HomeMost PopularAn Unlikely High-Yielding Investment: OXLC and the CLO Equity Market

An Unlikely High-Yielding Investment: OXLC and the CLO Equity Market

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Hand Waving the Flag of the United Stated of America

Co-authored by Treading Softly.

As 2024 unfolds, markets brace themselves for the impacts of a possible recession and the U.S. election. History provides context, with election years typically bringing positive returns, regardless of the outcome. These economic events hold significant weight, with interest rates affecting various portfolios. Lower interest rates, for instance, could be a boon for startup growth companies. Despite such crucial factors, the U.S. economy remains a place for strong exposure, driven by innovation, perseverance, and patriotism.

Thus, investment in the debt that sustains the entire U.S. economy is desirable. This brings us to the spotlight on a fund that allows broad exposure to debt across the U.S. economy.

Let’s delve into the details!

A Lasting Payoff in the CLO Equity Market

Oxford Lane Capital Corporation (NASDAQ:OXLC), offering an 18.7% yield, is a closed-end fund, investing in CLO (Collateralized Loan Obligation) equity positions. CLOs are investment vehicles that buy leveraged loans, securitize them, and offer premium benefits for being first in line to get paid. The “equity” tranche, where OXLC invests, bears the risk of borrowers defaulting while enjoying the potential for the greatest reward.

OXLC is reaping an extraordinary yield from its investments.

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The “effective” yield of 16.4% projects future defaults, while the “cash distribution” yield annualizes the actual cash OXLC received from its investments last quarter. Notably, both yields are based on OXLC’s current cost, not the market value.

It’s worth noting that OXLC regularly receives payments considered as a return of capital. Concerns have been expressed about some of OXLC’s investments having a fair value near zero. With the accounting complexities surrounding CLO equity positions, the real performance comes to light in OXLC’s annual report.

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OXLC’s asset value in CLO equity declined from $1.3 billion in March 2022 to $1.2 billion in March 2023, despite investing/reinvesting $511 million in capital. Realized losses totaled $19.3 million, a minimal impact relative to the $1.3 billion asset value.

“Unrealized depreciation in earnings” reflects changes in market value and accounted for a $293.9 million decline in asset value for OXLC last year – the largest impact. “Sales and repayments” amounted to $198.6 million in 2023.

Furthermore, “Reductions to CLO equity cost value” play a dynamic role in accounting for cash in excess of the effective yield. This is done by treating the excess cash as “return of capital” and reducing the cost basis of the investment. The largest detriment to OXLC’s NAV is unrealized depreciation, with realized losses being minimal.

It’s evident that OXLC’s performance is a mix of the complex dynamics within the CLO equity market and the broader economy. Despite market fluctuations, its strategic positioning in the high-yielding CLO equity space has been a source of strong investor interest.




OXLC: A Roadmap of Fiscal Wellness

OXLC: A Roadmap of Fiscal Wellness


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