Q1 2024 Oxford Lane Capital Corp Earnings Call

Participants

Bruce Lawrence Rubin; Corporate Secretary, Treasurer & CFO; Oxford Lane Capital Corp.

Jonathan H. Cohen; CEO & Interested Director; Oxford Lane Capital Corp.

Joseph Kupka; MD of Oxford Funds, LLC; Oxford Lane Capital Corp.

Matthew Philip Howlett; Director of Equity Research; B. Riley Securities, Inc., Research Division

Mickey Max Schleien; MD of Equity Research & Supervisory Analyst; Ladenburg Thalmann & Co. Inc., Research Division

Steven Bavaria

Presentation

Operator

Hello, everyone, and welcome to the Oxford Lane Capital Corporation First Fiscal Quarter 2024 Earnings Call. My name is Emily, and I'll be coordinating your call today. (Operator Instructions) I will now turn you over to our host, Jonathan Cohen, CEO of Oxford Lane Capital. Please go ahead, Jonathan.

Jonathan H. Cohen

Thanks very much. Good morning, everyone. Welcome to the Oxford Lane Capital Corp. First Fiscal Quarter 2024 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our CFO; and Joseph Kupka, our Managing Director. Bruce, could you open the call with the disclosure regarding forward-looking statements.

Bruce Lawrence Rubin

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 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 H. Cohen

Thanks, Bruce. On June 30, 2023, our net asset value per share stood at $4.34 compared to a net asset value per share of $4.61 as of March 31, 2023. For the quarter ended June, we recorded GAAP total investment income of approximately $70.5 million, representing an increase of approximately $4 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $66.2 million from our CLO equity and CLO warehouse investments, and approximately $4.3 million from our CLO debt investments and from other income.
Oxford Lane recorded GAAP net investment income of approximately $42 million or $0.24 per share for the quarter ended June compared to approximately $37.4 million or $0.22 per share for the quarter ended March. Our core net investment income was approximately $75 million or $0.43 per share for the quarter ended June, compared with approximately $37.5 million or $0.22 per share for the quarter ended March 31.
For the quarter ended June 30, we recorded net realized losses of approximately $1.3 million and net unrealized depreciation on investments of approximately $55.5 million or $0.32 per share. We had a net decrease in net assets resulting from operations of approximately $14.8 million or $0.08 per share for the first fiscal quarter. As of June 30, 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 18.1%, up from 18% as of March 31. The weighted average effective yield of our CLO equity investments at current cost was 16%, up from 15.8% as of March 31. The weighted average cash distribution yield of our CLO equity investments at current cost was 24.6%, up from 16.5% as of March.
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 June 30, we issued a total of approximately 12.1 million shares of our common stock pursuant to an aftermarket offering, resulting in net proceeds of approximately $60.2 million.
During the quarter ended June 30, we made additional CLO investments of approximately $111.9 million, and we received approximately $69.7 million from sales and from repayments. On July 27, our Board of Directors declared monthly common stock distributions of $0.08 per share for each of the months ending October, November and December of 2023.
And with that, I'll turn the call over to our Managing Director, Joe Kupka. Joe?

Joseph Kupka

Thank you, Jonathan. During the quarter ended June 30, 2023, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index, increased from [93.38%] of par as of March 31 to [94.24%] of par as of June 30. According to LCD, during the quarter, there was some pricing dispersion, with BB-rated loan prices increasing 69 basis points, B-rated loan prices increasing 134 basis points and CCC-rated loan prices increasing 212 basis points on average.
The 12-month trailing default rate for the loan index increased to 1.71% by principal amount at the end of the quarter from 1.35% at the end of March. We note that the percentage of the pulse within U.S. CLOs, which are actively managed, remains lower than the index. The increase in U.S. loan prices led to an approximate 9-point increase in median U.S. CLO net equity values.
Median junior over-collateralization cushions declined 0.3% to approximately 4.2%. Additionally, we observed loan pools within CLO portfolios modestly increased their weighted average spreads to 359 basis points compared to 357 basis points last quarter. With the primary market arbitrage remaining challenging, Oxford Lane continued to be active in the secondary market during the quarter. We added 12 new CLO equity investments and 2 new CLO debt investments during the quarter.
Our investment strategy during the quarter was to engage in relative value trading and to lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio. 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 towards our investment strategy. With that, I'll turn the call back over to Jonathan.

