Good day, and welcome to the Oxford Square Capital Corp. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jonathan Cohen. Please go ahead..

Thanks very much. Good morning, everyone, and welcome to the Oxford Square Capital Corp. second quarter 2021 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 open the call with a disclosure regarding forward-looking statements..

Sure, Jonathan. Today’s conference call is being recorded. An audio replay of this 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, www.oxfordsquarecapital.com. With that, I’ll turn the presentation back over to Jonathan..

Thank you, Bruce. For the quarter ended June 30, Oxford Square’s net investment income was approximately $2.8 million or $0.06 per share, and our net asset value per share stood at $4.91 compared to net investment income of approximately $4.8 million or $0.10 per share and a net asset value per share of $4.88 for the prior quarter.

The decrease in net investment income was principally driven by a higher level of interest expense from the issuance of our 5.5% baby bonds in May of 2021, the placement of an investment on nonaccrual status, which resulted in a reversal of approximately $170,000 of prior period income as well as from a onetime prepayment fee that we received in the prior quarter.

For the second quarter of 2021, we recorded total investment income of approximately $7.8 million as compared to approximately $9.4 million in the prior quarter.

In the second quarter of 2021, we recorded net unrealized appreciation on investments of approximately $2.5 million or $0.05 per share compared to net unrealized appreciation on investments of approximately $31 million or $0.67 per share for the prior quarter.

In the second quarter of 2021, we recorded realized gains on investments of approximately $1.2 million or $0.02 per share compared to realized losses of $14.1 million or $0.28 per share for the prior quarter.

In total, for the second quarter, we had a net increase in net assets from operations of approximately $6.5 million or $0.13 per share compared to a net increase in net assets from operations of approximately $21.8 million or $0.44 per share for the prior quarter.

During the second quarter of 2021, our investment activity consisted of purchases of approximately $99.5 million, sales of approximately $3 million and repayments of approximately $600,000. As of June 30, we held cash and cash equivalents of approximately $63.6 million, against which there were unsettled purchases of approximately $40.8 million.

On July 22, 2021, our Board of Directors declared monthly distributions of $0.035 per share for each of the months ending October, November and December of 2021. Additional details regarding record and payment data 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, Deep Maji, to discuss the loan market.

Deep?.

Thank you, Jonathan. During the quarter ended June 30, 2021, the U.S. loan market strengthened versus the quarter ended March 31, 2021. U.S. loan prices, as defined by the S&P/LSTA Leveraged Loan Index, increased from 97.55% on par as of March 31 to 98.37% on par as of June 30.

According to LCD, during the quarter, pricing dispersion related to credit quality continued the BB-rated loan prices increasing 0.1%, B-rated loan prices increasing 0.42% and CCC-rated loan prices increasing 1.4% on average.

12-month trailing default rate for the S&P/LSTA Leveraged Loan Index decreased to 1.25% by principal amount at the end of the quarter after starting the quarter at 3.15%. That rate has since decreased to 0.58% as of July 23.

Additionally, the distressed ratio, as – defined as the percentage of loans with a price below 80% on par, ended the quarter at approximately 1%, the lowest level since November 2014 and well below levels in March 2020.

During the quarter ended June 30, primary loan market issuance of approximately $142 billion was well ahead of approximately $42 billion during the comparable quarter in 2020. This was driven by strong refinancing, M&A and LBO activity during the quarter. Moreover, U.S.

loan fund inflows as measured by Lipper were approximately $10.4 billion for the quarter ended June 30, bringing year-to-date total inflows to approximately $20.3 billion versus total outflows of approximately $19 billion during 2020.

With that said, 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..

Thanks very much, Deep. We note that additional information about Oxford Square’s second quarter performance has been posted to our website at www.oxfordsquarecapital.com. With that, operator, we’re happy to open the call up for any questions..

[Operator Instructions] And the first question comes from Mickey Schleien with Ladenburg. Please go ahead..

Good morning, everyone.

Jonathan, we haven’t had an opportunity to review the Q, so could you tell us what was the new nonaccrual this quarter?.

It was a company on the balance sheet, Mickey, called PGI..

And what were the issues, which caused it to go on nonaccrual?.

We don’t generally go into operating fundamentals of our portfolio companies, Mickey, but I’m sure there’ll be some disclosure you can review in the Q. I don’t have that disclosure in front of me right now, but I think we’ve had a reasonable amount of discussions historically on the issue..

Okay.

What did you – why did your CLO-related GAAP income decline, even though the portfolio grew and the yields improved as well?.

