Good morning, and welcome to the Oxford Lane Second Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Jonathan Cohen. Please go ahead, sir..

Thank you. Good morning, everyone and welcome to the Oxford Lane Capital Corp Second Fiscal Quarter 2020 Earnings Conference Call. I’m joined today by Saul Rosenthal, our President; Bruce Rubin, our Chief Financial Officer; and Deep Maji, our Senior Managing Director and Portfolio Manager.

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

Sure, Jonathan. Today’s conference call is being recorded. An audio replay of the 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 Lane 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 you to 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 or update our forward-looking statements, unless required to do so by law.

During this call, we will use terms defined in the earnings release and also refer to non-GAAP measures. For definitions and reconciliations to GAAP, please refer to our earnings release posted on our website at www.oxfordlanecapital.com. With that, I’ll turn the call back over to Jonathan..

Thank you, Bruce. On September 30th, 2019, our net asset value per share stood at $6.63 compared to a net asset value per share of $8.01 as of June 30th. Our total return generated during the quarter ended September 30th, equaled to negative 12.2%.

That return reflected the change in net asset value per share for the period as well as the impact of a $0.45 per share distribution. For the quarter ended September 30th, we’ve recorded GAAP total investment income of approximately $28.5 million, representing an increase of $1.2 million from the prior quarter.

The quarter’s GAAP total investment income from our portfolio consisted of $27.3 million from our CLO equity investments and $1.2 million from our CLO debt investments and from all other sources.

Oxford Lane also recorded GAAP net investment income of approximately $16.7 million or $0.31 per share for the quarter ended September 30th, compared to $15.8 million or $0.35 per share for the quarter ended June 30th.

Our core net investment income was approximately $24.2 million or $0.45 per share for the quarter ended September 30th, compared with $19.7 million or $0.43 per share for the quarter ended June 30th.

During the quarter ended September 30th, we issued a total of approximately 9 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $88.5 million.

For the quarter ended September 30th, we recorded a net realized loss of approximately $2.3 million or $0.04 per share, and a net unrealized appreciation of $90.9 million or $1.70 per share. We had a net decrease in net assets resulting from operations of approximately $76.5 million or $1.43 per share for the second fiscal quarter.

As of September 30th, the following metrics applied. We note that none of these metrics represented a total return to shareholders. The weighted average yield of our CLO debt investments at current cost was 10.4%, down from 11.8% as of June 30th.

The weighted average GAAP effective yield of our CLO equity investments at current cost was 16.4%, down from 16.9% as of June 30th. The weighted average cash yield of our CLO equity investments at current cost was 22%, up from 19.8% as of June 30th.

We note that the cash yields calculated in our CLO equity investments are based on the cash distributions we received or which we were entitled to receive at each respective period end.

During the quarter ended September 30th, we made additional CLO investments of approximately $108.1 million and we received $8.6 million from sales and repayments of our CLO investments. With that, I’ll turn the call over to our Portfolio Manager, Deep Magic..

Thank you, Jonathan. During the quarter ended September 30th, the US loan market exhibited price declines across certain segments of the market, and increased pricing dispersion, as the market became more bifurcated from a demand perspective. As of September 30th, the S&P/LSTA Leveraged Loan Index decreased to 96.34% from 96.79% as of June 30th.

This decline continued into the current quarter with the LSTA Index declining further to 95.54% as of October 25th. To highlight the pricing dispersion and bifurcation of the US loan market, the percentage of US loans trading at prices at par higher increased to approximately 34% at the end of September from approximately 8% at the end of June.

However, during the same period, the percentage of loans trading at prices of 80% or at par or lower also increased approximately 4.1% from 2.5% which has increased the tails of US CLO portfolios.

Although this is a three-year high percentage of US loans trading below a price of 80%, this remains well below the post-crisis high of 12.1% in February 2016, which was caused by sector level stress with an oil and gas, metals and mining and brick and mortar retail sectors.

While there were no new US loan defaults during the third quarter and the 12-month trailing US loan default rate was unchanged at 1.3% by principal amount. There has been an increase in one-off idiosyncratic credit events in the US loan market. During the quarter, new issued US CLO debt spreads widened and US CLO manager tiering increased.

In the secondary market, CLO junior debt specifically BB and B rated tranches with a lower market value over collateralization ratios widened meaningfully, given this widening, we have looked up to purchase these tranches opportunistically.

This widening in spreads and increasing manager and deal tiering combined with the increase in loan pricing dispersion have also weighed on the US CLO equity pricing, which is have caused a continuation of elevated risk premiums during the quarter.

We continue to generally position our CLO portfolios and longer reinvestment periods equity positions which may allow our CLO managers to take advantage of market environments like we have today. That being said, we have also selectively purchased a variety of CLO equity and junior debt profiles over the past quarter.

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

Thanks, Deep. We note that additional information about Oxford Lane’s second fiscal quarter performance has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we’re happy to open the call up for any questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Mickey Schleien with Ladenburg. Please go ahead..

Yes. Good morning, everyone. Jonathan, bear with me, there’s a lot of volatility in the markets, so I do have several questions..

Sure, Mickey..

