Seeking 20% Yield: OXLC

seekingalpha09-28

My market-beating bet on the American economy keeps providing my portfolio with massive sums of cash.Default rates remain low, so cash output remains very high.You need income, we find sources.EHStock...

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Over the past year, there has been a significant increase in demand for senior debt tranches. If we look at TCW's reporting of spreads from July 2023, we can see that there has been some significant compression o","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"OXLC":"Oxford Lane Capital Corp"},"translate_title":"寻求20%收益率：OXLC","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"OXLC":0.9},"content_text":"My market-beating bet on the American economy keeps providing my portfolio with massive sums of cash.Default rates remain low, so cash output remains very high.You need income, we find sources.EHStock/iStock via Getty Images Co-authored by Treading Softly Recently, I attended a rodeo near where I live. It felt like I had time-traveled back to a simpler time when life was simpler, and everyone was more agreeable and friendly. There weren't cliches and drama, and there weren't fights over political views and social media posts. Everyone was there to enjoy the rodeo and support the athletes. We stood, sang the national anthem, and acknowledged the current and former military members. It can be easy to be consumed with the feeling that America is at the throat of tearing itself apart, especially if you listen to the 24/7 news cycle that will bombard you with negative news, political views, and drama. It's easy to forget that these talking heads are driven by viewership. The more you watch, the happier they are, because that means their results will be better. They are selling you as the product to the advertisers. Taking time to walk away from screens and from media and enjoy something as simple as a rodeo can remind you about how much we are still united as a country in many ways. Earlier this year, I indicated that I was betting on America-its economy and its strength-through different market investments. Today, I want to update you on how that is going. Below, we can see that my bet on America has not only provided us with a substantial income but has also outperformed the market year to date, according to total return. Data by YCharts Let's dive in! I Keep Getting Freshly Minted Cash Oxford Lane Capital Corp. (NASDAQ:OXLC), yielding 20.7%, is a CEF (Closed-End Fund) that invests in CLOs (Collateralized Loan Obligations). CLOs are unique investment vehicles structured to invest in \"leveraged loans.\" These loans are originated by banks, typically to borrowers with credit ratings in the B/B+ range. CLOs raise funds in the form of \"debt\" tranches, which gain the benefit of being the first to be repaid. In order for any lower tranche to be paid, the senior tranche has to be paid as agreed first. Additionally, there are various covenants that will trigger a redirection of cashflow to prepay the senior tranches if the CLO fails a test. With these additional protections in place, investors in the senior debt tranches are willing to accept much lower yields than the underlying portfolio. While the underlying loans might be paying an average spread around 360 bps, the senior debt tranches are being paid a lot less: Source TCW Website Where does that extra return go? It goes to the junior debt and the equity tranches, which is what OXLC invests in. Over the past year, there has been a significant increase in demand for senior debt tranches. If we look at TCW's reporting of spreads from July 2023, we can see that there has been some significant compression over the past year: Source TCW *DM to 3-month LIBOR The AAA tranche is the largest, making up approximately 60% of a CLO. So, a change from paying 180 bps to paying 130 bps is a significant savings for the equity position, which typically makes up approximately 10% of the capital structure. Remember, the debt tranches are the interest that a CLO has to pay before distributing to the equity. This tightening of the debt tranches has created an opportunity for CLO equity investors through a \"reset\". A reset is when the equity investors \"call\" a CLO. All the debt is repaid, the terms of the CLO are extended, and it is issued as a new CLO. The clock on the reinvestment period restarts, the old debt tranche investors are repaid, and new debt tranches are issued to new investors at lower spreads. The only thing that remains unchanged is the existing portfolio of loans and the equity investors, who now owe less interest to the debt tranches and have a longer reinvestment period, which means a longer time before they have to start repaying the principal to the debt tranches. For the equity of a CLO, when a reset can be performed at materially tighter spreads, it is pure upside. They have the same assets, with less interest to pay, which means more cash flow for the equity. This is why, in August, Bloomberg reported that $26 billion in CLOs were reset, an all-time record. 2024's reset activity is dwarfing even the reset activity in 2021: Bloomberg What does this mean for OXLC? It means the cash flow supporting its paltry 20.7% yield is going up as the CLO deals it has exposure to that are reset will be paying less interest and be passing along more cash to OXLC. Meanwhile, we know that OXLC has been raising new capital. In August, it reported having 320.4 million shares outstanding, compared to 304.4 million at the end of July and 287 million at the end of June. Since OXLC has been trading at a premium to NAV, these share issuances are accretive - they have a positive impact on NAV and cash flow per share. OXLC has recognized the buying opportunity and is pouncing on it. The main risk for OXLC remains the same as it has been: defaults. Holding the equity portion of the CLO, OXLC is directly exposed to credit risk. If a borrower defaults, it is OXLC's position that absorbs the loss to protect the senior tranches. To offset this credit risk, equity CLO tranches sell at a steep discount to the par value of the loans held, they get much higher cash flow, and it is the equity tranche that has the power to call the debt to refinance or reset the CLO. Loan defaults have remained extraordinarily low, and we expect defaults to remain well below historical averages, as corporate borrowers are relatively strong and have conservative balance sheets compared to history. Loan defaults spiking is the main risk of investing in OXLC. Resetting the debt tranches with lower interest rates will provide more cash flow to OXLC, helping offset that risk with an even larger reward. Conclusion With OXLC, we can continue to reap massive amounts of cash while credit default rates remain low, accepting that when they rise, the results of our holding will deteriorate. Over the long haul, credit default rates have remained historically low, allowing us to collect reliable income in good and bad times. If you believe that the economy is going to continue to perform well over the long run, then betting on low default rates will provide you with good results. If you believe that the economy is going to stumble, struggle and enter into a multi-decade depression, then there are other investments you may want to consider. You see, owning an investment that focuses on CLOs is a leveraged bet on your view of a strong economy over the long run. I continue to believe that there is no other economy in the world that is as strong and effective at producing wealth and returns as the U.S. economy. Therefore, I continue to choose investments that will benefit from that strength. When it comes to your retirement, you need income. I believe in having a wide range of different sources of income to provide me with what I so desperately need-cash. Cash is what we use every single day, and how you get that cash can be fundamentally different but also massively important because if you have a source that is depleting and shrinking every time it generates that cash, it will run out eventually. This is why I believe in tapping into the torrent of cash that flows to the market, enabling me to have a renewable and repeating source of income until I pass away-and beyond!  That's the beauty of my Income Method. That's the beauty of income investing.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"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":"4.29.2","shortVersion":"4.29.2","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/2470560023"}