Oxford Lane Capital Corp. (OXLC) Q2 2027 Earnings Report, Transcript and Summary

Good morning, and welcome, everyone, to the Oxford Lane Capital Corp. Second Quarter Earnings Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Jonathan Cohen, Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to the Oxford Lane Capital Corp. Second Fiscal Quarter 2027 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our CFO; and Joe Kupka, our Managing Director. Bruce, could you open the call 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 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. 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 return the call back to Jonathan.

Thank you, Bruce. On September 30, our net asset value per share stood at $9.95, compared to a net asset value per share of $10.74 as of the prior quarter. For the quarter ended September, we recorded GAAP total investment income of approximately $82.2 million, representing a decrease of approximately $4.8 million from the prior quarter. The quarter's GAAP total investment income consisted of approximately $78.8 million from our CLO equity and CLO warehouse investments and approximately $3.4 million from our CLO debt investments and from other income. Oxford Lane recorded GAAP net investment income of approximately 74 -- I'm sorry, $47.8 million, or $0.49 per share for the quarter ended September compared to approximately $50.2 million, or $0.51 per share for the quarter ended June 30. Our core net investment income was approximately $66.4 million, or $0.68 per share for the quarter ended September compared with approximately $93.4 million, or $0.95 per share for the quarter ended June 30. As of September 30, we held approximately $7.5 million in newly issued or newly acquired CLO equity investments that had not yet made initial distributions to Oxford Lane. For the quarter ended September 30, we recorded unrealized depreciation on investments of approximately $43.8 million and net realized losses of approximately $22.6 million. We had a net decrease in net assets resulting from operations of approximately $18.5 million, or $0.19 per share for the second fiscal quarter. As of September 30, the following metrics applied. We note that none of these metrics necessarily represented a total return to shareholders. The weighted average effective yield of our CLO equity investments at current cost was 10.5%, down from 11.1% as of June 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 12.4%, down from 16.3% as of June 30. We note that the cash distribution yields calculated on 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 30, we made additional CLO investments of approximately $18.7 million, and we received approximately $31.2 million from sales and from repayments. On October 22, our Board of Directors declared monthly stock distributions of $0.10 per share for each of the months ending January, February and March of 2027. On October 2, we redeemed $30 million of our 5% notes due 2027 and subsequently announced that we will redeem the remaining $40 million currently outstanding on December 4, at which point these notes will be fully retired. We issued an additional 1.6 million shares of our 8.25% Series 2031 term preferred stock on October 23 with an aggregate liquidation preference of $40 million. These shares are part of the same series initially issued on March 20, 2026. With that, I'll turn the call over to Joe Kupka.

Thank you, Jonathan. During the quarter ended September 30, 2026, U.S. loan market performance improved versus the prior quarter. U.S. loan price index increased from 94.96% as of June 30 to 95.32% as of September 30. The increase in U.S. loan prices led to an approximate 5-point increase in median U.S. CLO equity net asset values. Additionally, we observed median weighted average spreads across loan pools within CLO portfolios decreased modestly to 300 basis points compared to 302 basis points last quarter. Accumulated spread compression has weighed on cash flows. According to Barclays, BSL CLO equity payments in 2026 have been the lowest since the global financial crisis. The 12-month trailing default rate for the loan index decreased to 0.55% by principal amount at the end of the quarter from 0.97% at the end of June. We note that out-of-court restructurings, exchanges and subpar buybacks, which are not captured in the cited default rate, remain elevated. CLO new issuance for the quarter totaled approximately $46 billion, reflecting an approximate $12 billion increase from the previous quarter. Additionally, the U.S. CLO market saw approximately $86 billion in reset and refinancing activity in calendar Q3 2026 compared to approximately $94 billion in the previous quarter. Oxford Lane remained active this quarter, trading nearly $50 million in CLO equity. During the quarter, we also led or participated in numerous resets and refinancings, taking advantage of tighter liability spreads to lower the cost of funding and lengthen the weighted average reinvestment period of Oxford Lane's CLO equity portfolio from November 2029 to January 2030. We continue to evaluate existing investments for opportunities to improve the economics of our CLO equity positions. In the current market environment, we intend to continue to utilize our opportunistic and unconstrained CLO investment strategy across U.S. CLO equity, debt and warehouses as we look to maximize our long-term total return. And as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy. With that, I'll turn the call back over to Jonathan.

