLC -0.10%)
Q3 2021 Earnings Call
Jan 28, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, everyone, and welcome to the Oxford Lane Capital Corp. third fiscal quarter 2022 call. My name is Nadia, and I'll be coordinating the call today. [Operator instructions] I will now have over to your host, Jonathan Cohen, CEO of Oxford Lane Capital, to begin.

Jonathan, please go ahead.

Jonathan Cohen -- Chief Executive Officer

Thank you very much, Nadia. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. third fiscal quarter 2022 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 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 you to refer to our most recent filings with the SEC for important factors that can 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

Thank you, Bruce. On December 31, 2021, our net asset value per share stood at $6.93 compared to a net asset value per share of $6.97 as of September 30th. For the quarter ended December, we reported GAAP total investment income of approximately $57.3 million, representing an increase of approximately $12.1 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of $55 million from our CLO equity and CLO warehouse investments and $2.3 million from our CLO debt investments and from other income.

Oxford Lane also recorded GAAP net investment income of approximately $35.3 million or $0.29 per share for the quarter ended December 31st, compared to approximately $26.8 million or $0.24 per share for the quarter ended September 30th. Our core net investment income was approximately $53 million or $0.44 per share for the quarter ended December 31st, compared with approximately $41 million or $0.36 per share for the quarter ended September 30th. During the quarter ended December, we ended at -- we issued a total of approximately 12.8 million shares of our common stock pursuant to an active market offering, resulting in net proceeds of approximately $98.5 million. For the quarter ended December 31st, we reported net realized gains of approximately $600,000.

We reported net unrealized depreciation on investments of approximately $25.4 million or $0.21 per share. We had a net increase in net assets resulting from operations of approximately $10.5 million or $0.09 per share for the third fiscal quarter. As of December 31st, 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 13.3%, unchanged as of September 30th. The weighted average effective yield of our CLO equity investments at current cost was 16.3%, also unchanged from 16.3% as of September 30th. The weighted average cash distribution yield of our CLO equity investments at current cost was 29.7%, up from 27.7% as of September 30th. 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 December 31st, we made additional CLO equity investments -- CLO investments of approximately $310.7 million, and we received approximately $206.8 million from sales and repayments. On January 27, our board of directors declared monthly common stock distributions of $0.075 seven per share for each of the months of April, May, and June of 2022. In addition, during January, we were pleased to have completed an underwritten public offering of $100 million of aggregate principal amount of our 5% unsecured notes due 2027, raising approximately $96.9 million in net proceeds. 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 December 31, 2021, U.S. global market exhibited stability versus the quarter ended September 30, 2021. U.S.

loan prices, as defined by the S&P/LSTA Leveraged Loan Index, moved slightly lower into the end of November from 98.62% of par as of September 30th before rebounding to 98.64% of par as of December 31st. According to LCD, during the quarter, we saw some pricing dispersion related to the credit quality, with BB-rated loan prices decreasing 12 basis points and B-rated loan pricing decreasing 26 basis points and CCC-rated loan prices decreasing 155 basis points on average. The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index decreased to 29 basis points by principal amount at the end of the quarter after starting the quarter at 35 basis points. Note that this is -- this rate is just 14 basis points above the all-time low.

Additionally, the distress ratio, defined as the percentage of loans with the price below 80% of par, ended the quarter at approximately 1% compared to 2.2% in December of 2020 and 3.8% in December 2019. During the quarter, the modest increase in U.S. loan prices led to a modest increase in U.S. CLO equity net asset values.

We observed the median U.S. CLO equity net asset value modestly improving from approximately 61% of par to approximately 62% of par. Additionally, we observed that loan pools within the CLO portfolios generally maintain their weighted average spreads at 343 basis points compared to 342 basis points last quarter. Primary CLO issuance continued to be very strong for the quarter, setting a new record for calendar year 2021, approximately 187 billion of new issued deals priced in 2021 compared to the prior full year record of 129 billion set in 2018, and approximately up 245 billion of refinancings and resets priced as well compared to the prior year full -- year record of 167 billion set in 2017.

Oxford Lane was able to take advantage of the strength in the primary market this quarter, making eight new issued CLO equity investments, refinancing five deals, chipped in cheaper cost of debt financing, and resetting two deals. While we've been very active in the primary market recently, we continue to be very active in the secondary market as well. As a function of our overall activity in both markets this quarter, we were able to lengthen the weighted average reinvesting period of Oxford Lane's CLO equity portfolio from March of 2024 to December of 2024. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy across the 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 this call back to Jonathan.

Jonathan Cohen -- Chief Executive Officer

Thanks very much, Deep. We note that additional information about Oxford Lane's third fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. With that, operator, we're happy to open the call for any questions.

Questions & Answers:

Operator

[Operator instructions] And our first question comes from Mickey Schleien of Ladenburg. Mickey, please go ahead. Your line is open.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Thank you. Good morning, everyone. Jonathan, could you give us some insight into what were the main drivers of this quarter's unrealized depreciation apart from the decline in collateral prices?

