Oxford Square Capital Corp. (NASDAQ:OXSQ) Q1 2022 Earnings Conference Call April 28, 2022 9:00 AM ET

Company Participants

Jonathan Cohen - Chief Executive Officer
Bruce Rubin - Chief Financial Officer
Kevin Yonon - Managing Director and Portfolio Manager

Conference Call Participants

Mickey Schleien - Ladenburg

Operator

Good morning. Thank you for attending today's, Oxford Square Capital Corp. First Quarter 2022 Earnings Conference Call. My name is Bethany, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions-and-answers at the end. [Operator Instructions]

I would now like to pass the conference over to our host, Chief Executive Officer, Jonathan Cohen. Please go ahead.

Jonathan Cohen

Good morning, everyone, and welcome to the Oxford Square Capital Corp. First Quarter 2022 Earnings Conference Call. I'm joined today by Bruce Rubin, our Chief Financial Officer; and Kevin Yonon, our Managing Director and Portfolio Manager. Bruce, could you please open the call with the disclosure regarding forward-looking statements?

Bruce Rubin

Thank you, Jonathan. Today's conference call is being 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 call back over to Jonathan.

Jonathan Cohen

Thank you, Bruce. For the quarter ended March 31, Oxford Square's net investment income was approximately $4.3 million or $0.09 per share, and our net asset value per share stood at $4.65. This compares to net investment income of approximately $4.5 million or $0.09 per share and a net asset value per share of $4.92 for the prior quarter. The decrease in net investment income was principally driven by lower CLO effective yield income, partially offset by higher interest income on our corporate debt investments.

For the first quarter of 2022, we recorded total investment income of approximately $9.9 million as compared to approximately $10.2 million in the prior quarter. In the first quarter of 2022, we recorded net unrealized depreciation on investments of approximately $13.5 million or $0.27 per share compared to net unrealized depreciation on investments of approximately $700,000 or $0.01 per share for the prior quarter.

In the first quarter of 2022, we recorded realized gains on investments of approximately $1 million or $0.02 per share compared to realized losses of $3.7 million or $0.08 per share for the prior quarter.

During the first quarter, our investment activity consisted of purchases of approximately $47.4 million, sales of approximately $3.4 million, and repayments of approximately $38.6 million.

As of March 31st, we held cash and cash equivalents of approximately $15.1 million. On April 21st, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending July, August, and September of 2022. Additional details regarding record and 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 Yonon, to discuss the loan market.

Kevin Yonon

Thank you, Jonathan. During the quarter ended March 31st, 2022, the US loan market exhibited weakness versus the quarter ended December 31st, 2021. US loan prices, as defined by the S&P/LSTA Leveraged Loan Index decreased from 98.64% of par as of December 31st to 97.66% the par as of March 31st.

According to LCD, during the quarter, there was pricing dispersion related to credit quality with BB-rated loan prices decreasing 79 basis points, B-rated loan prices increasing 108 basis points, and CCC-rated loan prices decreasing 260 basis points on average.

The 12-month trailing default rate for the S&P/LSTA Leveraged Loan Index remained at a 10-year low of 0.19% by principal amount at the end of the quarter. Additionally, the distressed ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at approximately 1.55% compared to 0.99% at the end of December 2021.

During the quarter ended March 31st, primary market issuance was approximately $113.5 billion, representing a 39% decline versus the quarter ended March 31st, 2021. This was driven by lower refinancing M&A and LBO activity.

At the same time, US loan fund inflows, as measured by Lipper were approximately $15.5 billion for the quarter ended March 31st. 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.

Jonathan Cohen

Thanks very much, Kevin. We note that additional information about Oxford Square's first quarter performance has been posted to our website at www.oxfordsquarecapital.com.

And operator, with that, we're happy to open the call for any questions.

Question-and-Answer Session

Operator

Certainly. [Operator Instructions] The first question is from the line of Mickey Schleien with Ladenburg. Please go ahead.

Mickey Schleien

Yes. Good morning, everyone. Hope you're doing well. Jonathan, in the first quarter, we saw spreads on new single B loans climb around 50 basis points, one-month LIBOR climbed about 40 and three-month LIBOR climbed about 90. So we're now climbing through floors and new loans are getting meaningfully more expensive and that trend is probably going to continue. So I'd like to ask how are you seeing these trends affecting borrowers in the portfolio in terms of their appetite for capital and their ability to service their debt.

