Oxford Lane Capital Is In A Slump With No Signs Of Recovery

seekingalpha02-21

With an 18.86% forward dividend yield, Oxford Lane Capital may attract the interest of many income-focused investors. However, on a total shareholder return basis, I think it's poised to underperform:...

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However, on a total shareholder return basis, I think it's poised to underperform:...</p>\n\n<a href=\"https://seekingalpha.com/article/4671805-oxford-lane-capital-is-in-a-slump-with-no-signs-of-recovery\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Oxford Lane Capital Is In A Slump With No Signs Of Recovery</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nOxford Lane Capital Is In A Slump With No Signs Of Recovery\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-02-21 14:42 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4671805-oxford-lane-capital-is-in-a-slump-with-no-signs-of-recovery><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>With an 18.86% forward dividend yield, Oxford Lane Capital may attract the interest of many income-focused investors. However, on a total shareholder return basis, I think it's poised to underperform:...</p>\n\n<a href=\"https://seekingalpha.com/article/4671805-oxford-lane-capital-is-in-a-slump-with-no-signs-of-recovery\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"OXLCO","symbol_name":"Oxford Lane Capital Corp. - Term","start_time":0,"source_url":"https://seekingalpha.com/article/4671805-oxford-lane-capital-is-in-a-slump-with-no-signs-of-recovery","article_id":"2413491301","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1460500012/image_1460500012.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2413491301","pubTimestamp":1708497757,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"With an 18.86% forward dividend yield, Oxford Lane Capital may attract the interest of many income-focused investors. 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However, on a total shareholder return basis, I think it's poised to underperform:The company has been generating negative operating cash flows far in excess of its available cash and equivalent balances. This has forced it to raise funds, leading to a dilution of stakeholders.CLO warehouse investments are a leading indicator of future CLO issuances and investment activity. This has fallen sharply in recent quarters.OXLC's return profiles have shrunk as the fair value of its investments is underwater; 20% below cost value. Hence, NAVs have also shrunk.OXLC trades at a small premium to NAV. Given the weaker operational health, this reduces the margin of safety for buys. Technical analysis also indicates relative to the S&P 500.   Dilok Klaisataporn Thesis Oxford Lane Capital (NASDAQ:OXLC) is a closed-ended fund that invests in collateralized loan obligations (CLOs). With an 18.86% forward dividend yield, it seems attractive to many income investors. However, from a total shareholder return perspective, I am bearish on OXLC as I note the following:  The company has negative operating cash flow and is diluting its stakeholders Leading indicators point to a slowdown in CLO investment activity Return profiles have shrunk and there is no meaningful recovery in investment value above cost OXLC trades at a premium to NAV, reducing the margin of safety for buys  Note that Oxford Lane has stated that its investment objective is to maximize the portfolio's total return. In this article, I focus on the common stock of OXLC. However, much of my analysis here is relevant to the preferred equity (OXLCM) (OXLCN) (OXLCO) (OXLCP) and debt (OXLCL) (OXLCZ) instruments of Oxford Lane Capital as much of my arguments occur at the enterprise value level. From a relative preference perspective, I would rank the debt instruments first, then the preferred equity instruments and the common stock last. The company has negative operating cash flow and is diluting its stakeholders OXLC has consistently generating a negative operating cash flow (OCF) in recent half-years:   Operating Cash Flow (Company Filings, Hunting Alpha Analysis) The extent of these cash outflows has exceeded the typical cash balances in the company:   Cash and equivalents (USD mn) (Company Filings, Hunting Alpha Analysis) Hence, the company has needed to raise funds via common stock, preferred stock, and unsecured notes to maintain its cash balances:   Fund Raising Activities (Company Filings, Hunting Alpha Analysis) Since the half-year ended September 2020, the company has cumulatively raised $1,068 million in funds. $200 million (18.7%) of this has come via the issuance of unsecured notes, $737 million (69%) has come from the issuance of common stock, and $131 million (12.3%) has come from the issuance of preferred stock. Overall, this represents broad dilution of various stakeholders. Leading indicators point to a slowdown in CLO investment activity Net investment activity is important for OXLC as that is what generates cash flow and yields for the company. In the context of CLOs, a warehouse investment refers to the accumulation of a portfolio of loans that would be securitized into a CLO at a later date. Hence, warehouse investment activity is a leading indicator of future CLO