I’d like to start by asking the following. You know we’ve seen that your CLO equity cash flows have remained very good at over 22% in terms of yield, and core NII is covering the dividend, but those cash yields are a lot higher than the average estimated yield, which I see it was 16.4% and down a little bit from the previous quarter.

I know that CLO equity estimated yields take into account a lot of assumptions. But the weighted average spread on the collateral has been stable, maybe climbing a little bit, and loan defaults are low, so that should support those yields. And CLOs are also match-funded so they’re generally protected from LIBOR movements.

So I’d like to ask, you know, what are the main metrics that are changing when you forecast cash flows that are reducing estimated yields?.

It’s essentially mostly, Mickey, liquidation prices, estimated liquidation prices of loans within these various collateral pools in a market where the LSTA Index is hovering right around 95.5. That’s the principal assumption.

Keep in mind, that the effective yield calculations are drawn on the basis of a hold to maturity or final call assumption, which we may or may not ultimately affect, so given our trading history and the fact that we do trade the portfolio actively that is another factor for a consideration..

So, Jonathan those terminal values that you’re referring to, they effectively take into account the assumptions that I just talked about and other things like default rates and recovery rates and et cetera.

So, you know, what’s changed or what’s changing quarter-to-quarter that’s driving down those terminal values?.

Sure, Mickey. The composition of the loan portfolio, the underlying collateral pool loan portfolios have certainly shifted over time, our cost basis has changed. The cost basis affects all of these things or certain of these things. So the effective yield - the delta in the effective yield was not particularly dramatic during the quarter.

And the cash flows were essentially as we had modeled, so there were no real surprises on that basis..

Okay, let me move on. It’s been widely reported that there’s been a sharp increase in the share of B minus loans with a negative outlook. And that’s despite a relatively benign economic environment. And so there’s concern out there that these loans could put the CCC buckets at risk.

Do you believe that that CCC bucket risk is what is mainly driving down CLO equity prices? And what do you think is the actual outlook for that process?.

Sure, Mickey. I think that may be a part of the reason why CLO equity pricing was weak in the third calendar quarter. I don’t think that represents the majority of the reason. The fact I think that is much more related to flows of funds.

So there’s a supply-demand characteristic for this market as there is for all markets, and during the last six months or so we have seen pools of capital exiting and entering this asset-class, but probably more exiting than entering for a variety of reasons.

So I think this is more of a supply-demand issue than it is specifically related to a particular concern about the risk of CLO baskets. But that’s just my view..

So net, if folks are exiting, you know, if it’s not the CCC bucket, what’s the catalyst for the exit?.

I think, Jonathan was referring to the participants in the CLO market, I think that, you know, it could be their type of capital. There may be people who don’t have permanent capital like we do at Oxford Lane. I think within, you know, CLO managers themselves have raised a significant amount of capital and so we’ve seen more participation from them.

And yeah, and the [technical difficulty] on the back of the capital that they raised for the risk retention and I think that, if you look at the participants today, it’s a much different basket than it was several years ago..

Okay. If I can move on over a CLOs’ life, you know, the cash and estimated yields, you know, should converge all else equal.

So based on your experience when we’re linked in the cycle, which we appear to be in now, how do CLO equity, cash and estimated yields tend to track in relation to one another?.

It’s highly profile-dependent, Mickey. We hold all sorts of CLO profiles within Oxford Lane. We’ve historically held new issue, we’ve held primary, we look at doing warehouse, we hold post-reinvestment equity, we’ve got majority of tranches, we’ve got minority pieces, we hold late-stage equity that’s very near the end of its life cycle.

So it really depends pretty heavily on what the nature of the underlying collateral looks like and what the nature of the CLO structure itself is within its life cycle..

Okay..

But there’s no sort of overarching answer that I could give that would really cover all of those elements..

All right, I think in the prepared remarks you mentioned that, you know, the leverage loan market has continued to be weak in October. I see the LSTA was down – is down about 1%. So that indicates continued stress in the loan market.

I’d like to ask how that’s translating into CLO equity trading this month?.

I think that was a part of the reason, Mickey that loan prices or CLO equity prices were weak during the last three months, certainly..

And how about – how weak have they’ve been in October?.

It’s hard to generalize, I would say that they haven’t been dramatically down, but they’ve been probably weak, month-to-date..

All right, last question and I’ll probably take the rest offline. Looking at your dividend yield as a percentage of NAV, it’s now over 24%. So the market seems to be implying that the dividends not sustainable.

But the board has maintained a dividend through March and I suspect that that, you know, reflects the healthy cash flow profile of the portfolio.

So what risks do you think the market may be misinterpreting? And that’s causing these, you know, severe mark-to-market adjustments that we’re seeing?.

I wouldn’t want to speculate, Mickey on the market’s misinterpretation. I couldn’t speculate on that..

All right I think I’ll stop there and follow-up offline, Jonathan. Thanks for your time this morning..

All right, Mickey. Thanks very much..

I’m showing no further questioners. So I would like to turn the conference back over to Jonathan Cohen for any closing remarks..

All right, so I’d like to thank everybody on the call and listening to the replay for their interest and their participation. And we look forward to speaking to you again soon. Thank you very much..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..