Jonathan Cohen

From our perspective, Mickey, we've not yet seen that dynamic manifest across the businesses that we monitor. I think it's just simply too new.

Mickey Schleien

Okay. I understand. Jonathan, obviously, inflation is running quite high numbers, we haven't seen in a long time. Do you have any insight into the trends that you're seeing in revenues amongst issuers of leveraged loans and their ability to defend their margins and pass inflation on to their customers?

Kevin Yonon

Sure, Mickey, hi. This is Kevin Yonon. So I mean in terms of revenues, I mean, with respect to our portfolio companies in the market, I mean, we've generally seen revenues flat to improving since our last call. I would see the bigger pressure, which I think all issuers are seeing are on the margin front with respect to -- depends on the industry, whether it's labor costs, input costs, fuel costs and sort of anything else that's being impacted by inflation. So I'm assuming over the next few quarters, we will see impacts related to that.

Mickey Schleien

And again…

Jonathan Cohen

Sorry, Mickey go ahead.

Mickey Schleien

No, go ahead, Jonathan.

Jonathan Cohen

Just further to Kevin's point, Mickey, it's probably too recent dynamic to see very dramatic changes across our Obligor pool at the moment.

Mickey Schleien

With that in mind, Jonathan, with Kevin's remarks in mind, how are you thinking about your portfolio allocation? Are you changing, perhaps the target industries you're most interested in and moving away from others or how are you managing that risk?

Jonathan Cohen

We're taking account Mickey of dynamics that we see in the marketplace broadly, as we have for a long time and trying to incorporate that into the companies, into our decision-making around the companies that we're investing with. So as Kevin alluded to there are going to be companies that are certainly benefited from an inflationary environment in companies that are harmed by that same environment. And we're trying to reflect that in our decision-making as we always do.

Mickey Schleien

I understand. A couple of more questions, Jonathan. With CLO, AAA spreads up following the volatility in the first quarter, how do you see the current opportunity in that market to invest in primary versus secondary vehicles?

Jonathan Cohen

Mickey, this is Jo. You're right, AAAs have definitely picked up. We have been seeing opportunities in the primary market just because of the asset side. As you’ve noted the asset side has been widening out as well, as well as the opportunity to buy assets at a discounted price. So, we've definitely been seeing – continue to see opportunity both on the primary and selective secondary side.

Bruce Rubin

And I think it's fair to say that secondary market opportunities, Mickey, are generally driven at least in part by market volatility broadly. So, when markets are choppy, when global markets are under more pressure or subject to greater price movement, we do tend to see more opportunities present themselves in the secondary CLO equity tranche market.

Mickey Schleien

And Jonathan, did that occur in the first quarter? We haven't seen your schedule of investments, but were you able to find some interesting secondary CLO or individual loans in the second quarter?

Jonathan Cohen

Well, as you know, Mickey, speaking just about the market broadly, Oxford Square recently has been constrained by the 30% nonqualified asset test structure. So that remains something that we are mindful of. But so far as the market broadly is concerned, secondary market opportunity sets, do seem to be improving.

Mickey Schleien

Fair enough. Last question just for housekeeping. Can you tell me what the current average LIBOR and SOFR floors are in your loan and CLO portfolios just so we can gauge invest investment risk related to interest rates?

Jonathan Cohen

Sure, Mickey. We're looking at approximately 40 basis points, with respect to the syndicated corporate loan portfolio. And I would say, a little above that, I'll have the exact numbers, but I would say somewhere around 50 to 60 on the CLO portfolio.

Mickey Schleien

Okay. So floors are no longer really relevant?

Jonathan Cohen

No. Not at this moment, Mickey. No, you're absolutely right.

Mickey Schleien

Okay. That's it for me. This morning, Jonathan and everyone else, thank you for your time.

Jonathan Cohen

Thank you, Mickey. Thank you for your questions.

Operator

Thank you. There are no additional questions waiting at this time. I would like to pass the conference back to Jonathan Cohen for any closing remarks.

Jonathan Cohen

Thank you very much, operator. I'd like to thank everybody listening on this call and on the replay for their continued interest in Oxford Square Capital Corp. We look forward to speaking to you again. Thanks very much.

Operator

That concludes the Oxford Square Capital Corp. First Quarter 2022 Earnings Call. I hope you all enjoy the rest of your day. You may now disconnect your lines.