securitizations. Total Warehouse Investments (Company Filings, Hunting Alpha Analysis) Oxford Lane has seen a sharp fall in the total value of its warehouse investments in recent quarters, from >$50 million before Q1 FY24 to <$5 million in Q3 FY24 (the company reports on a March-ending fiscal year). This could be because of a dual impact of both a weaker CLO issuance environment ahead and/or OXLC's reduced appetite for new investments given its cash flow generation weakness. However, the numbers show net investment activity to be increasing: Net Investment Activity (Company Filings, Hunting Alpha Analysis) Hence, I believe it is more likely to signal a weaker CLO issuance environment ahead. In any case, this may not bode well for future CLO investment opportunities, which is a further headwind. Return profiles have shrunk and there is no meaningful recovery in investment value above cost OXLC's total common stockholders' return profiles has shrunk dramatically over the last 3 quarters and a recovery back to historical >20% levels are yet to occur:   Total Common Stockholders' Return (Company Filings, Hunting Alpha Analysis) Also, the fair value of investments is currently underwater below cost value by 22.4% as of H1 FY24:   Total Investments Fair Value Premium over Cost (Company Filings, Hunting Alpha Analysis) These factors have led to a fall in net asset values (NAV): Net Asset Value (Company Filings, Hunting Alpha Analysis) The company's estimate of NAV/share for January 2024 was $4.92 to $5.02. OXLC trades at a premium to NAV, reducing the margin of safety for buys OXLC common stock has tended to trade a modest premium to NAV historically:   NAV Premium (Company Filings, Hunting Alpha Analysis) The common stock security still trades at a premium based on the latest values as well: Using the middle of the company's January 2024's NAV estimate range gets us $4.97. The common stock's latest price is $5.09, representing an estimated 2.4% premium to NAV. Given the headwinds discussed, I believe this leaves little room for a margin of safety. Ideally, given the weaker operating context, I would be interested in buys only at material (>10% discounts) to NAV. Technical Analysis  If this is your first time reading a Hunting Alpha article using Technical Analysis, you may want to read this post, which explains how and why I read the charts the way I do OXLC Relative Technical Analysis vs S&P 500 (TradingView, Hunting Alpha Analysis) In the relative chart of OXLC vs the S&P 500 (SPY) (SPX), I see that the ratio prices have attempted a bullish alpha recovery after coming from an overall downflow. However, the march up by the buyers has halted and led to a consolidation, the details of which show the first signs of lower highs. This suggests to me that there is distribution going on, signaling negative alpha ahead for OXLC vs the S&P 500. Key Risks and Monitorables I believe an uptick in warehouse investments and improved operating cash flows would put OXLC in better stead. This would prompt me to revisit my thesis. Takeaway And Yield Alternatives Oxford Lane Capital is a high-yielding name that may attract the attention of many income-focused investors. However, from a total shareholder return perspective, I believe the stock is poised to underperform the S&P 500 due to a variety of headwinds: Consistent negative operating cash flow is forcing the company to raise more funds from common equity holders, preferred equity holders and debt security holders, leading to dilution. The company's CLO warehouse investments, which lead to future CLO issuance activity, have seen a sharp fall, suggesting weaker CLO investment prospects ahead. Return profiles have also shrunk, and the company's total investments' fair values are still underwater relative to cost value by >20%. This has led to a reduction in NAVs as well. On the valuations front, the common stock trades at a small premium to its NAV. Given the weaker operating health of the company, I believe this reduces the margin of safety for buys. And lastly, according to my interpretation, the relative technical analysis of OXLC vs the S&P 500 points towards distribution, suggesting negative alpha ahead. Among income-focused investment options, I prefer Brookfield Asset Management (BAM), Energy Transfer (ET) and Brookfield Infrastructure Partners (BIP). Rating: Sell How to interpret Hunting Alpha's ratings: Strong Buy: Expect the company to outperform the S&P 500 on a total shareholder return basis, with higher than usual confidence Buy: Expect the company to outperform the S&P 500 on a total shareholder return basis Neutral/hold: Expect the company to perform in-line with the S&P 500 on a total shareholder return basis Sell: Expect the company to underperform the S&P 500 on a total shareholder return basis Strong Sell: Expect the company to underperform the S&P 500 on a total shareholder return basis, with higher than usual confidence  The typical time-horizon for my views is multiple quarters to around a year. It is not set in stone. However, I will share updates on my changes in stance in a pinned comment to this article and may also publish a new article discussing the reasons for the change in view.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2413491301"}