Oxford Square Capital Corp. (OXSQ) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to TICC Capital Corp. First Quarter Conference Call. [Operator Instructions] Please note, this event is being recorded. I now would like to turn the conference over to Jonathan Cohen. Mr. Cohen, please go ahead.

Thanks very much. Good morning, and welcome, everyone, to the TICC Capital Corp. First Quarter 2012 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President and Chief Operating Officer; Patrick Conroy, our Chief Financial Officer; and Bruce Rubin, our Controller and Treasurer. Bruce, could you open the call today with the discussion regarding forward-looking statements?

Sure, Jonathan. Today's 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 released earlier this morning. Please note that this call is the property of TICC Capital Corp. Any unauthorized rebroadcast of this call, in any form, is strictly prohibited. I'd also like to call your attention to the customary disclosure in our press release today regarding forward-looking information. Today's conference call includes forward-looking statements and projections, and 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 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 at www.ticc.com. With that, I'll turn the presentation back over to Jonathan.

Thanks, Bruce. As we noted in our press release this morning, TICC reported total investment income of approximately $14.7 million for the first quarter of 2012, representing an increase of about $1.5 million over the fourth quarter of 2011. Consistent with recent quarters, our revenue components included the continuation of strong cash flows from our syndicated and bilateral loans, as well as distributions from our investments in the equity tranches of our CLO investments. Additionally, our increase in total investment income was consistent with the continued strong performance and additional investments made in CLO equity tranches. Our first quarter net investment income was approximately $8.2 million, or $0.24 per share, which includes the impact of a capital gains incentive fee accrual of approximately $1.1 million. Excluding the impact of that accrual, our core net investment income was approximately $9.2 million, or $0.28 per share. We also recorded net unrealized appreciation of approximately $8.6 million and net realized capital gains of approximately $300,000 for the quarter. As a result of those realized and unrealized gains, we had a net increase in net assets resulting from operations of approximately $17.1 million, or approximately $0.51 per share. At the same time, we believe that the credit quality of our portfolio remains stable. Our weighted average credit rating, on a fair value basis, was 2.1 at the end of the first quarter of 2012, which compares to a 2.2 at the end of the fourth quarter of 2011. I note that lower numerical ratings correspond to higher credit quality. Therefore, the 2.1 represented a small increase in overall credit quality with respect to the first quarter. Our Board of Directors has declared a $0.27 per share distribution for the second quarter of this year, payable on June 29, 2012, to stockholders of record as of June 15. I believe that we saw a strong first quarter, as reflected by our having raised net proceeds of approximately $46 million and having deployed approximately $57.5 million of capital, consistent with our investment strategy, as well as by the continued very close matching of our taxable income to our dividend distributions. As previously mentioned, our increase in total investment income over our fourth quarter results was largely attributable to the continued strong performance of our CLO debt and equity investments. With regard to our CLO subsidiary, we note that we remained in full compliance with all of the various covenant tests, and that the CLO's monthly trustee reports are available on our website. We believe that the market is currently favorably positioned for our type of investing. Opportunities across a wide range of debt investments are available to us, with what we believe are attractive risk return characteristics. Those opportunities include direct investments in middle-market and lower middle-market syndicated corporate loans, and indirect investments in the same type of assets through CLO BB and equity investments. With that, I'd like to turn the call over to Patrick, who will describe our first quarter investment activities and go through some of the financial highlights from the first quarter.

Thanks, Jonathan. At March 31, 2012, net asset value per share was $9.50 compared with the net asset value at the end of the fourth quarter 2011 of $9.30. As mentioned previously, during the first quarter we deployed approximately $57.5 million in additional investments. Also during the quarter, we announced that we completed a public offering of about 4.9 million shares of our common stock including 637,500 shares of common stock issued to cover overallotments. The offer is at a price of $9.96 per share for total gross proceeds of $48.7 million, net proceeds after cost were approximately $46 million. For the quarter ended March 31, TICC recorded earned income from our investment portfolio in the following categories: $7.9 million from our direct investments; $5.5 million from our CLO equity investments; and approximately $1.2 million from our CLO debt investments. At March 31, the weighted average yield on the debt investments was approximately 11.6% compared with 11.3% at December 31. And I note again, we have no investments on nonaccrual status at this time. As John already mentioned, the Board of Directors declared a distribution of $0.27 per share for the second quarter, payable June 29 to record holders as of June 15. Now let me turn it back to Jonathan.

Patrick, thank you very much. With that, we're very happy to see if there's any questions. We're happy to take questions from the group.

[Operator Instructions] And the first question comes from Joel Houck from Wells Fargo.

Kind of a 2-part question, I guess. One is, if you kind of look at the existing portfolio kind of given the strength we've seen in the capital markets, which obviously helps the portfolio, what is your thoughts on prospective IRRs from continuing to kind of hold these investments? And then the second part is, when you look at deploying new capital, can you maybe compare and contrast the returns, expected returns you're seeing on kind of the direct investments in the middle-market companies versus as you fray the indirect investments through the CLO debt and equity opportunity?

Sure, Joel. We're looking obviously across a fairly wide range of investment opportunities right now. We've got bilateral transactions in the middle market. We've got lower middle market and conventional middle-market syndicated loans. We've got transactions both inside and outside of our existing CLO, which obviously have different return, prospective return parameters. And then we've got, as you referenced, CLO equity and BB tranches. I mean, I'd say as a general matter, yields total IRR expectations across that fairly wide continuum are anywhere from kind of the 7% -- 6%, 7% at the low end, for some of the larger higher credit quality middle-market syndicated loans, that we typically go into our CLO financing structure.

And just as a reminder, our cost of capital inside the CLO is L plus 2.25%, so obviously, in the inside, the vehicle investing in 6% or 7% is profitable business.