Jonathan H. Cohen

Thanks, Joe. We note that additional information about Oxford Lane's first quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we're happy now to poll for any questions.

Question and Answer Session

Operator

(Operator Instructions) The first question today comes from the line of Mickey Schleien with Ladenburg.

Mickey Max Schleien

You hear me okay?

Jonathan H. Cohen

We do.

Mickey Max Schleien

Okay. I think, Jonathan, Joe just mentioned that the primary markets in CLO equity are still challenging. I'm just curious whether you've seen at the margin, any improvements in the trends in CLO equity trading, either primary or secondary, with this sense that maybe an economic soft landing is actually more probable than we might have thought?

Jonathan H. Cohen

We have, Mickey, yes. I would say, since quarter's end, we've seen an upturn, both in the tone of the secondary market and also, prospectively, the arbitrage in the primary market. So yes, I would say, things, just in the past month or so, strengthened across our asset class.

Mickey Max Schleien

Okay. Last quarter, Joe mentioned that managers have some ability to reinvest even past the end of a CLO's official reinvestment period. And just counting this morning the positions you're showing in the presentation, it looks like about 1/3 of the portfolio is past its reinvestment period. So could you maybe help us understand or describe the parameters that managers have to follow in that situation to continue to invest after the end of the reinvestment period?

Jonathan H. Cohen

Sure, Mickey. It's essentially a function of the 4 corners of the indenture itself, but Joe will speak more specifically to that.

Joseph Kupka

Sure. Like Jonathan mentioned, a lot of it depends on the exact tests in the indenture, and these vary by manager to manager and even deal by deal, and that's a big part of where we believe we deliver value decomposing those indentures and finding the managers who are able and willing to continue reinvesting. So it has various tests like weighted average life, [worth], diversity score, the various OC tests, and they can vary from satisfy at the end of the reinvestment period or maintain or improve. So there's a wide range, I would say. No deal is exactly alike, and that's part of just analyzing the individual deals. Yes.

Mickey Max Schleien

Okay. My last question, there has been some spread tightening, I believe, in CLO liabilities. But looking at the portfolio's average AAA spread at [128], it looks like there's still a long ways to go before it's economical to reset most of the portfolios positions. So we don't see more significant spread tightening then there could be more pressure on Oxford's cash flows as more reinvestment period end. And so how are you managing that risk without having to take losses in the secondary market to trade out of those positions that are in that predicament?

Jonathan H. Cohen

Sure. As you say, Mickey, we are an active trader across this asset class. And the issue for us isn't whether we happen to take a loss on a particular position or not. The issue for us is optimizing the portfolio as aggressively as we can for the best possible risk-adjusted return. So we are, I don't believe, heavily reliant on the assumption of refis or resets across the portfolio. We're looking at cash flows, we're looking at interest income, and we're looking at the prospect and the quantity of likely return of principal, all of those things set against the arbitrage that exists between the use of proceeds and the cost of capital on a deal-by-deal basis, and our ability and desire to trade out of things and into new things in the secondary market just as you say.

Operator

Our next question comes from Steven Bavaria with Inside the Income Factory.

Steven Bavaria

You're doing a great job, and we're just trying to understand it and explain what's still a pretty complex asset class to a lot of the retail investors. And there's a lot of concern expressed about how your NAV, which I understand sometimes can move opposite to your business prospects. I mean, it seems to me like as loans drop on the secondary market to the point where you can then collect at par and reinvest at 92% of par or whatever and then collect again at par when those loans mature. Your business prospects probably improve when the loan market drops.
At the same time that your own -- the CLO equity in theory probably drops because their loans are worthless, but their debt is still worth the same. How do you -- am I interpreting that appropriately? And then when people see that they're earning 17% yields on your very secured distribution at the moment, how much realistically should they regard that as perhaps a certain erosion of NAV that's inevitable over time? And how much of that 17% is real sort of total return they get to keep?

