Earnings Call: Q3 2021

Oct 26, 2021

Hello, and welcome to the Oxford Square Capital Corp. Third Quarter of 2021 Earnings Conference Call. My name is Elliot, and I will be coordinating your call today. I will now hand over to our host, Jonathan Cohen. Jonathan, please go ahead when you're ready. Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp. 3rd quarter 2021 earnings conference call. I'm joined today by Saul Rosenthal, our President Bruce Rubin, our Chief Financial Officer and Kevin Yonon, our Managing Director and Portfolio Manager. Bruce is joining the call with a disclosure regarding forward looking statements. 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 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 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 To obtain copies of our latest SEC filings, please visit our website at www.oxfordsquarecapital.com. With that, I'll turn the floor to closing back to Jonathan. Thank you, Bruce. For the quarter ended September 30, Oxford Square's net investment With approximately $4,000,000 or $0.08 per share and our net asset value per share stood at $5.03 This compares to net investment income of approximately $2,800,000 or $0.06 per share and a net asset value per share of $4.91 for the prior quarter. That increase in net investment income was principally driven by higher interest in CLO income, partially offset by higher interest expense. For the Q3, we reported total investment income of approximately $9,800,000 as compared to approximately $7,800,000 in the prior quarter. In the Q3, we reported net unrealized appreciation on investments of approximately $5,600,000 or $0.11 per share There is a net unrealized depreciation on investments of approximately $2,500,000 or $0.05 per share for the prior quarter. In the Q3 of 2021, we recorded realized gains on investments of approximately $1,700,000 or $0.03 per share compared to realized gains of $1,200,000 or $0.02 per share for the prior quarter. In total, for the Q3, we had a net increase in net assets from operations of approximately $11,300,000 or $0.23 per share compared to a net increase in net assets from operations of $6,500,000 was $0.13 per share for the prior quarter. During the Q3, our investment activity consisted of purchases of approximately $23,100,000 and repayments of approximately $5,700,000 As of September 30, we held cash and cash equivalents of approximately $19,500,000 against which there were unsettled purchases of approximately $6,500,000 On October 22, 2021, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending January, February March of 2022. Additional details regarding record and payment date 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 Yonan, to discuss the loan market. Thank you, Jonathan. During the quarter ended September 30, 2021, the S. Loan market modestly strengthened versus the quarter ended June 30, 2021. U. S. Loan prices, as defined by the S and PLSTA Leveraged Loan Index, increased from 98.37 percent of par as of June 30 to 98.62 percent of par as of September 30. According to LCD, during the quarter, BB rated loan prices increased 13 basis points, B rated loan prices increased 4 basis points and CCC rated loan prices increased 26 basis points on average. The 12 month trailing default rate for the S and PLSTA Leveraged Loan Index increased to 0.35 percent by principal amount at the end of the quarter after starting the quarter at 1.25%. Note that this rate is just 14 basis points above the post global financial crisis level. Additionally, the distress ratio defined as a percent of loans with a price below 18% at par ended the quarter at approximately 0.72%, the lowest level in nearly 7 years and below levels in June 2020. During the quarter ended September 30, primary market issuance was approximately $161,000,000,000 bringing the year to date primary market issuance to approximately $485,000,000,000 versus $407,000,000,000 during all of 2020. This was driven by continued strong refinancing, M and A and LBO activity. Moreover, U. S. Loan fund inflows, as measured by LIBOR, were approximately $5,600,000,000 for the quarter ended September 30, We're bringing year to date total inflows to approximately $25,900,000,000 versus total outflows of approximately $19,000,000,000 during 2020. We 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 Thanks very much, Kevin. We note that additional information about Oxford Square Capital Corp. 3rd quarter performance has been posted to our website atwww.oxfordsquarecapital.com. With that, operator, we're happy to open the call up for any questions. Our first question comes from Mickey Schleien from Ladenburg. Mickey, your line is now open. Yes. Good morning, everyone. Jonathan, we're experiencing inflation rates not seen in a generation. And as we all know, the loan and CLO markets have grown dramatically over that time. So I think it would be helpful For us to understand what is your thesis on how these assets should perform during inflation periods such as now? Sure, Mickey. Thank you for the question. We don't have a single answer. Obviously, inflation Manifests itself in myriad ways throughout the economy, throughout different sectors of the economy, throughout the operations of the businesses That we are invested in throughout the CLO structures that we are invested in. So there is no single answer. I think it would be adequate For the purpose of answering this question, I note, as you know, that all of our loans are floating rate. They're expressed as LIBOR Plus. And our CLO equity exposure is also borrowing, constructively borrowing On a LIBOR plus basis, the underlying collateral pools, the assets within the collateral pools of the CLOs that we invest in Are also denominated on a LIBOR plus basis. We do think that may provide us Some element of protection, but that protection, to the extent it exists at all, It depends on so many factors, how inflation is manifested operationally for these businesses And ultimately, the effect on these assets in a more inflationary environment. So we are aware of inflationary trends. Certainly, We have that in mind as we invest, but I don't think there is a specific sort of panacea For inflationary trends in the sector that we invest in or in most other sectors. Thank you for that, Jonathan. I wanted to move on. I noticed that the Effective yield in your CLO equity portfolio declined at the same time that the cash yields in that portfolio increased. Could you help us understand that dynamic? Sure, Matthew. So as you know, effective yield essentially is meant To capture the total return that we are expecting as a result of holding these assets. And in most cases, certainly across this portfolio, the effective yield has been and continues to be substantially lower than the actual cash that we're receiving from these investments. In terms of the specific reasons across Oxford Square's portfolio, why effective yield may have trended down somewhat this quarter, I don't have a specific reason for that. It varies across each of the positions. Jonathan, under the current market Conditions, what's your target leverage ratio in the form of debt to equity for the fund? So at the moment, Mickey, having affected a debt capital raise several months back, We are standing at a debt to equity ratio of 0.76. I think the general consensus is that within that range, Within a certain moderate range of that figure, we are comfortable, given the assets that we're holding, Given the economic environment that we're operating in and given, most importantly, the cost and availability and the duration of Leverage that we can obtain in the marketplace. Thank you, Jonathan. My last question, could you describe your plans, if any, To reduce the Fund's nonqualified asset ratio back down to the statutory limit? Sure, Mickey. As I think you know, all of our non qualified assets within Oxford Square Our CLO tranche positions, CLO tranche investing is a part of our current strategy at Oxford Square. And as you know also, those investments roll off over time. They are repaid. The deals are called, We've had refinanced, etcetera. That is essentially probably the largest part of that strategy. Although we have and will continue to affect sales where we think it's opportunistic and appropriate. So over time, as those investments come to maturity, are you expecting to roll off and eventually get Down to the 30% limit? That, I believe, is our most current thinking. Although, again, we're are certainly not opposed to making opportunistic sales where we think it's appropriate. I understand. Those are all my questions for this morning. Thank you for your time. Thank you very much, Maggie. I show no further questions. Will now turn the call back over to Mr. Cohen. All right. Operator, thank you very much. I'd like to thank everyone who listened to this call for their interest This concludes today's call. You may now disconnect your lines and we thank you for joining.