Good morning and welcome to the Oxford Lane Capital Corp. Scheduled Second Fiscal Quarter Earnings Release and Conference Call. All participants will be in a 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, CEO. Please go ahead.

Thanks very much. Good morning everyone and welcome to the Oxford Lane Capital Corp. second fiscal 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 today with the disclosure regarding forward-looking statements?

Thank you, Jonathan. Sure will. Today's conference call is prerecorded and audio replay of the call will be available for 30 days. The 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 Web site at www.oxfordlanecapital.com. With that, I'll turn the presentation back over to Jonathan.

Thank you, Bruce. On September 30, 2020, our net asset value per share stood at $3.88 compared to a net asset value per share of $3.23 as of June 30. For the quarter ended September 30, we recorded GAAP total investment income of approximately $30.1 million representing an increase of approximately $400,000 from the prior quarter. The quarter’s GAAP total investment income from our portfolio consisted of $28.1 million from our CLO equity investments and $2 million from our CLO debt investments and from other income. Oxford Lane also recorded GAAP net investment income of approximately $18.2 million or $0.21 per share for the quarter ended September 30 compared to approximately $17.6 million or $0.23 per share for the quarter ended June 30. Our core net investment income was approximately $20.3 million or $0.24 per share for the quarter ended September 30 compared with approximately $17.7 million or $0.23 per share for the quarter ended June 30. We note that by way of comparison, our portfolio generated cash distributions of approximately $22.4 million during the month of July and approximately $41.7 million during the month of October of 2020. During the quarter ended September, we issued a total of approximately 3.8 million shares of our common stock pursuant to an aftermarket offering resulting in net proceeds of approximately $16.1 million. For the quarter ended September 30, we recorded net realized losses of approximately $33.2 million or $0.39 per share. We recorded net unrealized appreciation of approximately $85 million or $1.00 per share. We had a net increase in net assets resulting from operations of approximately $70 million or $0.82 per share for the second fiscal quarter. As of September 30, 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 11%, down from 11.7% as of June 30. The weighted average GAAP effective yield of our CLO equity investments at current cost was 14.5%, up from 13.4% as of June 30. The weighted average cash distribution yield of our CLO equity investments at current cost was 14.9%, up from 14% 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 $68 million and we received approximately $55.7 million from sales and repayments. On October 29, our Board of Directors declared monthly common stock distributions of six and three quarters cents per share for the month of January, February and March of 2021. And with that, I'll turn the call over to our Portfolio Manager, Deep Maji.

Thank you, Jonathan. During the quarter ended September 30, the U.S. loan market strengthened versus the quarter ended June 30. U.S. loan prices as defined by the S&P/LSTA Leveraged Loan Index increased from 89.9% of par as of June 30 to a quarterly high of 93.96% of par on September 16, before declining to 93.2% of par on September 30. As we mentioned last quarter, we anticipated that the loan collateral within U.S. CLOs would continue to face headwinds from elevated ratings downgrades over the past six months, specifically to CCC or below rated and increasing loan default rate which increased to approximately 4.2% by principal amount as of September 30 from 3.2% on principal as of June 30 and CLO equity cash flow diversion. According to Bank of America research, approximately 22% of outstanding U.S. CLO transactions were failing one of those cash flow diversion tests as of September 23, 2020, which is the highest percentage since the 2008 global financial crisis. While CLO equity cash flow diversion risk remains elevated, we have seen an improvement in cash flow diversion tests over the past several months due to the proactive portfolio management by the CLO managers, certain CCC issuers being upgraded and self-healing cash flow diversion mechanisms of the CLOs themselves. We saw the similar dynamic during the 2008 global financial crisis when approximately 50% of our CLO transactions, sales cash flow divergent tests for an average of two to four quarterly payment dates before resuming CLO equity payments over time. In the current market environment, we intend to continue to utilize an opportunistic and unconstrained CLO investment strategy, partially U.S. CLO debt equity tranches looking to maximize our long-term total returns and as a permanent capital vehicle, we have historically been able to take a longer-term view towards our investment strategy. With that, I will turn the call back over to Jonathan.

Thanks, Deep. Additional information about Oxford Lane’s second fiscal quarter performance has been posted to our Web site at www.oxfordlanecapital.com. And with that operator, we're happy to open the call up for any questions.