Exactly. All the way up at the other end of the continuum to return expectations as high as high-teens, or in some cases higher, for some of the equity tranches of the CLO structures that we own.

And so is there an opportunity maybe that to recycle some of the lower IRRs stuff into its kind of new opportunities which might, whether there direct or indirect, might present high IRR? I guess it's more of a how do you think about the marginal investment versus what you have existing in your portfolio?

Sure. I mean we have a variety of ways to recycle capital. Some of the investments that we've made, we have pretty good control over liquidity events and repayment. Certainly, some of the more liquid positions, we can simply sell in the open market, some of our bilateral positions or smaller syndicated deals we've got other things that we can look at in terms of capturing liquidity there. So that's a process. It's a very good question, and it's a process that we're engaging in essentially every day. I mean that's a real time discipline for us looking at how we recycle capital, what the risk profile of various new investments are and how we can maximize the overall return structure of the portfolio, obviously, with risk and risk adjustment very much at the front of mind.

And the next question comes from Boris Pialloux from National Securities.

Jonathan, so actually I wanted to go back to the CLOs. You haven't published your 10-Q yet, but what was the size of the equity CLO tranches in your portfolio? And the second question is, I mean I understand that the distributions are going up, but is that distribution actually reflects your portfolio, equity CLO portfolio, in Q4 2011, or does that include new investments following the equity raise?

Sure, Boris. Thank you for the question. The CLO equity rate of return has increased, well for 2 reasons, really. First of all, we've bought some additional assets there. And secondly, on sort of a same-store comparison basis, the return for the existing paper that we've held, in some cases, for years now, has generally risen, and generally rose in the first quarter for a variety of reasons. So as we look at this asset class, both the BB tranche opportunities and the equity, CLO equity opportunities, it's a very interesting part of the investment, debt investment world that we continue to like. Now we've got limited headroom in terms of how much activity we can continue to engage in there, and we've bumped up against that issue historically simply because of the BDC rules requiring us to invest no more than 30% of our total assets in what are termed, as you know, nonqualified assets. Nonqualified assets include not only CLO-related investments, but things like securities issued by foreign corporations, public company debt, which we occasionally do buy as well. So it's a minority part of our investment portfolio and will always be simply from a rules-based perspective, but one that clearly has and continues to generate what we regard as very compelling risk-adjusted returns.

Yes, I mean I guess to go back to that, if I understand that last -- in Q4 2011, the share, 2.8% of the portfolio was roughly in equity CLOs. So what that, let's say, it's $10 million, $11 million, and you're generating $5.5 million from this $10 million, $11 million investment. So it's almost like when I look at your net investment income, it's like 1/3 is coming almost from 2% or 3% of your investment portfolio. Am I reading that correctly or...

No, no, no. It's not 2% or 3% of our investment portfolio. I think you've made an error in your calculation there. Patrick?

Let me just say, I think what you're looking at in the 10-K at the end of the year, ended what it appear [Audio Gap] is based on net assets, not based on total portfolio size. So you just redo the math a little bit, and those numbers pop up a bit. It is true that we added to the equity positions during the first quarter and they are -- they do have a very significant yield. But I just would look at your numbers one more time if you could, and if you rerun them, the percentage of our portfolio which is equity at the end of the year was much higher than 2% to 3%, it was more like 7% to 10% of the portfolio. It has moved up again.

Right, right. In answer to a question that wasn't asked, we ended the year last year at about 21% of our total portfolio invested in CLO-related assets, a combination of BB paper and equity, we ended the first quarter at approximately 26%.

On a gross basis? On a gross assets basis?

On a gross basis, precisely.

The next question comes from Troy Ward from Stifel, Nicolaus.

Yes, you just answered the one I was wanting to know, which is what percentage of the portfolio, you said it was 21%, now up to 26%. Then just a second question, kind of a follow-up on what Joel has added, I think on as we think about your next opportunity, can you focus a little bit and give us some color on what you're seeing in the bilateral loan deals? Obviously, we've seen a lot of fund flow activity into the higher yield stuff, and when that happens, we've seen historically, that some of those plays start to come down into what we consider the traditional middle market. Are you seeing any pressure on structure, structure but also pricing, are you seeing anything of that in the deals that you're looking at?

You know, that's a very good question, Troy. We've seen a decent number of bilateral opportunities recently, and we haven't done one, a new bilateral deal for a while. Obviously, we still have some very significant bilateral positions in the portfolio. When we looked at new bilateral deals, we're effectively comparing them to the continuum of opportunity that I was talking about a minute ago. Again, everything from sort of the larger sized middle-market syndicated loan opportunity to CLO-related opportunities and everything in between. And our expectation is that we will likely be doing more bilateral investing going forward. But we've had a pretty fertile market for investment of the type that we've been doing recently, and we haven't sort of felt the need to push bilateral opportunities that we weren't really excited about to the top of the list thus far. That said, my expectation is that we went from being 100% bilateral when we started and for the first several years of our operation, to very little bilateral activity recently. And my sense is that, that pendulum will begin to shift back at some point going forward.

Now is that shift a function of what you're seeing and then it's more attractive? Or is it a shift because you're bumping up against the 30% bucket?

I say it's more of the former. Because again, we have an unlimited capability to do syndicated transactions, club deals, small middle market, loan participations and things like that. So it's really that population that we're comparing the bilateral opportunities set against. So I would say it's the former.

There are no more questions at the present, so I'd like to turn the call back over to Mr. Cohen for any closing remarks.

Wonderful. Well thanks very much everybody for your continued interest and your attention, and we look forward to talking to you next quarter. As always if you have any additional questions, please feel free to give us a call directly. Thanks very much.

Thank you. This concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating, and have a nice day.