Thanks, Joe. Additional information about Oxford Lane's second fiscal quarter has been uploaded to our website at www.oxfordlanecapital.com. And with that, operator, we're happy to poll for any questions.

[Operator Instructions] Our first question comes from Erik Zwick at Lucid Capital Markets.

I wanted to start maybe with just a bigger term, kind of bigger picture question. And looking back over the past 6 quarters, NAV is down 49% and the quarterly distribution rate has been reduced, I think, by 78%. And Oxford Lane is not alone in this experience. The other equity CLO funds in the space have experienced very similar conditions. So from an investor who's looking at this as a total return vehicle, over the past 6 years -- sorry, the past 6 quarters this -- I'm trying to think of the best way to characterize this, kind of, been a very adverse experience. So it seems relatively kind of unprecedented over the recent history, 5 or 10 years. So just curious, as you, kind of, take a look at that, is there anything, kind of, different you could have done to potentially navigate this environment differently? And just kind of curious to your thoughts there.

Within the context, Erik, of investing in CLO tranches and specifically CLO equity and, to a much lesser extent, CLO junior debt tranches, I feel that we've constructed an effective portfolio, but it has been a portfolio that has been impacted substantially by market conditions. The CLO market has been in a decline and at -- selling at depressed levels for the last 18 months or slightly more than 18 months. So I appreciate the question, and we're sensitive to it. But at the same time, we have to acknowledge the overall state of this asset class.

Yes, that makes sense. And I guess thinking about the future and from here, and it's been a challenging environment in the market, as you mentioned, you have a very long experience in this market. To what extent is this potentially reversible from the NAV decline and then the cash flow yield? What does it take to, kind of, rebuild and repair from here? And I guess the second part of the question is, how is the current -- your view of the current market and maybe the next few quarters, do they potentially present an opportunity? Like where do you, kind of, go forward from here?

Sure. I think the answer to the question, Erik, is best reflected in the state of the CLO secondary market. And in our opinion, we are seeing interesting and even compelling opportunities now within that market for this asset class. So there is, I think, only a quite weak bid for CLO equity broadly, and that has translated into lower transaction prices. And those lower transaction prices, and we are actively -- as you can see, we're actively participating in that market and buying things at prices that we think are compelling, hopefully will provide us with long-term compelling total returns from these depressed levels. That is the hope. And certainly...

Yes.

And certainly, measured on a scale of cash-on-cash returns, the opportunities that we're seeing now, we think, are truly interesting.

Yes. No, that's good to hear. And you guys have, as you pointed out, been very active there. I guess it's interesting to me, having covered a number of different, kind of, credit-based products in the past that this occurred in, kind of, the current market environment, while there's been a little bit of elevated credit issues and maybe some LME transactions, there hasn't been a major credit downturn in the U.S. What do you think maybe has, kind of, turned the sentiment for the market and, kind of, drove the market, kind of, reaction that we've seen in terms of leveraged loan prices and things of that nature since it was not credit in this instance?

Well, leveraged loan prices have not been depressed. Leveraged loan prices, if anything, have been strong. And that gets manifested in U.S. syndicated corporate loan spreads, which have been tight. And those tight spreads, all things being equal, diminish the embedded arbitrage within every U.S. CLO equity tranche. So that's been a weight. But I think a more important weight, a more important factor in this equation has been an overall turn in sentiment, which you noted, starting a little less than 2 years ago. And the reason for that may be embedded inside of a similar turn in sentiment for private credit broadly, which we certainly saw start to play out pretty powerfully about 18 months ago. So I think -- or we believe that flows of funds and technical factors and supply and demand characteristics are pushing this market or have pushed this market in a certain way that, again, we're hoping starts to reverse fairly soon.

I appreciate all the thoughts. And I guess the key takeaway here is that you guys continue to manage the strong portfolio that you've built. Certainly, it's impossible to be completely immune to market moves. And hopefully, that the market moves back in your favor in the near term. But in the meantime, you'll continue to manage and make smart investment opportunities with that long term in mind. So it's a good way to approach it.

And that concludes our Q&A session. I would like to turn the conference back over to Jonathan for closing remarks.

Thanks very much. I'd like to thank everybody who has listened to this call live or on the replay, and we look forward to speaking to you again soon. Thanks very much.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.