I hate to sound like a broken records, but investors have to watch the preferred stocks and debt of the Collateralized Loan Obligation (CLO) company’s and in particular right now Oxford Lane Capital Corp (OXLC). While this situation MAY turn out just fine I personally love to watch these CEF items play out–at least for education purposes.
Oxford Lane posted an update as of 4/30/2020 and it wasn’t pretty. The company is estimating a Net Asset Value of $2.67-$2.77/share. This is down 25% in the last month. The NAV on 3/31/2020 was $3.58 and was $6.81 on 12/31/2019—ouch! The common shares traded between $8 and $9.60 in January–now at $3.09–double ouch!!
The company press release can be read here.
As you all know being a closed end fund (CEF) Oxford Lane must maintain an asset coverage ratio of 200% on preferred leverage or they will need to raise cash via common share sales or through redemption of preferred shares.
The company has 3 term preferreds outstanding which are not trading too terribly bad–priced currently in the $19.00 to $23.00 range. You can see them here. Will folks panic out in the weeks ahead? Will shares then be a great bargain–or just a pure speculative bet?
Right now I am certain the company has breached the leverage limits–so we will see what the company does in the next few weeks.
We are likely to see Eagle Point Credit (ECC) and Priority Income Fund have the same issues as Oxford Lane—I will be watching.
Bear in mind that OXLC has an unleveraged expense ratio of almost 9 pct. – and more than 12 pct. includering leverage. My guess would be that those costs do NOT include indirect costs of approx. 5 pct. from their CLO equity investments. If/when distributions to CLO Equity holders are halted they will have no income and huge costs. And we haven’t even discussed defaults yet.
Some people argue that USO should be closed down. IMO these vehicles investing in CLO equity with leverage is the worst in this cycle (at least what I have come across).
https://cefdata.com/funds/oxlc/
Yes Peter–no doubt these are very high risk right now which is why I point it out again. In the past I have always said that these were high risk—BUT as long as the economy was good they likely would do ok (the preferred stock)–of course we no longer have that economy and it is a new ballgame–the same may be said of some business development companies, but it is likely next quarter before we see the destruction in the BDC arena.
Sure Tim – you are right. I have worked in the AM industri for almost 25 years and I must admit, that investors thirst for leverage keeps amazing me. By now most should know that it’s only a matter of time before the cycle ends and credit implodes. Considering the amount of credit we have managed to create each crash will be more severe than the prior one. Of course much of the blame can be placed with the CB’s and their phd’s that think they can build a model for everything. I have lived with -ve interest rates for 7 years. And believe me, it does no good. Investors will go searching for yield and buy BDC’s like OXLC or HY @2 pct./corporate perps @1 pct (european type of prefs.) No one can see a problem until it all comes crashing down – then everybody can. When this is over I believe that You will have the same search for yield in US as we’ve had in Europe. That means call protection is important. (even though credit quality is more important of course). Personally I really like Canandian IG reset prefs – they are pretty much priced at a CAD 5y rate of zero. You can lock in 4-5 years at a nice fixed rate and when they reset, rates are either higher or investors will demand less in return for holding IG prefs. (just my thesis). And they have NO call risk. Now I can even hedge FX without a huge loss.
Btw. it’s not that i disagree with your case about asset coverage for OXLC prefs. They will probably be fine – even though I don’t think i’ll take the chance myself 🙂
And thanks for a great site.
I don’t buy lottery tickets but I do satiate my betting compulsions with a (very) small stake in CLO funds.
So 22% of the CLO market gets downgraded in April by Moody’s, yet no mention of any of it in Oxford’s annual report?
Anybody cross reference their list of portfolio holdings against the downgrade list and see what toxic waste could be hiding on their books?
Pricing models can be manipulated. Payment streams cannot.
No mention of the Moody’s downgrade.
And look at those fair market value versus the cost.. if those were highly rated, those prices would be fire-sale prices. most are 33 to 50% of their cost.
https://www.sec.gov/Archives/edgar/data/1495222/000161577420005611/s124917_ncsr.htm#T05
Not too bullish on these CLO things. I still remember them as wearing the black hats in the Great Recession.
I re-read “All The Devils Are Here” (McLean/Nocera) from time to time so I won’t forget.
Not lacking coincidence I think is that Oxford, Eagle and Priority are all unrated.
On the other hand, tried to peel back the layers on Highland’s A-rated HFRO-A and didn’t get far. $100Ms in barely identifiable companies, the largest holding of which appears to be in a ringed-off subsidiary of a timber company which is also co-owned by multiple additional investors, in which they also have multiple investors. No real transparency here on asset value or marketability of most listed positions. Asset coverage notwithstanding, the ponzi-BDC-esque feel was unmistakable. Management viewing the capital as OPM came to mind.
