Oxford Square Capital Corp. (NASDAQ:OXSQ) Q1 2020 Results Conference Call April 28, 2020 9:00 AM ET

Company Participants

Jonathan Cohen - CEO
Bruce Rubin - CFO
Kevin Yonon - Managing Director and Portfolio Manager
Debdeep Maji - Senior Managing Director and Portfolio Manager

Conference Call Participants

Mickey Schleien - Ladenburg

Operator

Good morning and welcome to Oxford Square Capital First Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be opportunity to ask questions. [Operator Instructions] Please note that the call is being recorded.

I’d now like to turn the conference over to Mr. Jonathan Cohen, CEO. Please go ahead.

Jonathan Cohen

Thank you very much. Good morning, everyone. And welcome to the Oxford Square Capital Corp. first quarter 2020 earnings conference call. I’m joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; Kevin Yonon, our Managing Director and Portfolio Manager. And, Bruce, could you please open our call with a discussion regarding forward-looking statements?

Bruce Rubin

Sure, Jonathan.

Today’s call is being recorded. An audio replay of this conference call will be available for 30 days. Replay information is included in our press release that was issued earlier 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 wwwd.oxfordsquarecapital.com.

With that, I’ll turn the call back to Jonathan.

Jonathan Cohen

Thank you, Bruce.

For the quarter ended March 31st, Oxford Square’s net investment income was $0.13 per share and our net asset value per share stood at $3.32. Those compared to net investment income per share -- a net investment income per share of $0.18 and a net asset value per share of $5.12 in the prior quarter.

For the first quarter of 2020, we reported total investment income of approximately $10.8 million, compared to $13.4 million for the prior quarter. In the first quarter of 2020, we recorded unrealized depreciation on investments of approximately $85.4 million, or $1.74 per share compared to $13.3 million or $0.28 per share for the prior quarter.

In the first quarter of 2020, we recognized realized losses on investments of approximately $300,000 or $0.01 per share. We did not recognize any realized gains or losses on investments in the prior quarter.

In total for the first quarter, we had a net decrease in net assets from operations of approximately $79.4 million or $1.62 per share compared to a net decrease of $4.9 million or $0.10 per share for the prior quarter. We note that as of March 31st, we held two debt investments on non-accrual status with a combined fair value of $5.2 million. Also as of March 31st, our preferred equity investments in one of our portfolio companies were on non-accrual status with an aggregate fair value of $400,000.

For the first quarter of 2020, we made a new investment of $7.4 million, and we had principal repayments in sales of $23 million.

And with that, I’ll turn the call over to our Portfolio Manager, Kevin Yonon.

Kevin Yonon

Thank you, Jonathan.

During the quarter ended March 31st, the U.S. loan market exhibited a heightened level of volatility. At the beginning of the quarter, U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index, increased from 96.72% at par as of December 31st to a quarterly high of 97.35% on January 22nd. This strength led to an increase in U.S. loan repricings as U.S. loan issuers opportunistically refinanced and repriced their existing debts to decrease their cost-of-debt financing and in some instances extend the terms of their existing loans.

While U.S loan prices remained relatively stable throughout February, the increasingly negative sentiment associated with the economic ramifications of the rapid spread of COVID-19 led to a precipitous decline in U.S loan prices during March with the S&P/LSTA leveraged loan index declining to a low of 76.23% on March 23rd and ending March at 82.85%.

During the quarter, pricing dispersion related to credit quality occurred with BB-rated loan prices declining 11.1%, B-rated loan prices declining 15.1% and CCC-rated loan prices declining 22.4% on average. Moreover, rating agency downgrades of U.S. leveraged loans accelerated and the 12-month trailing default rate for the S&P/LSTA leveraged loan index increased to 1.84% by principal amount at the end of the quarter after starting the quarter at 1.4% by principal amount.

Finally, the distress ratio defined as the percentage of loans where they price below 80% at par peaked at 57% on March 23rd and ended the quarter at 24% compared to 3.9% at the end of 2019. In this environment, 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. As previously announced by the Company, our Board of Directors had declared monthly common stock distributions through June 30th of 2020. While no decision has yet been made with regard to the Company’s common stock distributions for July, August, and September, we believe that the Company’s Board of Directors would likely elect to reduce or suspend the Company’s distributions for those months.

In light of current economic and market conditions, specifically as a result of the global crisis caused by the spread of the COVID-19 virus, we believe that no reliance should be placed on the prospect for any particular level of distribution for those months or for any other periods. We note that additional information about Oxford Square Capital Corp.’s first quarter financial performance has been posted to our website at www.oxfordsquarecapital.com.

