oxlc – Scalper1

Oxford Lane Capital And Eagle Point Keep Churning Out The Cash, While High Yield Market Jitters Drag Down NAVs

Summary As high yield bond and corporate loan markets continue to be hammered by nervous investors, funds like OXLC and ECC have seen their NAVs drop even more. This is a natural result of their leverage, but essentially is irrelevant to their ability to generate cash flow and make their dividend payments. These are tough vehicles for some retail investors to understand and appreciate, but offer impressive income potential to those willing to make the effort. As the proverbial blood continues to run in the streets of the high yield bond and leveraged loan markets (because of a range of fears related to the Fed increasing rates, the world economy slump, etc.) the non-investment grade companies that comprise those markets continue to go about their business, making their interest and principal payments. This translates into strong cash flows and high distributions for Oxford Lane Capital Corporation (NASDAQ: OXLC ) and Eagle Point Credit (NYSE: ECC ), the two closed end funds that specialize in buying collateralized loan obligations (“CLO’s”). CLO’s are leveraged, special purpose vehicles that function like “virtual banks,” buying and holding senior, secured floating-rate loans to non-investment grade companies. (This is the same cohort of companies that issues high-yield bonds. But whereas high-yield bonds are unsecured and typically recover only 20-30% in the event of the issuer’s default, senior secured loans have historically recovered 70-80% in the event of default, so the overall credit loss on a portfolio of loans over time is less than half the credit loss on a portfolio of high yield bonds.) Both ECC and OXLC put out quarterly reports yesterday and followed up with investor conference calls this morning. In both cases the messages were similar, that the market for the assets they hold – CLOs and the loans held by CLOs – are way down, the cash flows from those assets continue strong, and the reinvestment opportunities for CLOs in the loan market are very attractive. But the strong income prospects this represents (OXLC yields over 22% and ECC over 14%) are not enough to offset the fears of many closed end fund investors, who remain fixated on the net asset values (NAVs) of both funds. These have dropped in recent months to reflect the depressed markets for their underlying assets. Here is why the NAV of a CLO fund would drop as the market for its underlying assets drops. Suppose the equity in a typical CLO is leveraged 10 times. If the market for the loans held by that CLO drops by 1%, then the mark-to-market or “paper loss” to the equity of the CLO will be 10 times 1%, or 10%. This means that investors should not be surprised to see NAVs of ECC or OXLC fall at about ten times the rate as the drop in market prices in the loan market. None of the drop however, has any relation to the ability of the portfolio to generate the cash needed to pay distributions. Investors who can understand that and be comfortable with it can appreciate the opportunity these funds represent for income investors. But be prepared for a potentially volatile ride in terms of market value, although many of us who have owned the funds for awhile may feel – given the current entry point versus where we got in – that today’s new investors will have a smoother ride than we did.

Oxford Lane Capital: Cash Flow Jumps, But So Do Paper Losses

Summary Oxford Lane Capital announces sharp increase in cash flow since last quarter. Last year’s newly acquired CLO assets are now starting to distribute cash, tripling cash flow from one quarter ago. Meanwhile, however, the assets pumping out this additional cash have dropped in value as credit risk assets in general have dropped in recent months. So cash flow up, but NAV down. Will the market be happy or sad about this? And how will the “smart money” react? Wish I knew. Oxford Lane Capital (NASDAQ: OXLC ) announced its quarterly results just after the market close on Tuesday and there was plenty for both optimists and pessimists to react to. Those who focus on cash flow (since that’s what drives CLO distributions and the distributions from funds like OXLC that buy CLO equity) were pleased to see that OXLC’s “estimated distributable net investment income” which is the cash flow that funds its 60 cents a quarter dividend, was $1.01, three times the level of last quarter, and 25% higher than it was a year ago when the fund decided to both raise its dividend and pay out a special one. The increased cash flow is no surprise, since OXLC raised considerable new equity a year ago, invested it in new CLO equity and has been waiting for that newly purchased equity to start making cash distributions to the fund. It can take up to 2 quarters for newly purchased CLO equity to start making payments to its equity holders. Three months ago OXLC reported that it had about $172 million of CLO investments that were still in the pre-distribution stage, out of $330 million total assets. That’s quite a drag, and explains why the portfolio as a whole, including the non-distributing assets, had only yielded 2.9% for the preceding quarter (annualized, that’s only 11.6%). But this time around, only $90 million, instead of $172 million, is in that pre-distribution stage, out of total assets of $354 million, and the portfolio as a whole is distributing 5.0% to OXLC, which is 20% annualized. With more assets “working,” it is no surprise the cash flow available to fund distributions is higher. Next quarter should improve further, as some of the current $90 million of pre-distribution equity begins its distributions to equity holders as well. To me this augurs well for OXLC’s ability to continue to meet its current distribution, which works out to a yield of over 15%. Along with that good news, OXLC also reported that its net asset valuation (which is largely model-based since there is very little trading or market for most seasoned equity tranches of CLOs) had dropped considerably since the last quarter, from $15.54 to $14.09. Although this just reflects paper losses in the valuation of CLOs that are still pumping out the same cash they were previously, this will undoubtedly upset and perhaps even panic some OXLC holders who take seriously the NAV number (which I don’t). To summarize, the fund is pumping out more cash than ever before, but its NAV has dropped because of unrealized paper losses on the portfolio generating that increasing cash flow. One interesting thing about OXLC trading Tuesday: · During the day, before the announcement of the greatly increased cash flow, the stock jumped 25 cents. · After hours trading, after the announcement was made public, the stock dropped back 30 cents. · Which was the smart money? · My guess is that the “cash flow increase” is the more important factor, compared to the “paper loss” drop in the NAV. · Time will tell. Disclosure: The author is long OXLC. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.