Good morning, and welcome to the Oxford Square Capital Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jonathan Cohen, CEO. Please go ahead, sir..

Thank very much. Good morning, everyone and welcome to the Oxford Square Capital Corp. Fourth Quarter 2018 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; and Bruce Rubin, our Chief Financial Officer. Kevin Yonon, Managing Director of Portfolio Manager and Debdeep Maji, Senior Managing Director and Portfolio Manager.

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

Sure, Jonathan. Good morning. 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 at 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 Web site at www.oxfordsquarecapital.com. With that, I'll turn the presentation back to Jonathan..

Thanks Bruce. We note that the fourth quarter of calendar 2018 was characterized by significant volatility in global equity and debt markets. The S&P/LSTA leveraged loan index fell from 98.6% of par in September 30th to 93.8% of par in December 31st. Against that backdrop, the fair value of our portfolio fell during that period.

While Oxford Square saw a meaningful mark-to-market base decline in our net asset value in the December quarter, we remained comfortable with the credit quality of the portfolio. Moreover, we know that the S&P/LSTA leveraged loan index is rebounded significantly since December 31 from 93.8% of par to 97% of pars of February 27th,2019.

That recent performance has been reflected in the markets that we participate in with greater liquidity and higher prices since the end of last year. On December 31st, our net asset value per share stood at $6.60 compared to a net asset value per share of $7.49 as of September 30th.

Our total return generated during the quarter ended December 31st was a negative 9.2%. That total return reflected the change in that asset value per share for the period, as well as the impact of a $0.20 per share distribution.

For the fourth quarter, we've recorded GAAP net investment income of approximately $8.5 million or approximately $0.18 per share which was roughly flat with the quarter ended September 30th. In the fourth quarter of 2018, we recorded a net unrealized depreciation on investments of $39.8 million and a net realized loss of approximately $2.8 million.

In total, we had a net decrease and net assets from operations of $34.1 million or $0.71 per share. On February 22nd, 2019, our Board of Directors declared a $0.20 per share distribution for the first quarter to shareholders of record as of March 15, 2019. We also moved to monthly distributions as follows.

$0.067 per share for the months ended April, May and June of 2019. Additional details regarding record and payment data information can be found at our press release that was issued earlier this morning. We note that the $25 million stock repurchase program we previously announced has now been fully utilized.

Under that program, we repurchased approximately 3.8 million shares of our common stock and weighted average share price of $6.53 per share. That program produced an accretion to NAV of approximately $0.08 per share We note that as of December 31st continue to have no investments on non-accrual status.

With that I'll turn the call over to our Senior Portfolio Managers Kevin Yonon and then Deep Maji.

Kevin?.

Thank you, Jonathan. The quarter ended December 31st presented the first meaningful period of volatility in the loan market since 2016. We believe that this low n US loan prices during the fourth quarter of 2018 was principally driven by large outflows out of US loan mutual funds and ETFs.

According to leveraged commentary and data also known as LCD, a service provided by S&P global from the middle of November 2018 to the end of 2018, US loan mutual funds and ETFs experienced approximately $16 billion of outflows. We believe that fundamentals across the US loan market continue to be stable. The US loan default rate remains low.

According to LCD the trailing 12-month default rate on the S&P/LSTA leveraged loan index was approximately 1.4% by principal amount as of February 12. This is the lowest the default rate has been over the past 17 months and remains below its historical average of approximately 3% according to LCD.

Second, the loan maturity wall continues to be turned out and there are limited near-term maturities as a percentage of the overall S&P/ LSTA leveraged loan index. According to LCD, there are $33 billion of loans coming due before the end of 2020. In 2021, there are approximately $70 billion of loans scheduled to be repaid.

This aggregate amount represents approximately 10% of the overall size of the S&P/LSTA leveraged loan index according to LCD. Third, corporate interest coverage ratios continue to be strong.

According to LCD, interest coverage on a weighted average basis across the constituents of the S&P/LSTA leveraged loan index was 4.6x in the third quarter of 2018. According to LCD, a 100 basis point rise and three-month LIBOR would cut interest coverage for a typical loan issuer by approximately 0.5x all else equal.

Lastly, the current corporate loan market continues to be stable. The share performing loans in the S&P/LSTA leverages own index price below 80% of par was 2.7% in December 2018 according to LCD. In January 2019, this figure has decreased to 2.5% with the increase in US loan prices. This remains well below the post-crisis high of 12% in February 2016.

With that I will turn the call over to Deep..

Thank you, Kevin. For the reasons Kevin just discussed and according to Wells Fargo's CEO research team, the median US CLO equity net asset value has recovered with the increase in loan prices.

After bottoming on January 2nd, 2019 at 24.5% of PAR, Wells Fargo's CLO research team estimate the median US CLO equity net asset value was 43.3% of par as a February 1st, 2019. We believe that this is an attractive environment for CLO equity.

