Oxford Lane Capital Corp.

Good morning, everyone. Welcome to the Oxford Lane Capital Corp fourth fiscal quarter 2023 earnings conference call. I'm joined today by Saul Rosenthal, our president, Bruce Rubin, our chief financial officer, and Joe Kupka, our managing director. Bruce, could you please open our call with a disclosure regarding forward-looking statements? Sure, Jonathan. Today's conference call is being recorded. A replay of the call will be available for 30 days Repay information is included in our press release, as 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 of 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 can cause actual results to differ materially from those indicated in these projections. We do not undertake to update our public 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 to Jonathan. Thanks very much, Bruce. On March 31st, 2023, our net asset value per share stood at $4.61 compared to a net asset value per share of $4.63 as of December 31st, 2022. For the quarter ended March, we recorded GAAP total investment income of approximately $66.5 million, representing a decrease of approximately $1.2 million from the prior quarter. The quarter's GAAP total investment income from our portfolio consisted of approximately $62.8 million from our CLO equity and CLO warehouse investments, and approximately $3.6 million from our CLO debt investments and from other incomes. Oxford Lane recorded GAAP net investment income of approximately $37.4 million, or 22 cents per share, for the quarter ended March, compared to approximately $41.4 million, or 26 cents per share, for the quarter ended December. Our core net investment income was approximately $37.5 million, or 22 cents per share, for the quarter ended March, compared with approximately $50.1 million, or 31 cents per share, for the quarter ended December 31st. For the March quarter, we reported net realized losses of approximately $4.9 million and net unrealized depreciation on investments of approximately $3.5 million, or 5 cents per share in total. We had a net increase in net assets resulting from operations of approximately $29 million, or 17 cents per share for the fourth fiscal quarter. As of March 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 18%, up from 16.6% as of December 31st. The weighted average effective yield of our CLO equity investments at current cost was 15.8%, up from 15.7% as of December 31st. The weighted average cash distribution yield of our CLO equity investments at current cost was 16.5%, down from 18.6% as of December. 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, we issued a total of approximately 3.9 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $22.6 million. During the quarter ended March, we made additional CLO investments of approximately $117.4 million, and we received approximately $24.8 million from sales and from repayments. On May 10th, our Board of Directors declared monthly common stock distributions of $0.08 per share for each of the months ending July, August, and September of 2023. And with that, I'll turn the call over to Joe Kupka.

Thank you, Jonathan. During the quarter ended March 31st, 2023, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LFPA U.S. Leverage Loan Index, increased from 92.44% of par as of December 31st to 94.71% of par as of February 9th, before dropping to 93.38% of par as of March 31st. According to LCD, during the quarter, there was some pricing dispersion related to credit quality, with double B rate of loan prices increasing 17 basis points, single B rate of loan prices increasing 165 basis points, and CCC-rated loan prices increasing 270 basis points on average. The 12-month trailing default rate for the loan index increased to 1.35% by principal amount at the end of the quarter from 0.72% at the end of December 2022. Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 6.3% compared to approximately 7.4% at the end of December 2022. The increase in U.S. loan prices led to an approximate 10% increase in median U.S. CLO equity net asset values. Median junior over-collateralization cushions declined 0.2% to approximately 4.5%. Additionally, we observed loan pools within CLO portfolios modestly increased their weighted average spreads to 357 basis points compared to 354 basis points last quarter. Oxfam Lean continued to be active in the secondary market during the quarter. While most of our activity took place in the secondary market, we added two new issue CLO equity investments and one new issue CLO debt investment 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.

Thanks, Joe. We note that additional information about Oxford Lane's fourth quarter performance has been uploaded to our website at www.OxfordLaneCapital.com. And with that, we're happy, operator, to open the call for any questions.

Thank you. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad now. When preparing to ask your question, please ensure you are unmuted locally. And our first question today comes from Mickey Schling from Leidenberg. Mickey, your line is open. Please go ahead.

Yes, good morning, everyone. A few questions this morning. Jonathan wanted to start by asking you how the problems at the regional banks that we've seen the last few months impacted overall demand for CLO debt and its pricing as well?

If it's had an impact, Mickey, we haven't seen it. I'm not sure what correlations there might exist between the situation at U.S. regional banks and the CLO market broadly. I'm sure there are some interrelations, but none that have been evidence to us.

Okay. That's good to hear. And it looks like about a third of your CELO equity investment portfolio is beyond its reinvestment period. And with liabilities generally seeing spreads that are still quite wide, the refinancing and reset opportunity is difficult. So How do you see your CLO equity portfolios yields on cash develop as these investments unwind?

Sure, Mickey. So, yeah, that's definitely a challenge with wider liability prices and limited refi and reset optionality. The one positive I would note is just the ability for these managers to extend and reinvest even after the reinvestment period. So we continue to see, you know, low prepayment rates, strong reinvestment. So that's definitely an offset to the current environment. So we continue to see strong cash-on-cash returns and attractive profiles, even with post-reinvestment deals.

But very much to your point, Mickey, I mean, that is essentially the reason we have been focused more on the secondary market and secondary market trading than on the primary market as of late.

Yeah, I actually wanted to ask you about the secondary market, Jonathan. From what I understand, after the April payments were made on CLO equity, there was a lot of CLO equity offered into the secondary market. How did that deal flow impact your ability to push out the reinvestment period? And what sort of estimated yields are you getting on current deal flow?

Sure. I mean, as a general matter, Mickey, to your point, a more liquid and a greater volume of secondary market activity we think is beneficial to us. We are, as you know, active portfolio managers within this asset class. We turn this portfolio over time and have done historically. So more liquidity, more volume, again, can be more conducive in terms of our ability to push out our reinvestment periods. Joe?

