Feb. 26, 2020 10:10 AM ET | About: Oxford Square Capital Corp. (OXSQ)
Oxford Square Capital Corp. (NASDAQ:OXSQ) Q4 2019 Earnings Conference Call February 26, 2020 9:00 AM ET
Company Participants
Jonathan Cohen - CEO
Saul Rosenthal - President
Bruce Rubin - CFO
Kevin Young - Managing Director and Portfolio Manager
Conference Call Participants
Mickey Schleien - Ladenburg
Jonathan Cohen
For the quarter ended December 31, Oxford Square's net investment income was $0.18 per share and our net asset value per share stood at $5.12 compared to net investment income per share of $0.19 and a net asset value per share of $5.42 in the prior quarter.
BDCR Notes: NAV dropped (4.4%). Since the end of 2017 OXSQ has lost one third of its book value, making the BDC one of the top 3 losers in the sector by that metric.
For the fourth quarter we recorded total investment income of approximately $13.4 million compared to $14.1 million for the prior quarter. [ BDCR: A (5.0%) drop] For the fourth quarter of 2019 we recorded unrealized depreciation on investments of approximately $13.3 million or $0.28 per share compared with $41.6 million or $0.87 for the prior quarter.
In the fourth quarter of 2019, we did not recognize any realized gains or losses on our investment portfolio. In total we had a net decrease in net assets from operations of approximately $4.9 million or $0.10 per share compared to a net decrease of $33.1 million or $0.69 per share for the prior quarter.
We note that as of December 31 we held two investment on nonaccrual status with combined fair values of $5.8 million.
BDCR Notes: An increase from 1 non accrual in prior period
During the fourth quarter of 2019 we made new investments totaling $3.9 million and we had principal repayments in sales of $19.7 million.
On February 24, 2020 our Board of Directors declared monthly distribution $0.067 per share for the months ending April, May and June of 2020.
BDCR Notes: Unchanged for 5 quarters now.
Additional details regarding record and payment date information can be found in our press release that was issued earlier this morning.
And with that I'll turn the call over to our Portfolio Manager. Kevin Young.
Kevin Young
During the quarter ended December 31, US loan market continued to exhibit pricing dispersion and remained bifurcated from a demand perspective. At the beginning of the quarter US loan prices as defined by the S&P/LSTA Leverage Loan Index declined from 96.3% to a quarterly low of 95.35% by the beginning of November.
The decline in US loan to market pricing was likely caused by continued one-off in using credit loan market weakness, increased loan downgrades, difference for certain loan issuers and continued outflows from US loan funds. As the [Technical difficulty] stopped declining and started stabilizing by deposit market technical versus no primary loan issuance and a limited for calendar and brought our macro market strength.
To highlight the pricing dispersion and bifurcation of the US loan market the percentage of the US loan is trading at pricing at par or higher increased to approximately 50% at the end of December from approximately 34% at the end of September. During the same period, the percentage of loans quoted at 80% at par or below peaked at 5.9% at the end of November before finishing at 3.9% at the end of December from approximately 4.1% at the end of September.
BDCR Notes: Evidence of the market strength that was happening before the coronavirus fears developed.
While the percentage of performing loans quoted at 80% at par or below is that at a three-year high, this remains well below post crisis highs of 12.1% in February 2016 which was caused by sector level stress within the oil and gas, metals and mining and brick and mortar retail sectors.
BDCR Notes: We’ll be curious to see if markets revisit those metrics in the current scenario.
Moreover during the quarter BB rated loan prices increased by 0.3% B rated loan prices increase 0.8% and CCC rated prices increased 3.9%.
Despite the increase in rating agency downgrade of US leverage loans, the US loan market default rate remains relatively stable throughout 2019 as the 12 month trailing default rate for the S&P/LSTA Loan Index ended the year at 1.4% by principal amount after starting the year at 1.6 by principal amount.
In this environment we continue to focus on portfolio management strategies to define the 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.
Question-and-Answer Session
Operator
Thank you. We'll now begin the question-and-answer session. [Operator instructions] Our first question today will come from Mickey Schleien of Ladenburg. Please go ahead.