Deep Maji -- Senior Managing Director and Portfolio Manager

Mickey, this is Deep. That was the primary driver. We had a little bit of pricing dispersion which increased the tails just modestly. So, you had a little bit of volatility in net asset values throughout the period.

And that led to some market decline and maybe some modest weakness in bids, so --

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Thank you. How do you see the introduction or I guess the transition to SOFR impacting the primary market and Oxford's investment opportunity this year?

Deep Maji -- Senior Managing Director and Portfolio Manager

Sure, the transition to SOFR has been very topical. A lot of market participants have been talking about it for some period of time. And we're now in the midst of it. And we've already seen several deals priced in SOFR.

Most of them being top-tier managers. So, ultimately, as we expected, the market kind of figured it out fairly quickly. And I think, you know, once we have a few more deals print, we'll be essentially back to ordinary course.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Thank you. Deep, when you look at history, how have CLO equity cash flows behaved in periods of rising interest rates as we're expecting this year?

Deep Maji -- Senior Managing Director and Portfolio Manager

Sure. That's a great question, Mickey. And again, it's been very topical recently. As rates rise, you know, LIBOR and SOFR have both been creeping up over the last few weeks and month.

You will lose the benefit of the floors, which will decrease kind of current cash on cash returns as you lose that benefit of the floors. But once you pass over the floors, you actually get a benefit on your cash flows because the unlevered portion of the equity will benefit from rising rates as well the assets. So, I think that, you know, it's something that's been -- that's already modeled into our attractive yields. We do use the forward curves, which do show that have gotten deeper over the, you know, last couple of months as the expectation for rates rising has increased.

So, again, we believe that it's mostly factored into the yields that we're seeing when we look at these deals.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

And, Deep, what is the sort of average floor in the collaterals at this point?

Deep Maji -- Senior Managing Director and Portfolio Manager

It's between 50 and 75 basis points.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

OK. So, it would take a couple of rate rises to get past that. Am I correct?

Deep Maji -- Senior Managing Director and Portfolio Manager

Presumably, Mickey. But again, all of this assumes everything else stays constant, which it very rarely does.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Sure. Yeah.

Deep Maji -- Senior Managing Director and Portfolio Manager

So, we have to consider things like the forward path for syndicated corporate loan spreads and loan pricing, default rates, recovery rates --

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Yeah.

Deep Maji -- Senior Managing Director and Portfolio Manager

The direction and rapidity of changes in that direction of LIBOR and SOFR now. So, there -- it -- as with most things in the CLO asset class, it is a multivariable equation.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

I understand. Jonathan, you know, AAA -- CLO AAA paper is quite tight, and it's been tight for a while. And managers have taken advantage of that pretty actively. How would you say the remaining -- how large would you say the remaining opportunity in your portfolio is for further repricing or resetting of liabilities to help support cash flows?

Jonathan Cohen -- Chief Executive Officer

We think there probably is some ongoing opportunity there, Mickey. It's very difficult to quantify. And it changes in real time, just as you say.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

And Deep mentioned the steepening of the yield curve which may impact cash flows, given that the assets reset at a different pace than the liabilities. Can you give us any insight into how January CLO equity payments are shaping up versus October?

Deep Maji -- Senior Managing Director and Portfolio Manager

Sure.

Jonathan Cohen -- Chief Executive Officer

Yeah, please, Deep.

Deep Maji -- Senior Managing Director and Portfolio Manager

Sure. You know, January cash flows have actually kind of come in at or slightly above, you know, what was modeled. So, we haven't seen a meaningful impact. But again, you have to realize that we're actively rotating our portfolio to mitigate some of those risks, so --

Jonathan Cohen -- Chief Executive Officer

Right. And the --

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

I understand.

Jonathan Cohen -- Chief Executive Officer

[Inaudible] and to capture risk-adjusted return broadly.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

I understand. Jonathan, since SOFR is a risk-free rate, it tends to be lower than LIBOR. And its curve tends to be flatter than LIBOR. How do you envision the transition to SOFR impacting the portfolio valuation and estimated deal, if it's going to be meaningful at all?

Jonathan Cohen -- Chief Executive Officer

We're not looking for radical shifts here, Mickey. But at the same time, we've built up what we believe are fairly robust set of analytics over the last decade, and where -- we've incorporated this transition into those analytics. And we're happy with the current state of the portfolio.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

OK. I appreciate that, Jonathan. And my last question, just looking at next year sort of philosophically, my understanding is that LIBOR will completely sunset next year. So, we may be in a situation where you have, I guess, CLOs with some labor assets, some SOFR assets, liabilities may be mismatched.

How do you see the market just dealing with this mismatch in general going into this year and next?

Deep Maji -- Senior Managing Director and Portfolio Manager

Mickey, great question. So, you know, all of the CLOs that we've invested in for, you know, the past several years have backup transition language to deal with the change in rates. And generally, this will happen once a certain percentage of the underlying loans switch their indices. But again, the indentures and documentation all have provisions that adequately, in our opinion, deal with the transition.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

And, Deep, does that apply both to the assets and liabilities? Or are the liabilities locked in at, let's say, LIBOR until you do a refire or a reset?

