Oxford Square Capital Corp. (NASDAQ:OXSQ) Q4 2022 Earnings Call Transcript

Oxford Square Capital Corp. (NASDAQ:OXSQ) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Hello, everyone and welcome to the Oxford Square Capital Fourth Quarter 2022 Earnings Conference Call. My name is Bruno and I will be the operator of today. I will now hand over to your host, Jonathan Cohen, CEO. Please go ahead.

Jonathan Cohen: Thanks very much. Good morning, everyone and welcome to the Oxford Square Capital Corp fourth quarter 2022 earnings conference call. I am joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Kevin Yonon, our Managing Director and Portfolio Manager. Bruce, could you open the call with a disclosure regarding forward-looking statements?

Bruce Rubin: Sure, 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.

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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 will turn the presentation back to Jonathan.

Jonathan Cohen: Thanks, Bruce. For the quarter ended December 31, Oxford Square’s net investment income was approximately $6.5 million or $0.13 per share and our net asset value per share stood at $2.78. This compares to net investment income of approximately $5.6 million or $0.11 per share and a net asset value per share of $3.34 for the prior quarter. For the fourth quarter, we reported total investment income of approximately $11.9 million as compared to approximately $11.4 million for the prior quarter. That increase in total investment income was principally driven by an increase in interest income from our loan portfolio, partially offset by a decrease in income from our CLO equity investments. In the fourth quarter, we recorded net unrealized depreciation on investments of approximately $29.4 million or $0.59 per share compared to net unrealized depreciation on investments of approximately $16.8 million or $0.34 per share for the prior quarter.

In the fourth quarter, we reported realized gains on investments of approximately $100,000 compared to realized gains of approximately $50,000 for the prior quarter. During the fourth quarter, our investment activity consisted of purchases of approximately $6.1 million and sales and repayments of approximately $200,000. As of December 31, we have cash and cash equivalents of approximately $9 million. On March 16, 2023, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending April, May and June of 2023. Additional details regarding record and payment date 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 December 31, 2022, the U.S. loan market was volatile. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index increased from 91.92% of par as of September 30 to 93.06% of par as of November 16 before dropping to 92.44% of par as of December 30. According to LCD, during the quarter, there were significant pricing dispersion related to credit quality with BB-rated loan prices increasing 195 basis points or 2.04%, B-rated loan prices increasing 94 basis points or 1.02% and CCC-rated loan prices decreasing 603 basis points or 7.53% on average. The 12-month trailing default rate for the Morningstar LSTA U.S. Leveraged Loan Index decreased to 0.72% by principal amount at the end of the quarter from 0.9% at the end of September 2022.

Additionally, the distress ratio, defined as the percentage of loans with a price below 80% of par, ended the quarter at 7.4% compared to approximately 6% at the end of September 2022. During the quarter ended December 31, 2022, primary market issuance was approximately $33 billion, representing a 70.8% decline versus the quarter ended December 31, 2021. For 2022, primary market issuance declined 62.5% versus 2021. This was driven by lower refinancing, M&A and LBO activity. At the same time, U.S. loan fund outflows, as measured by Lipper, were approximately $10.5 billion for the quarter ended December 31, 2022, and approximately $9 billion for calendar 2022. 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 Jonathan.

Jonathan Cohen: Thanks, Kevin. Additional information about Oxford Square’s fourth quarter performance has been posted to our website at oxfordsquarecapital.com. With that, operator, we’re happy to open the call up for any questions.

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Q&A Session

Operator: We have our first question from Mickey Schleien from Ladenburg. Mickey, your line is now open. Please go ahead.

Mickey Schleien: Yes. Good morning, everyone. Jonathan, with half the portfolio in second-lien loan investments and given the uncertainty about the economic outlook, could you give us a sense of the size of these companies in terms of the revenues and EBITDA? And how they are performing in terms of their interest coverage ratios?

Jonathan Cohen: Sure, Mickey. We are typically targeting companies with multiple hundreds of millions of dollars of revenues, north of $50 million in EBITDA typically, and several or a significant number in excess of that. So, we are not engaging, as you know, in bilateral lending. We are not targeting very small companies compared to what we have targeted historically. That’s where we are situated.

Mickey Schleien: And in terms of their interest coverage, how do you see them performing in the fourth quarter and perhaps, more importantly, this year?

Kevin Yonon: Sure, Mickey. This is Kevin Yonon. So, we haven’t received Q4 results for our portfolio companies. Thus far, interest coverage, while obviously, interest rates are higher and all of our €“ the vast majority of our loans outstanding are floating rate versus LIBOR or SOFR. Interest €“ cash interest expense is increasing, although thus far, interest coverage has been maintained and portfolio companies have indicated that they continue to generate cash are able to support both the required amortization and cash interest.

Mickey Schleien: Okay. That’s helpful. In terms of the CLOs, almost half of the CLOs in the broader market have their reinvestment periods ending this year, which could pose a challenge since refinancing them may not be attractive in the current market. So, how do you see yourselves managing that risk given the pressure that might produce on the portfolio’s yield?

Joe Kupka: Hey Mickey, this is Joe Kupka. Yes, that’s definitely a concern in the broader market. We do expect to be able to refi or reset some select deals for the ones that we just choose to remain outstanding. There is still some flexibility. So, those deals that can’t get extended still have the ability to do some reinvestment post-reinvestment period. So, that definitely helps to relieve some of the pressure. So, it will be a mixed bag in terms of some calls, some refis and some just extensions and what remain outstanding for a while.

Mickey Schleien: Okay. And in terms of the cash yield of the CLO equity portfolio, it was down quite a bit during the fourth quarter. How much of that trend was due to the spread between one-month and three-month rates? And how have CLO cash distributions trended in the first quarter of this year?

Joe Kupka: Yes. That was definitely the majority of what was occurring that one-month, three-month basis. We have seen that compress a bit and are projecting just based on the publicly available forward curves for that to continue to improve starting in Q1 and then throughout the remainder of the year.

Mickey Schleien: It’s likely that most of your CLOs made their distributions in January of this year. How did those look relative to October of last year?

Joe Kupka: Brian, do you want to take that one?

Brian Aleksa: Sure. Hi Mickey, this is Brian Aleksa. Yes, they were roughly flat to down slightly from the October distributions. But as Joe mentioned, we do see those picking up in April from we were modeling them.

Mickey Schleien: Okay. That’s it for me this morning. Thanks for your time.

Jonathan Cohen: Thanks Mickey very much.

Operator: We currently have no further questions. I would like to hand back over to Jonathan for final remarks. Please go ahead.

Jonathan Cohen: Thank you very much. I would like to thank everybody for listening to the call this morning and listening to the replay. We look forward to speaking to you soon. Thanks very much.

Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines. Thank you.