Mickey, this is Deep. We had a couple of deals that were option redeemed. We also had one refinancing, that – which causes some level of cash flow. Income did decline. Overall effective yields did increase, and we would expect that to kind of revert in the next quarter..

Okay. And my last question. Unfortunately, we’re entering another upward cycle of the COVID pandemic. And it’s unclear, at least to me, how much support the federal government would provide if we were to return to a situation with stay-at-home orders or things like that.

So could you perhaps describe to us how you’ve structured the portfolio in terms of industries and CLO managers to contend with that risk?.

Sure, Mickey. I think we’ve always tried to take a fairly broad view of the portfolio. We’ve always looked fairly carefully and intentionally. At our sector exposure, this is something we, I think, talked about as we were going into and – at the sort of worst part of the COVID pandemic and the accompanying economic slowdown last year.

So we’ve looked at the various components of our loan book. We’ve certainly looked at various components of our CLO portfolio with those issues very much in mind.

Deep, would you like to address the CLO book specifically on that issue?.

Sure. Mickey, in the CLO book, one of the focuses this quarter in our additions were focused on longer-dated reinvestment period equity in the new issue market. As you know, the length of the reinvestment period is extremely beneficial, especially going into potential periods of downturn.

And we were able to connect on two very large 5-year reinvestment period equity, one we purchased in the secondary market, one in the new issue market. That we drove the negotiations, and we really crafted that deal with a top-tier manager.

And again, we’re very pleased with how we repositioned the book into this – into an extended weighted average reinvestment period of our CLO book this quarter..

So if there was another period of volatility overall, the book has enough reinvestment period to take advantage of that..

We hope so, Mickey. I mean, it depends, obviously, on the magnitude and duration of any prospective downturn. But we have tried to architect the entirety of the investment portfolio and the CLO book, certainly, with those things, again, very much in mind..

And Jonathan, in terms of CLO managers, do you – how would you characterize your approach to investing with top-tier managers versus mid-tier versus lower tiered? There’s a price for everything in this world. And obviously, there can be attractive opportunities in the lower-tier managers if the expected returns are high enough.

But are you staying away from that group? Or are you sort of agnostic? Could you help us understand that?.

Sure, Mickey. I think you said it perfectly. There is a price for everything. We historically, really, over the entire duration of our involvement in the CLO tranche investment business, have taken a view that we want to be as broad based and as flexible as we possibly can be.

How that has manifested itself is that we’ve invested considerably with first-tier managers. Our first-tier manager exposure has and continues to be the largest part of our investment book across Oxford Square.

At the same time, to the extent there are unusual opportunities, compelling opportunities to invest in CLO junior debt and equity tranches managed by second or lesser tiered collateral managers, we will certainly look at those and occasionally avail of those opportunities as appropriate.

But I think you said it well, which is that we are interested in any investment, CLO-related investment at a price..

That’s helpful, Jonathan. And just one follow-up that occurred to me. Perhaps, for some folks on the call, it would be helpful for us to understand the non-qualified asset bucket, which, in your case, the CLO equity tranche has been 30% now for a handful of quarters.

Could you describe how that affects your ability to invest in that sector on a go-forward basis?.

Sure, Mickey. Oxford Square Capital Corp. as a BDC RIC is subject to the relevant BDC-related provisions of the Investment Company Act of 1940, which compels us to make no investment in a non-qualified asset if at the time we are invested in excess of 30% of our assets in non-qualified investments.

CLO tranches are almost universally or universally non-qualified for the 1940 Act requirement. So from a practical perspective, we can only generally invest around 30% of our assets in CLO debt and equity at Oxford Square Capital Corp. or in any other non-qualified investment..

So Jonathan, could you help me reconcile that to – I think Deep said you invested in a couple of new CLO equity tranches this quarter. One was primary, one was secondary.

How do you – how can that be if the CLO equity has been above 40% now for several quarters?.

Sure, Mickey. The test is made at the time of the investment. So obviously, we raised a great deal of additional capital through the mechanism of our baby bond issuance at Oxford Square intra – at an intra-quarter date. But at the point of measurement, at the point at which the test is made, that is the measurement that’s considered..

Okay. That’s what I thought. That’s helpful. Those are all my questions. Thank you very much for your time..

Thank you, Mickey, very much for your questions.

Operator, anything else? Any other questions from the group?.

We have no further questions, so I will turn the conference back over to Jonathan Cohen, CEO..

Thank you, operator, very much. I’d like to thank everyone on the call and listening on the replay for their continued interest in Oxford Square, and we look forward to speaking to you again soon. Thanks very much..

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