Deep Maji -- Senior Managing Director and Portfolio Manager

So, it deals with the liabilities added -- determined based on the composition of the assets.

Mickey Schleien -- Ladenburg Thalmann and Company Inc. -- Analyst

Terrific. So, the matching will continue. Those are all my questions for this morning. I appreciate your time.

Thank you.

Jonathan Cohen -- Chief Executive Officer

Thank you, Mickey, very much. We appreciate it.

Operator

Thank you, Mickey. And our next question comes from Matthew Howlett of B. Riley. Matthew, please go ahead.

Your line is open.

Matt Howlett -- B. Riley Financial -- Analyst

Good morning, and thanks for taking my question. Congratulations. I just want to look at the NII, the GAAP NII trend, and, you know, we get -- I get excited when I see the strong growth and what's happening in the quarter. And you obviously had stable yields but you had a bigger portfolio balance.

And then your debt costs are coming down. So, I wanted to just focus on the baby bond you did in January, the 5%. Is that now the sort of the new level, I mean, five-year level? I know rates are going to change. But do you feel like you can reprice the debt stack and get one preferred that's callable now? Just talk a little bit about bringing down that interest expense and what to expect going forward.

Jonathan Cohen -- Chief Executive Officer

Sure, Matt. That's a great question. Thank you for it. We're obviously looking all the time at our cost of capital and our liability stack, at opportunities to refinance, at opportunities to issue at attractive cost of capital where we believe we should have a good risk-adjusted arbitrage between that use of capital and our use of proceeds.

It's difficult to say whether we have the ability or will have the ability in the future to refinance the liability stack at a lower cost of capital. That depends on an awful lot of factors that are hard to predict. But we are certainly very pleased having issued these 5% notes. We think that is for us a quite attractive cost of capital.

Matt Howlett -- B. Riley Financial -- Analyst

And there is -- Jonathan, there still is that one preferred debt that's callable that's in a high 6% rate? Is that -- am I correct on that? That can be called in any time?

Jonathan Cohen -- Chief Executive Officer

You are correct, Matt. Yes.

Matt Howlett -- B. Riley Financial -- Analyst

Great. I just look at the combination of the ATM, the debt, and I think that's where I want to go with the leverage. I mean, you're -- it ticked down. Obviously, that was before the baby bond.

You have the lowest leverage in this space. You know, you're -- you know, you guys are seeing opportunities. I mean, how much appetite is there to do to take leverage up a little bit, you know, going forward or during the year?

Jonathan Cohen -- Chief Executive Officer

Not a great deal probably, Matt, on a percentage basis. In other words, if we continue to build the equity capital base as we have been, the general philosophy is to stay an approximate step with those increases in terms of maintaining a reasonably consistent leverage ratio. In terms of taking that leverage ratio and bringing it up very substantially, that really is not part of our existing strategy. We think having a substantial cushion to our statutory leverage limits is a prudent and appropriate strategy having -- with the mandate of investing in this asset class.

And that is our current intention.

Matt Howlett -- B. Riley Financial -- Analyst

Great, got it. Last question, just on the dividend, you bumped the dividend a nice increase. You still have a very high yield. I look at where GAAP NII is, where your core NII is going.

You have it comfortably covered. It looks like it's good that it have to be. What's the appetite to increase it? What are the restraints -- what are the requirements in terms of meeting having to increase it this year, paying out a special? Just talk a little bit about, you know, what to expect in the distribution side.

Jonathan Cohen -- Chief Executive Officer

Sure, Matt. Thank you for the question. We do not have a plan, a specific plan in place vis-a-vis the dividend for the remainder of this year or in the next year. We -- this is a topic of conversation, as you can imagine, at every board meeting.

The board is -- our independent board members are very involved. It completely involves a -- the full board set the distribution each quarter. As you note, we recorded a $0.29 GAAP NII for the quarter and our core net investment income, which reflects the actual cash that we received, was $0.44 for the period. Those are obviously numbers that are, as you note, in excess of our our current distributions.

That's an ongoing topic of conversation. But certainly, no decisions have been made with regard to any change. We maintain the existing distribution over these next three months, these forward three months, at the rate of $0.075 per share per month.

Matt Howlett -- B. Riley Financial -- Analyst

Jonathan, look, congratulations. Congrats to you and the team. Thanks for taking my questions.

Jonathan Cohen -- Chief Executive Officer

All right, Matt. Thank you very much. We appreciate your questions.

Operator

Thank you. We currently have no further questions. We'll hand the call back over to Jonathan Cohen, CEO, for any closing remarks.

Jonathan Cohen -- Chief Executive Officer

All right. Well, I'd like to thank everybody on the call for their ongoing interest in Oxford Lane Capital Corp. And we look forward to speaking to you again, hopefully, very soon. Thanks very much.

Operator

[Operator signoff]

Duration: 24 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 and Company Inc. -- Analyst

Matt Howlett -- B. Riley Financial -- Analyst

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