Jonathan H. Cohen

Sure, Steve. Thank you for those questions. As you say very correctly, it's a complex asset class. In terms of our assumption or our presumption about the total return we are looking to receive over an extended period of time, we're not managing across all periods to any specific rate of return. We are looking for the best possible risk-adjusted return, risk-adjusted total return over each period that we're managing to. So at this moment, we are enjoying the benefit of relatively high cash flows in the secondary market.
We are not participating, especially actively in the primary market by virtue of the very challenged arbitrage that Mickey referenced in his earlier question. And we're not projecting out any number of years into the future in terms of a targeted total return. Instead, we would focus on how we've done historically. Oxford Lane has been in existence since 2011, and our track record is certainly in the public record. We're, I would say, generally enthusiastic about the current state of this market, but this is also a fairly volatile market, as you correctly note.

Operator

Our next question comes from Matthew Howlett with B. Riley.

Matthew Philip Howlett

The core NII, the pickup here, could just go over what explains the really dramatic pickup in the core net investment income quarter-over-quarter?

Joseph Kupka

Sure, Matt. Sure. There were 2 main components. So just again, when we're looking at this quarter-over-quarter increase, we're mainly comparing the payments in April to the payments in January last quarter. The payments in January were historically depressed, mainly driven by the 1-month, 3-month LIBOR mismatch basis that we've spoken about a few times. In addition, for our portfolio, in particular, we've also had some first-time large payers kick on this quarter, which drove that number up further.

Matthew Philip Howlett

That's when you say your CLO activity starting to cash flow immediately when you say first time payers is that...

Joseph Kupka

Yes. Either a large position we had purchased in the secondary or a large primary position we had purchased several quarters ago who have just now finished ramping up and made their first payment.

Matthew Philip Howlett

Got you. Got you. I know you disclosed sort of what's in the ramp process on new presentations. I appreciate that. And that doesn't really move the needle clearly.
My second question is on the credit curve. I mean you're obviously showing higher debt yields versus equity yields. I mean, I know there's some accounting phenomenon in that. But I mean, what -- is the curve flat here where you could actually go up in credit and pick up yield or up the capital stack and pick up yield? I mean, what're you seeing with the BBs versus equity yields? And how are you playing it?

Joseph Kupka

Yes. So I think there are 2 components to that. First, what you see is the current, like you said, the GAAP accounting yield. So that's just a function of the accounting standards we apply, and it's not necessarily what we project going forward what we could buy out in the market. That said, I believe the credit curve has flattened a bit, and we have seen some other equity players move to BBs, for instance, because they can't quite pick up the yield they can in equity, but pick up a definitely elevated yield in BB, for instance. So I wouldn't say it's flipped, but definitely has compressed if you look at certain tranches.

Jonathan H. Cohen

Yes. The vast majority of our book, Matt, is still CLO equity. But as you say, we've been looking a bit more carefully at B and BB opportunities.

Matthew Philip Howlett

Right. Exactly, and then it creeped up a little bit, the percentage to CLO debt, but it'd be interesting to see how that moves going forward. And then could you just comment -- I know you don't give July NAV here, last day of the month. But I mean, we've seen a strong rally in the markets here. Is there a sense, I mean -- you gave some numbers in the beginning. I don't know if that was for July, but it [made any sense of what went on] July, and I'm assuming the trajectory which your NAV was positive given the markets. Just any sort of [handle] what you saw in July?

Jonathan H. Cohen

Sure. Matt, without commenting on our portfolio or our balance sheet and just speaking to the market broadly, I would say, in the month of July, the market for CLO equity broadly is probably sort of mid-high single digits.

Matthew Philip Howlett

For CLO equity that is?

Jonathan H. Cohen

Yes.

Matthew Philip Howlett

Great. No, that's interesting. And when will you put out that July NAV? Is it a week or so from now?

Jonathan H. Cohen

Hopefully, a bit sooner than that. We'd like to say probably later this week.

Operator

There are no further questions at this time. So I will now turn the call back over to Mr. Jonathan Cohen, CEO.

Jonathan H. Cohen

Operator, thanks very much. We'd like to thank everyone who participated in this call and who listens to the call on replay. We look forward to speaking to you soon, and thank you again for your interest in Oxford Lane. Thank you.

Operator

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.