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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. Scalper1 News
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