@alpha8 thanks for that, i was considering the hfro pfds,
but now a hard pass after digging in.
the fund’s common looks doa also.
cheers.
alpha8-
I agree that the HFRO portfolio is not very transparent. But I did some digging and found that I like the preferred stock timber investment. You can read more about it in the investor presentation from Catchmark. I think Catchmark is a quality outfit.
Highland is invested in the Triple T Timberlands joint venture described on Page 37 of the presentation. I know I would consider investing in the project myself if it were available to retail accredited investors because of the diversification benefit.
http://filecache.investorroom.com/mr5ir_catchmark2/476/CTT_1Q_2020_IP_FINAL_5-5-20.pdf
Thank you Mozart. I had seen this and agree Timber itself has merit – but the HFRO-A $$ are buried in a subsidiary called Creek Pine Holdings LLC, ownership of which is split with other investors. Walled-off, this reminds me of what finally unnerved me in SLMNP – when they buried the exposure in a subsidiary LLC – so they have access to the gains, but if the operation goes south it can be cast adrift and given a Viking funeral. Keep in mind this is only one of “many” such Highland investments. The second top holding is in Nfront Inc. It may be a fine operation but it’s a software/service based company the value for which I would suspect is heavily based on goodwill – or the continued operation of the company. Then there’s the medical device delivery company ccs medical – heavy pressure on margins from low barrier to entry competition. I mean some people start those companies out of their home. It goes on. just my 2 cents.
alpha8- Yes, the Creek Pine Holdings JV arrangement is complex. I also saw the Nfront Inc holding listed on Morningstar which seemd odd so I called Investor Relations at Highlands and they said Morningstar had an error. The second top holding should be “NFRO REIT Sub, LLC” which is SafStor a self-storage development REIT. Morningstar somehow interpreted this as Nfront Inc.
It is listed on the latest HFRO fact sheet for March 31, 2020:
https://www.highlandfunds.com/wp-content/uploads/2020/01/Updated-Highland-Income-Fund-Q1-2020.pdf
Link to SafStor info: https://safstor.squarespace.com/overview
excellent drill down mozart.
HDO loved these pushed them hard to their subscribers.
Max–yes they did–and always defended with their typical ‘as long as I get my dividend it is ok’ AND as long as I haven’t sold I haven’t lost money.
I was a subscriber to HDO in 2019 and did well up to the virus.
I was horrified to see them continue to tell everyone to hold, while the market was collapsing. As far as I can tell they are maintaining that position.
I could see the virus was terrible, and sold out early. Cancelled the subscription to HDO early on, could not believe what they were preaching.
I own some OXLCO and watch closely. They received $33 million in cash as well they reported. Assuming they repaid preferred (or better, bought on open market at bid discount as several entities have done), coverage is about 429/227 estimated or 1.89x. They may have to sell so CLO assets to repay more preferred. Not sure exactly how much time they have to remedy. But even with these big losses, they are still nearly 2x covered. Which is why I believe OXLCM and O actually went up yesterday.
Larry—your numbers approximate mine. Will be most interesting to see this play out.
Larry Rodbard, be careful about assuming that that coverage ratio is safe. These assets are extremely leveraged and it’s not impossible for them to drop more than 50% in addition to the current markdowns. A lot of people made those types of bad assumptions when subprime mortgage securitizations collapsed in 2007-2008. They saw subordinated debt drop 30-40% and said, “What a deal! Where can I buy some?” and then they dropped another 80+%. Unless you know where all (or at least the vast majority) of these tranches land in the cash flow waterfalls of each securitization, and how the underlying assets are performing, don’t assume you can guess what they’re worth. Some could be worth 70 and others could be worth 10.
Karma–good comment–yes very dicey and will be curious to see how it is worked out.
I think the “You can see them here” link may be incorrect, unless you meant it to be the same as the company release statement. I had some OXLCP – bought at about par before the virus, and then ouch, pain, darn… and then I got out around $19. Sometimes lessons are expensive. 🙂 It will be interesting to see what happens, though it won’t be a $ interest this time around.
Thanks Dave–got it fixed.
A lot of CLO’s are starting to fail their overcollateralization tests. Guess it will only get worse in the coming months. That means no payments for CLO equity.
Peter–yes these folks hold mostly equity tranches so it is going to get dicey–anxious to watch it play out.
I have never understood why anyone would want the equity tranche of a CLO. Seems like the sucker at the card table.
David–when times are good they ‘appear’ great (big yield) but in fact they are mostly capital destroyers.
as PRIF, HFRO and others fall below their coverage ratios are the preferreds likely to be suspended? and curious how did some of these get the A ratings to begin with?