At the present time according to LCD, only approximately 1% of the S&P/LSTA leveraged loan index trades at a price at par or higher. This environment may allow CLO managers to buy performing loan assets in the secondary market at discounts apart which may build CLO asset values and spreads over time ultimately occurring to the benefit of CLO equity.

In general, we position in our CLO portfolio on longer reinvestment period equity positions to allow our CLO managers to take advantage of the market environments like we have today. With that I will turn the call back over to Jonathan Cohen..

Thanks very much, Deep and Kevin. Additional information about Oxford Square Capital Corp' fourth quarter performances has been posted to our website at www.oxfordsquarecaptial.com. And with that operator, we're happy to open the call up for any questions..

[Operator Instructions] The first question comes from Mickey Schleien of Ladenburg. Please go ahead..

Yes. Good morning, everyone.

Jonathan since we haven't had a chance yet to look at the 10-K, could you give us a sense of the breakdown of the main drivers of the realized and unrealized losses for the fourth quarter?.

So on a percentage, Mickey, a very substantial majority of the marks- to-market were on our CLO equity portfolio. CLO equity during the quarter saw meaningful volatility as a multiple essentially of the substantial volatility we saw on the corporate lending --corporate syndicated loan market..

And what about that realized loss. Jonathan.

What drove that?.

That was principally CLO equity trades on that side of the book. Mickey..

Okay and sticking to CLO equity, you mentioned some percentage of par figures for this year.

Where was that figure on September 30th of last year? I'm just trying to get a sense of how much has been recuperated so far?.

So NAV I mean without speaking directly to our portfolio, Mickey, I think that the CLO market has seen a meaningful increase in equity NAV since the beginning of the year.

It's highly profile dependent, so I wouldn't want to put a particular figure on the market overall, but as we've seen loan prices increase substantially since the beginning of the year since December 31st of last year. There's been a concurrent increase in CLO equity net asset values certainly..

Do you think CLO equity broadly speaking is nearest levels of September of last year?.

Probably not quite Mickey, no..

Not quite, okay, I wanted to talk a little bit about leveraged in October, you borrowed about $37 million on the credit facility, but then in December you repaid a similar amount and there was a little more repayment in January.

Were these payments something required under the facility itself?.

They were indeed, Mickey, yes..

Okay, so there must --there's a leveraged covenant somewhere in there..

No. There's a mandatory cash sweep as a component of the facility, Mickey..

Okay.

So looking forward what kind of trends can we expect in the companies leveraged and do you have a target leveraged you are attempting to reach?.

We haven't published or discussed publicly a target level for leveraged, Mickey. I think that given the composition of our assets, I did some additional leveraged at the right cost of capital with the right terms around it, would likely be appropriate for us, but we've not announced anything yet..

And could that facility allow you to re-borrow to get a little bit more liquidity?.

That facility does not but a new facility would..

Okay and lastly, Jonathan, I'd like to ask how the board is thinking about the dividend. It hasn't been covered from NII for many years and last year you reported that about a third of your distributions were return of capital, which I suppose was probably due to all the CLO refi and resets.

Is there a scenario where you or the management team and the board see Oxford Square earning the dividend from NII?.

Sure, Mickey. In terms of GAAP NII coverage of the distribution, you're right. The number has not equaled the distribution for some time. The Board looks at the entirety of the company's financial performance in determining the quarterly and now monthly distributions.

They look at the actual cash flows that we receive separate and apart from the GAAP recognition of the company's income. They look at the economic return. we have and continue to generate on our leveraged loan book and on our CLO equity portfolio.

They look at the ability to preserve net asset value or to grow net asset value over a significant period of time. If appropriate, so all of those things go into that decision-making process. GAAP NII is certainly a component of that but it's not the sole component..

And looking at taxable income, am I right to assume that the difference between the distribution taxable income last year had something to do with expenses related to the CLO refi and resets?.

You are exactly correct about that, yes,.

Okay so looking at this year taking it into account where spreads are now it seems that that opportunity at least right now is none nearly as opportune as it was last year even the year before that.

So if we were to remain in this sort of environment, would you expect your taxable income to get closer to the distribution in 2019? I know it's hypothetical but based on what I just laid out..

Sure. I mean there are so many different components, Mickey, to the determination of taxable income. There's the PFIC income that we recognize from our CLO equity positions that is by its nature inherently difficult to project. There are obviously lots of other elements.

So I wouldn't want to say that in any particular hypothetical the taxable income will be higher or lower than it is currently, but the PFIC income specifically makes that number fairly difficult to project..

Did you agree with my assessment though that the refi and reset opportunity within CLOs at least right now is not very meaningful?.

It is certainly much less meaningful than it would have been a year ago, yes, I agree with that assessment. End of Q&A.

I don't see any further questions. I would like to turn the conference back over to Mr. Cohen for closing remarks..

Great. Well, I'd like to thank everybody on the call and everybody listening to the replay for their interest in Oxford Square Capital Corp. We look forward to speaking to you again very soon. Thank you..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..