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3/21/2023
Hello, everyone, and welcome to the Oxford Square Capital Fourth Quarter 2022 Earnings Conference Call. My name is Bruno, and I will be the operator of today. During the presentation, you can register to ask a question by pressing star followed by one on a telephone keypad. I will now hand over to your host, Jonathan Cohen, CEO. Please go ahead.
Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Court Fourth Quarter 2022 earnings conference call. I'm joined today by Saul Rosenthal, our president, Bruce Rubin, our chief financial officer, and Kevin Yonan, our managing director and portfolio manager. Bruce, could you open the call with a disclosure regarding solar lifting statements? Sure, Jonathan. Today's conference call has been recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was issued this morning. Please note that this call is the property of Oxford Square 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. To obtain copies of our latest SEC filings, please visit our website at www.OxfordSquareCapital.com. With that, I'll turn the presentation back to Jonathan. Thanks, Bruce. For the quarter ended December 31st, Oxford Square's net investment income was approximately $6.5 million, or 13 cents per share. and our net asset value per share is $2.78. This compares to net investment income of approximately $5.6 million, or 11 cents per share, and a net asset value per share of $3.34 for the prior quarter. For the fourth quarter, we reported total investment income of approximately $11.9 million, as compared to approximately $11.4 million for the prior quarter. That increase in total investment income was principally driven by an increase in interest income from our loan portfolio, partially offset by a decrease in income from our CLO equity investments. In the fourth quarter, we reported net unrealized depreciation on investments of approximately $29.4 million, or 59 cents per share, compared to net unrealized depreciation on investments of approximately $16.8 million, or 34 cents per share, for the prior quarter. In the fourth quarter, we reported realized gains on investments of approximately $100,000 compared to realized gains of approximately $50,000 for the prior quarter. During the fourth quarter, our investment activity consisted of purchases of approximately $6.1 million and sales and repayments of approximately $200,000. As of December 31st, we held cash and cash equivalents OF APPROXIMATELY $9 MILLION. ON MARCH 16, 2023, OUR BOARD OF DIRECTORS DECLARED MONTHLY DISTRIBUTIONS OF 3.5 CENTS PER SHARE FOR EACH OF THE MONTHS TENDING APRIL, MAY, AND JUNE OF 2023. ADDITIONAL DETAILS REGARDING RECORDING PAYMENT DATA INFORMATION CAN BE FOUND IN OUR PRESS RELEASE THAT WAS ISSUED THIS MORNING. WITH THAT, I'LL TURN THE CALL OVER TO OUR PORTFOLIO MANAGER, KEVIN YOHNAN, TO DISCUSS THE LOAN MARKET. THANK YOU, JONATHAN. During the quarter ended December 31st, 2022, the U.S. loan market was volatile. U.S. loan prices, as defined by the Morningstar LSTA U.S. leverage loan index, increased from 91.92% of par as of September 30th to 93.06% of par as of November 16th, before dropping to 92.44% of par as of December 30th. According to LTD, during the quarter, there was significant pricing dispersion related to credit quality, to double B-rated loan prices increasing 195 basis points or 2.04%, B-rated loan prices increasing 94 basis points or 1.02%, and triple C-rated loan prices decreasing 603 basis points or 7.53% on average. the 12-month trailing default rate for the Morningstar LSTA U.S. Leverage Loan Index decreased to 0.72% by principal amount at the end of the quarter from 0.9% at the end of September 2022. Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 7.4% compared to approximately 6% at the end of September 2022. During the quarter ended December 31st, 2022, primary market issuance was approximately $33 billion, representing a 70.8% decline versus the quarter end of December 31st of 2021. For 2022, primary market issuance declined 62.5% versus 2021. This was driven by lower refinancing, M&A, and LBO activity. At the same time, U.S. loan fund outflows as measured by LIPR, were approximately $10.5 billion for the quarter ended December 31, 2022, and approximately $9 billion for calendar 2022. We continue to focus on portfolio management strategies designed to maximize our long-term total return, and as a permanent capital vehicle, we historically have been able to take a longer-term view towards our investment strategy. With that, I will turn the call back over to Jonathan. Thank you. Additional information about Oxford Square's fourth quarter performance has been posted to our website at OxfordSquareCapital.com. With that, operator, we're happy to open the call up for any questions.
Ladies and gentlemen, if you'd like to ask a question, please press the star followed by one on the telephone keypad now. Please also remember to unmute your microphones. We have our first question from Mikey Schlein from Leidenberg. Mikey, your line is now open. Please go ahead.
Good morning, everyone. Jonathan, with half the portfolio in second lien loan investments and given the uncertainty about the economic outlook, could you give us a sense of the size of these companies in terms of their revenues and EBITDA and how they're performing in terms of their interest coverage ratios? Sure, Mickey. We're typically targeting companies with multiple hundreds of millions of dollars of revenue, north of $50 million in EBITDA, typically, and several or a significant number in excess of that. So we're not engaging, as you know, in bilateral lending. We're not targeting very small companies compared to what we've targeted historically. That's where we're situated. And in terms of their interest coverage, how do you see them performing in the fourth quarter and perhaps more importantly this year? Sure, Mickey, this is Kevin Yonan. So we haven't received Q4 results for all portfolio companies thus far. Interest coverage, while obviously interest rates are higher and all of our, the vast majority of our loans outstanding are floating rate versus live order SOFR. Cash interest expense is increasing, although thus far interest coverage has been maintained and portfolio companies have indicated that they continue to generate cash or able to support both the required amortization and cash interest. Okay, that's helpful. In terms of the CLOs, almost half of the CLOs in the broader market have their reinvestment periods ending this year, which could pose a challenge since refinancing them may not be attractive in the current market. So how do you see yourselves managing that risk given the pressure that might produce on the portfolio's yield? Hey, Mickey, this is Joe Cook. Yeah, that's definitely a concern in the broader market. We do expect to be able to re-buy or reset some select deals for the ones that we just choose to remain outstanding. There's still some flexibility, so those deals that can't get extended still have the ability to do some reinvestment post-reinvestment period. So that definitely helps to leave some of the pressure. So it will be a mixed bag in terms of you know, some calls, some refis, and some just extensions and let remain outstanding for a while. Okay. And in terms of the cash yield of the CLO equity portfolio, it was down quite a bit during the fourth quarter. How much of that trend was due to the spread between one-month and three-month rates, and how have CLO cash distributions trended in the first quarter of this year? Yeah, that was definitely the majority of what was occurring that one-month, three-month basis. We've seen that compress a bit and are projecting just based on the publicly available forward curves for that to continue to improve, starting in Q1 and then throughout the remainder of the year. It's likely that most of your CLOs made their distributions in January of this year. How did those look? relative to October of last year. Brian, you want to kick off? Sure. Hi, Mickey. This is Brian Alexa. Yeah, they were roughly flat to down slightly from the October distributions. But as Joe mentioned, we do see those picking up in April from where we're modeling them. Okay. That's it for me this morning. Thanks for your time. Thanks, Mickey, very much.
We currently have no further questions. I would like to hand back over to Jonathan for final remarks. Please go ahead.
Thank you very much. I'd like to thank everybody for listening to the call this morning and listening to the replay. We look forward to speaking to you soon. Thanks very much.
Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines. Thank you.