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

Question-and-Answer Session

Operator

[Operator Instruction] Our first question comes from Mickey Schleien of Ladenburg. Please go ahead.

Mickey Schleien

Good morning, everyone. Hope you’re all doing well. Jonathan, a handful of questions this morning. I’d like to start by asking about how the senior secured notes and the assets and the CLO equity portfolio’s reference LIBOR rate breaks down between one month and three months? I’m asking because there’s a wide dispersion between one month and three months at the moment.

Debdeep Maji

Hi, Mickey. This is Deep. Currently, the splits, we can get back to you with the exact splits, but there is a split. It generally varies month-to-month. But in general, a portion of our borrowers are on three-month LIBOR and a portion of our underlying borrowers are on a one month LIBOR. Historically, it’s been kind of 60-40. But, we can get back to you with the exact splits.

Mickey Schleien

Okay. I’ll follow up with you on that. And Deep, did any of your CLO equity investments divert cash flows during the first calendar quarter?

Debdeep Maji

We did have two positions that diverted cash flows during the first calendar quarter in January. The magnitude of it was de minimis.

Mickey Schleien

And any sense of cash flow diversion’s potential for the second quarter.

Debdeep Maji

The level of cash flow diversion for the second quarter is the increased from the level of cash flow diversion in the first quarter.

Mickey Schleien

All right. And what are your expectations for CLO equity GAAP and cash yields for the balance of this year? Given that from what I’ve read on average, CCC buckets have almost tripled from the beginning of March to sort of mid-April, and we’re now at almost 11%.

Jonathan Cohen

Sure, Mickey. Thank you for the question. We haven’t published any projections with respect to those statistics for the remainder of this year.

Mickey Schleien

Okay. Jonathan, in the 2015, 2016, let’s call it mini cycle, which was obviously driven by different factors than what we’re experiencing today. Oxford Square’s CLO equity portfolio appreciated fairly dramatically as that cycle was completed. How would you compare today’s environment and today’s cycle to that time? And what’s your investment thesis on CLO equity in general, in the current environment?

Jonathan Cohen

I wouldn’t compare the period Mickey that you referenced, late 2015 and into early 2016 to this environment, at least not yet. I think, there are too many unknowns at work. Our investment philosophy and our investment mandate continues to be the same, which is that we are actively looking for investment opportunities, both in the syndicated corporate loan market and on an ongoing basis in the CLO asset class.

The profiles that we have and continue to look at differ pretty markedly. So, we’re looking and we have looked, we continue to look at longer dated product, longer reinvestment, shorter reinvestment, Tier 1 versus Tier 2 managers, different types of collateral pools. This is an asset class that tends to become less efficient in times of this economic dislocation. We think that’s true at the moment, and we think it’s likely to continue to be true for probably some time.

Mickey Schleien

Understand. My last question is just in terms of the distribution language in the press release. In terms of the distribution, you mentioned the potential to suspend the dividends, at least for the third quarter -- third calendar quarter. Is that due more to just management of distribution of taxable income relative to the dividends that you’ve already declared through June of this year, or is it due to something else such as the high level of uncertainty regarding the outlook for the portfolio’s ability to generate income?

Jonathan Cohen

I think that the Board has and will continue to consider both of those things and every other aspect of the business that they think is appropriate in determining the distributions. But, I think the decision to defer setting a distribution for those months, July, August and September is a reasonable and rational one in light of this current environment.

Mickey Schleien

When you say -- I understand deferring the decision. I’m just trying to get a handle on potentially no distribution, at least for those three months, because that’s a pretty severe decision. And I’m trying to understand whether that’s concern over the health of the portfolio or just more managing the tax distribution itself.

Jonathan Cohen

Sure. It’s difficult, Mickey, to speak to a decision that hasn’t been made yet. So, it’s very hard for me to speculate as to how the Board is going to deliberate that in a month or more. I’m not certain yet.

Mickey Schleien

Okay. So, the timing would be for an announcement of the July dividend sometime next month?

Jonathan Cohen

IT’s at the Board’s discretion. It might be next month, it might be in June. It’s whenever Board feels is most appropriate.

Mickey Schleien

Understand. Those are all my questions for this morning. Thank you.

Jonathan Cohen

Thank you, Mickey, very much.

Operator

This concludes our question-and-answer session. I’d like to turn the conference back over to Mr. Jonathan Cohen for any closing remarks. Please go ahead.

Jonathan Cohen

All right. Nick, thank you very much. I’d like to thank everybody for their participation in the Oxford Square Capital Corp. first quarter 2020 earnings conference call. And we look forward to speaking to you again soon. Thanks very much.

Operator

Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.