Mickey Schleien
A couple of high level questions first Jonathan, so by the end of last year the proportion of loans in the LSTA index, which are related B minus declined to 20% which was expected and that's about double the level from the end of 2018 and a rate we haven't seen since the financial crisis.
I also see that Oxford Square's OC cushion in the CLO equity portfolio declined again down to 3.56. So given these trends what's your thesis on the outlook for CLO equity cash flows given this climbing risk of the B minus loans being downgraded into the CCC bucket?
Jonathan Cohen
Sure Mickey, I think we continue to believe that CLO equity cash distributions will remain highly profile dependent. So obviously we're focused on total return when it comes to our CLO equity and junior debt investing strategy.
We're looking at the IO component and the CLO component and certain profiles continue to look very strong from a cash flow perspective, long dated CLO equity as an asset class continues to demonstrate very strong content loaded cash flow characteristics, but we're total return investors.
So if we have the ability to invest in CLO equity profiles that are more backend loaded, but offer us a compelling risk of adjusted returns, we'll continue to look at those opportunities.
Mickey Schleien
And Jonathan in terms of your portfolio the CLO equity portfolio, do you have any positions that have started to divert cash flows away from CLO equity or very close to doing them?
Jonathan Cohen
So we had a single portfolio position in the fourth quarter at Oxford Square that did show diversion.
BDCR Notes: Admittedly one CLO diverting proceeds to pay debt holders - and not equity - may not seem important but is a dire sign in a market that was still supposedly far from historic credit default rates. Seems like OXSQ should be a seller in order to be a buyer as prices inevitably drop, but that’s hard to do when you’ve got a dividend to pay.
Mickey Schleien
Moving on to the broader market, so in this year the leverage loan markets started off quite strong I think as you mentioned but it's given up all its gains with investors concerned about risks related to the Coronavirus. Can you discuss with us your thesis on the potential impact of the virus on the fundamentals of the borrowers amongst US leverage loans and how you may be managing the portfolio in front of that risk?
Jonathan Cohen
I don't think we presume to know more about the economic impact of the Coronavirus on the US and global economies than other market participants. So we've looked at what is coming out of the Centers for Disease Control with that all of the statements or most of the statements I think have been made by various governments globally.
We've looked at various analyses that have been performed by firms across Wall Street. I don't think we have a defining thesis at this point, I think like most other market participants in our asset class were monitoring closely these development, but we don't have a specific thesis.
BDCR Notes: Not an encouraging response, but honest.
Mickey Schleien
And just if I could follow-up of that Jonathan, are there CLOs that have more of a focus internally into the US as opposed to CLOs that may be more at risk of let's say the supply chain issues that everyone is talking about or is it a situation where CLOs have become such a large component of the broader loan market that this risk is just unavoidable and the managers will just have to deal with it across the board?
Jonathan Cohen
So as you know US CLOs the type of CLOs that we invest in at Oxford Square are comprised almost entirely of loans to US operating companies. So from that perspective, there is not a great deal of direct international exposure inside of the CLOs that we invest in.
The second part of your question though I think is that which is US companies of all varieties or especially larger companies are globally integrated operating concerns and they take on global risk as a function of running the businesses. So we certainly have the ability to skew the portfolio over time away from certain types of exposures.
We can invest in CLOs with different diversities tests or different types of CCC baskets that will limit or better define our specific risk as we invest in these structures, but in terms of eliminating or even radically diminishing risks relating to global macroeconomic concerns as a function of the Coronavirus I think we and the rest of the world are fairly limited in that regard.
Mickey Schleien
Was the Premiere Global first lien the new non-accrual or was it another borrower?
Jonathan Cohen
Just the second lien Mickey.
BDCR Notes: The second lien, with a cost of $9.8mn was placed on nonaccrual in the IIQ 2019. The first lien has a cost of $13.8mn and was performing through the IIIQ 2019. Investcorp has already reported its first and second lien exposure which were unchanged from the third quarter.
Mickey Schleien
So what was the new non-accrual this quarter?
Jonathan Cohen
We'll be releasing that information in the K, which would come out later today.
BDCR Notes: We don’t understand the reticence to name what is officially required by SEC regulations.
Operator
Ladies and gentlemen, this will conclude our question-and-answer session. At this time I'd like to turn the conference back over to Mr. Jonathan Cohen for closing remarks.