OXSQZ - Oxford Square Capital Corp. (OXSQ) Q1 2023 Earnings Conference Call Transcript

2023-05-02 10:48:05 ET

Oxford Square Capital Corp. (OXSQ)

Q1 2023 Earnings Conference Call

May 2, 2023 9:00 AM ET

Company Participants

Saul Rosenthal - President

Bruce Rubin - Chief Financial Officer

Kevin Yonon - Managing Director and Portfolio Manager

Hooman Banafsheha - Principal

Conference Call Participants

Mickey Schleien - Ladenburg

Presentation

Operator

Good morning or good afternoon, and welcome to the Oxford Square Capital Corp’s First Quarter 2023 Earnings Conference Call. My name is Adam, and I'll be your operator for today. [Operator Instructions].

I will now hand the floor over to Saul Rosenthal to begin. So Saul, please go ahead when you are ready.

Saul Rosenthal

Thank you, operator, and good morning, everyone. Welcome to the Oxford Square Capital first quarter 2023 earnings conference call. I'm joined today by Bruce Rubin, our Chief Financial Officer and Kevin Yonon, our Managing Director and Portfolio Manager.

First, would you please open our call with a disclosure regarding forward looking statements? Sure,

Bruce Rubin

Sure, Saul. 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 issued this morning. Please note that this call is the property of Oxford Square Capital Corp. and the 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 can 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 Saul.

Saul Rosenthal

Thank you, Bruce. For the quarter ended March 31, Oxford Square's net investment income was approximately $6.5 million or $0.13 per share, which was unchanged from the prior quarter, our net asset value per share stood at $2.80 compared to a net asset value per share of $2.78 for the prior quarter. For the first quarter, we recorded total investment income of approximately $12.9 million as compared to approximately $11.9 million in the prior quarter. That increase in total investment income was principally driven by an increase in interest income from our loan portfolio.

In the first quarter, we recorded net unrealized depreciation on investments of approximately $220,000 or less than $0.01 per share compared to net unrealized depreciation on investments of approximately $29.4 million or $0.59 per share for the prior quarter. There were no realization events during this first quarter.

During the first quarter, our investment activity consisted of purchases of approximately $8.2 million and repayments of approximately $330,000 there were no sales during the quarter. As of March 31, we held cash and cash equivalents of approximately $10.8 million.

On April 25, 2023, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending July, August and September 2023. Additional details regarding record and period date information can be found in our press release that was issued this morning.

I will turn the call over to our Portfolio Manager, Kevin Yonon to discuss the loan market.

Kevin Yonon

Thank you, Saul. During the quarter ended March 31, 2023, the U.S. loan market performance improved versus the prior quarter. U.S. loan prices as defined by the Morningstar LSTA U.S. Leveraged Loan Index increased from 92.44% of par as of December 31 to 94.71% of par as of February 9, before dropping to 93.38% of par as of March 31. According to LCD during the quarter, there were some pricing dispersion related to credit quality with BB-rated loan prices increasing 17 basis points or 0.18%, B-rated loan prices increasing 165 basis points or 1.78% and CCC-rated loan prices increasing 270 basis points or 3.64% on average. The 12-month trailing default rate for the Morningstar LSTA U.S. Leveraged Loan Index increased to 1.35% by principal amount at the end of the quarter from 0.72% at the end of December 2022. Additionally, the distress ratio defined as percentage of loans with a price below 80% of par ended the quarter at 6.3% compared to approximately 7.4% at the end of December 2022.

During the quarter ended March 31, 2023, primary market issuance was approximately $45 billion representing a 61% decline versus the quarter ended March 31, 2022. This was driven by lower M&A and LBO activity partly offset by higher refinancing activity. At the same time, U.S. loan fund outflows, as measured by Lipper, were approximately $8.2 billion for the quarter ended March 31, 2023. 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.

With that, I will turn the call back over to, Saul.

Saul Rosenthal

Thank you, Kevin. Additional information about Oxford Square Capital Corp’s first quarter performance has been posted to our website at www.oxfordsquarecapital.com.

And with that, operator, we will now open the discussion for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]. And our first question today comes from Mickey Schleien from Ladenburg. Mickey, please go ahead. Your line is open.

Mickey Schleien

Yes, good morning, everyone. Saul, it looks like about half of your CLO investments are beyond their reinvestment period. And I'd like to ask and understand what percentage of those are also failing their weighted average life test?

Saul Rosenthal

Hang on a second, let's punch up that information. Actually, we have one of our senior investment team members here with us. I'm sorry, Mickey. We actually don't have that statistic readily handy, but we're happy to follow-up offline.

Mickey Schleien

Okay. I'll follow-up with you. But my understanding is that for the market overall, a significant number of those CLOs beyond the reinvestment period are failing their weighted average life test. With CLO, liability spread, still quite wide, meaning the refinancing and reset opportunity is limited. When we think about those CLOs, and their managers looking to buy short duration loans to meet the weighted average life test, how do you see those CLO cash flows developing assuming everything else remains equal?

Saul Rosenthal

Right. I'm going to turn the call to Hooman Banafsheha, senior member of our investment team to address that.

Hooman Banafsheha

Hi, Mickey, right. As you noted, that is part of the CLO structure. However, within the indentures, there's also a lot of different profiles that allow CLO managers to continue to reinvest, despite being outside of the reinvestment period, if the weighted average life success is failing. Some of them are one touch tests where they could fail as long as they maintain and improve.

And given the current conditions in the secondary market, managers that we're speaking to are seeing ample opportunities to buy loans that fit their criteria and kind of continue to let them reinvest and build out portfolios.

Mickey Schleien

Okay, that's helpful. I also see that four out of the funds 21 CLOs have negative junior OC cushions, but only $100,000 of cash flow was diverted which looks like only about 1% of the total cash flow for that segment. Could you help us understand that relationship?

Hooman Banafsheha

Right. So, there's only two partial diversions for roughly I think 60K as a total number. And some of those tests won't apply after the deals are out of their reinvestment period.

Mickey Schleien

Okay. That's helpful.

Saul Rosenthal

Another one, Mickey --

Mickey Schleien

That's it for me this morning.

Saul Rosenthal

Yes, okay. Thank you, Mickey.

Mickey Schleien

No, go ahead, Saul.

Saul Rosenthal

I was just going to say that as, Hooman, was saying, the test -- post reinvestment period the test may not be applicable. In other words, they would be selling the OC test and yet still have a full payment. I think that was important.

Mickey Schleien

Okay. That's helpful. That's it for me this morning. Thank you for your time.

Saul Rosenthal

Great. Thank you, Mickey. Operator, any other questions?

Operator

Nothing further in the queue at present. [Operator Instructions]. And as we have no further questions at this time, I'll hand back to, Saul, for any concluding remarks.

Saul Rosenthal

Thank you. Well, thank you everyone for joining us this morning for Oxford Square Capital’s first quarter 2023 earnings conference call and we look forward to updating you on our next call. Thank you, operator.

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

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