Yeah. Now, like you said, we definitely saw a lot of activity post-payments come out. We were able to take advantage of that just given, you know, the volume. We think we were able to pick up some attractive paper. In terms of, you know, future expectations, we don't, I think, really get into that, but see very attractive risk-adjusted profiles in the secondary market right now.

Okay. Core NII was down quarter to quarter, even as the spread between one-month and three-month interest rates compressed, which had been a problem for several quarters. I would have expected that to help the CLO market in terms of the April distribution. So can you just walk us through at a high level what caused Core NII to decline quarter to quarter?

Sure. There were really two major components. One was that the one-month, three-month basis had its widest point in October when the liabilities for January were being set. So remember, the quarter we're looking at are mainly composed of the January payments. So that was really the payment that took the brunt of this one-month, three-month basis. Since then, it's definitely tightened, and we expect to see that continue to normalize going forward. again, just based on the publicly available forward curves. And specifically within Oxford Lane's portfolio, we had an unusually large number of first-time payers, which make their inaugural distribution, which is an outsized payment, the previous quarter. So when you're looking for that quarter-over-quarter core comparison, that explains that delta, you see.

So if I'm understanding you correctly, Are you saying that the April payments were meaningfully better than the January payments on a relative basis?

Yes, that's correct.

Yes?

Yes.

Okay. And is that the rationale for raising the dividend above the core and II you reported for this current quarter? Yes.

The dividend declaration, Mickey, is really taking into account a larger set of factors. We're looking at cash flow. We're looking at core NII. We're looking at NAV. We're looking at our own internal projections. All of these things are being considered by the board in setting the distribution.

Okay. That's it for me this morning. I appreciate your time. Thank you.

Thank you very much.

The next question comes from Matthew Howlett from B. Rowley. Matthew, your line is open. Please go ahead. Yeah, thanks for taking my question.

Just first on, you know, rating agencies, have you seen any sort of meaningful change in upgrades, downgrades since, you know, since this bank turmoil started?

Yeah, so I think we continue to see downgrades, outpaced upgrades in terms of how that flows through the CLL buckets. There are definitely you know, increasing and getting closer to that 7.5% bucket, but there's still some room, and we still see managers continue to, you know, reduce CCC risk where they see appropriate. So it's definitely something worth keeping an eye on. But, yeah, right now we still see downgrades picking up, you know, slowly but steadily.

Gotcha. And then, I mean, from just a high level, I mean, when you look at, I mean, defaults are still low. They obviously picked up a little bit. You know, I'd love to hear some of your expectations. Is this just sort of a normalization? Have you seen anything idiosyncratic on maturity defaults that, you know, that's coming up so far? Are people able to refinance? Just curious at a high level what you're seeing in the leverage loan market today.

Sure. Matt, I'm not sure we're seeing anything radically different from what everyone else is seeing. We're not seeing the kind of idiosyncratic events, wild outliers that you referenced. But at the same time, I think we're preparing, as Joe said, for higher default rates overall. Our models certainly take account of that, especially with respect to certain profiles and certain collateral pools. So set against that is the fact that the LSDA is sitting with the 93 handle, and there's a potentially powerful pull to par. So all of these things we seek to account for, in modeling out our projected cash flows and total returns.

And that leads me to the next question, Jonathan. When you look at Oxford Lane, you guys are a leader, have been a leader for years in the CLO market. You think about the Fed, them potentially on hold now and the forward market projecting easing at some point this year or next year. Whether you believe it or not, how do you position Oxford Lane for what's going to be likely a change in the interest rate cycle? And what can you tell sort of investors how Oxford Lane historically, you know, has benefited from lower rates?

Sure. As you said, we've, you know, taken into account the forward curves.

We try, as Jonathan mentioned, to try to lengthen that reinvestment period as much as possible, which really, Matt, represents the best risk mitigation structurally that we're able to affect.

Yeah, so in combination with, you know, less than the reinvestment period, relative value trading, if we do see some, you know, mid-length or shorter-dated deals just to increase our margin of safety from an absolute basis, and also moving up manager tiering, you know, participating and investing in these managers who have proven themselves to be good credit collectors or who we think will be able to, you know, getting these lender groups which will, you know, be able to, be the leaders in these workouts where we see some difficult situations in the future.

Right. And at the end of the day, obviously, the collateral pool is vitally important to the performance of these structures. But equally important, sometimes of equal importance, is the total return that we're going to receive or we're projecting to receive based on the arbitrage that we're presented with in a particular deal structure. So we are, in some cases, able to seek to compensate for collateral pool risk by virtue of either our entry price or some combination of that plus the indenture structure itself and the arbitrage based on the cost of capital for the CLO overall. So these are all things that we're thinking about all the time.

Yeah, and my thought was exactly that. Does that arbitrage increase the general rate you're going down as opposed to going up? And I look at your balance sheet, you have low cost, locked in, 50 debt. And I know all those are weighing in the money, but, I mean, could you – are you thinking about, you know, at some point exploring more, you know, unsecured debt and things like that if the rate cycle does begin to change?

I mean, Matt, we're looking all of the time at our overall capital structure. We're not seeking to change our liability stack at the moment, but to the extent the market provides us with that, and we're very happy with the state of our overall liabilities right now, but these are things that we're looking at in real time based on the use of proceeds that we're able to deploy and the cost of capital that the market presents us with.

I appreciate that. You've done a terrific job really positioning the company for this and managing through this. I look forward to the next stage of the cycle. Thanks, John. Thank you, Matt, very much. Thanks.

This concludes today's Q&A session, so now I hand the call back over to CEO Jonathan Cohen for some concluding remarks.

Thank you very much, Operator. I'd like to thank everybody who listened to the call today and who listened to the call on the replay. We look forward to speaking to you again soon. Thanks very much.