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

Good morning, everyone. Hope you’re all well. Jonathan, I guess it goes without saying that the outlook for the economy is very uncertain. And in fact, S&P puts the odds of a double dip recession at about one out of three. And I've seen that the leverage loan market is off from its peak in September, which I suppose could reflect some of that uncertainty. What I'd like to understand is what you're seeing from the CLO managers in which you invest in terms of how they're positioning their portfolios for the fourth quarter and going into next year concerning how much uncertainty persists?

Very good question, Mickey. I'm going to turn that over to Deep to answer.

Hi, Mickey. How are you?

Hi. Good. Thanks.

Sure. So our CLO managers have definitely, in certain cases, been taking a bit more of a defensive position. I think in light of COVID especially, managers have been positioning and issuers that they feel are going to be more resilient against the second wave of COVID and essentially a second kind of drawdown in the economy from the potential ramifications that we – still remains to be seen from COVID. So I think the managers are very cognizant of it. They do have to maintain certain levels of diversity scores. But we have seen managers reflect the current market environment into the way that they're positioning their portfolios.

Okay. That's helpful, Deep. And in terms of the managers, we've seen a steady decline interestingly in CLO CCC buckets. I'm talking about the market in general, which peaked back in May. I'd like to understand how much of that decline do you think was the opportunity for those borrowers who are classified as CCC to refinance their loans into the high yield market, which has been exceptionally strong versus CLO managers just taking their losses and rotating into higher rated credits? And what do you think the outlook is for CCC buckets over the next several quarters?

Sure, Mickey. I think our view is that some of the dynamic you've just described is likely to be due to the element that you just mentioned, but probably not all of it. There's probably other factors at work.

And the outlook, Jonathan, do you think CCC buckets have peaked or could they start to climb again?

I think maybe that really depends on the arc of the economy's sort of trajectory over the course of the next year or two. That's more of a leading indicator I think – a lagging indicator than a leading one.

I understand. But, Jonathan, if we look at the Great Financial Crisis and clearly understanding that CLOs back then, CLO 1.0 are not the same as the structures that we have today but it's the best comparison that we have. Median equity cash flows bottomed out – CLO equity cash flows bottomed out about one year after the default rate began to spike. So in our case, today we're sort of maybe halfway through that. How do you expect CLO equity cash flows to behave in this particular cycle, assuming we don't have a double dip recession?

Sure. So I would say that, clearly there's a lot of different factors that go into 1.0 versus 2.0. For example, 1.0 CLOs had the benefit of a significantly better cost of funding where AAAs were anywhere from output 25 to 29 basis points versus today where they average somewhere between 110 and 130 basis points, again, give or take. The benefit we have today is we have the benefit of LIBOR for us, giving where LIBOR is currently. And we also have the benefit of generally a better collateral pool and better leverage levels compared to the 1.0 era. So there's a lot of factors that go into play in terms of CLO equity cash flows over the coming year. We have seen a positive trend from the previous quarter to what we're seeing for the upcoming quarter, as Jonathan mentioned, in terms of cash flow that we received in July versus October. But I think managers have obviously learned from what happened in the last cycle and they're taking that into consideration as they monitor their interest diversion test and OC tests in the current market.

I understand, Deep. And just a couple last questions. I think in the prepared remarks, you mentioned that about a fifth of the CLO equity market was diverting cash flows. It looks like in Oxford Lane's case, it's a similar number based on a quick glance at the PowerPoint this morning. Is that correct?

That's by number of deals. We have some level of diversion and you have to think about the market value of the names that we have that are currently diverting versus the absolute count. That's all I would say on that matter.

Yes, I understand. I didn't have time to do that naturally. And lastly, can you give a sense of – give us a sense of how CLO equity has traded in October last month that just finished?

So we've seen definitely more robust volumes, especially after the October payment dates, which were generally pretty strong given the dynamics around LIBOR and the lesser amount of interest aversion that we saw. So we've seen greater liquidity in the month of October, more trading activity than we have historically. That being said, obviously, going into the election and the remainder of the quarter, we'll see how that continues to persist or not.

And how have CLO equity prices behaved in October at least directionally?

I would say highly profile-dependent, Mickey, but not radically up nor down.

Okay, that's fair enough. Those are all my questions for this morning. I'll hop in the queue and let somebody else ask questions.

All right. Thank you, Mickey, very much.

You’re welcome.

This will conclude our question-and-answer session. I'd like to turn the conference back over to Jonathan Cohen, CEO, for any closing remarks.

Thanks very much, operator. I'd like to thank everyone who took the time to hear this call today. And we look forward to speaking to you again soon. Thanks very much.

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