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

Operator

Good day and welcome to the Oxford Square Capital Corp. Fourth Quarter 2019 Earnings Conference Call. All participants will be in listen only mode. [Operator Instructions] After today's presentation there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Jonathan Cohen, Chief Executive Officer, please go ahead.

Jonathan Cohen

Thanks very much. Good morning, everyone and welcome to the Oxford Square Capital Corp. Fourth Quarter 2019 Earnings Conference Call. I'm joined today by Saul Rosenthal our President; Bruce Rubin, our Chief Financial Officer and Kevin Young our Managing Director and Portfolio Manager.

Bruce, could you please open the call this morning with a disclosure regarding forward-looking statements?

Bruce Rubin

Sure Jonathon. 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 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 www.oxfordsquarecapital.com.

With that, I'll turn the presentation back to Jonathan.

Jonathan Cohen

Thanks Bruce. 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.

For the fourth quarter we recorded total investment income of approximately $13.4 million compared to $14.1 million for the prior quarter. 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. During the fourth quarter of 2019 we made new investments totaling $3.9 million and we had principle 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. 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

Thank you, Jonathan. 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 hirer increase 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.

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 crises 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. 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 principle amount after starting the year at 1.6 by principle 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.

Jonathan Cohen

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

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

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

Yes. Good morning, everyone. 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.

Mickey Schleien

Okay. 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 discus 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

Sure Mickey. 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.

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

Sure Mickey. That's a great question. 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

I understand. Just couple questions related to the balance sheet was the premier global first lien the new non-accrual or was it another borrower?

Jonathan Cohen

Just the second lean Mickey.

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.

Mickey Schleien

Okay that's it for me the morning. I'll follow-up with you offline with some more questions.

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.

Jonathan Cohen

Thank you very much operator. I would like to thank everyone on the call for their participation and their interest and we look forward to speaking to you again soon. Thanks very much.

Operator

The conference has now concluded. We thank you for attending today's presentation and you may now disconnect your lines.