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A New Term Preferred Stock IPO From Oxford Lane Capital

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Introduction

Currently, there are 471 exchange-traded preferred stocks, no matter what dividend they pay, whether it’s fixed-rate, fixed-to-floating, or floating rate. What’s characteristic of these issues is almost all are perpetual, meaning they don’t have a stated maturity. However, there are 14 preferred stocks (3% of all) that are term securities, as they have a maturity date, usually no longer than 10 years (Priority Income Fund’s PRIF-D is currently having the longest maturity with a little more than nine years to its maturity date, while the new OXLCP comes second with seven years to maturity). After all, they are mostly issued by closed-end funds there’s also a specific clause that every preferred stock issued by a CEF has an “Asset Coverage Protection.” This means that if the fund fails to maintain an “Asset Coverage Ratio” of at least 200%, it’s required to redeem its preferred stock at the redemption price in an amount that allows the fund to comply with this ratio. That is what makes these securities a little safer than the conventional preferred stocks. This also is the case with the newest term preferred stock issued by Oxford Lane Capital Corp (OXLC).

The New Issue

Before we submerge into our brief analysis, here’s a link to the 497 Filing by Oxford Lane Capital Corp – the prospectus.

Source: SEC.gov

For a total of 3.5M shares issued, the total gross proceeds to the company are $85.5M. You can find some relevant information about the new preferred stock in the table below:

Source: Author’s spreadsheet

Oxford Lane Capital Corp 6.25% Series 2027 Preferred Stock (NASDAQ: OXLCP) pays a cumulative fixed dividend at a rate of 6.25%. The new issue has no Standard & Poor’s rating and is callable as of 02/28/2023, maturing on 02/28/2027. Currently, the new issue trades below its par value at a price of $24.64 and has a yield-to-maturity of 6.53% and a yield-to-call of 6.83%. The dividends paid by this preferred stock are not eligible for the preferential 15%-20% tax rate on dividends. They also are not eligible for the dividend received deduction for corporate holders. This means that the “qualified equivalent” YTM and YTC would be sitting at 5.44% and 5.69%, respectively.

Here’s how the stock’s YTC curve looks like:

Source: Author’s spreadsheet

The Company

Oxford Lane Capital Corp. is a non-diversified closed-end management investment company. The Fund’s investment objective is to maximize its portfolio’s risk adjusted total return and seeks to achieve its investment objective by investing in structured finance investments, specifically collateralized loan obligation (‘CLO’) vehicles, which primarily own senior corporate debt securities. The Fund holds debt investments in over three different CLO structures and equity investments in approximately 30 different CLO structures. Its investment strategy also includes investing in warehouse facilities, which are financing structures intended to aggregate loans that may be used to form the basis of a CLO vehicle. The Fund may also invest, on an opportunistic basis, in corporate debt securities on a direct basis and a range of other corporate credits. Oxford Lane Management, LLC (OXLC Management) is the investment advisor of the Fund.

Source: Reuters.com | Oxford Lane Capital Corp

Below, you can see a price chart of the common stock, OXLC:

Source: Tradingview.com

While the text above provides us with a stepping stone in terms of information about the fund, it means nothing without looking at some numbers:

Source: Cefdata.com

The Oxford Lane Capital Corp Family

The company has two more outstanding preferred Stocks:

  • Oxford Lane Capital Corp. 7.50% Cumulative Series 2023 Term Preferred Shares (OXLCO)
  • Oxford Lane Capital Corp. 6.75% Cumulative Series 2024 Term Preferred Shares (OXLCM)

Source: Author’s database

The company uses the net proceeds from this offering to all of its outstanding 7.50% Series 2023 Term Preferred Shares (NASDAQ:OXLCO) on March 12. As for the second preferred stock, OXLCM, it becomes callable in June, and with its current market price of $25.47 has a Yield-to-Worst (equal to its Yield-to-Call) of 1.14%. Thus, with a YTW of 6.53%, OXLCP is the best preferred stock in the family.

In addition, in the following chart, you can see a comparison between OXLC’s preferred stocks and the fixed income securities benchmark, the iShares Preferred and Income Securities ETF (PFF). As term securities maturing most after four years, we see a much flatter chart of OXLCM and OXLCO during last year’s rally than the benchmark.

Source: Tradingview.com

Sector Comparison

The image below contains all baby bonds and term preferred stocks that pay a fixed distribution rate in the ‘”Closed-End Fund – Debt” sector (according to Finviz.com) by their Yield-to-Call and Yield-to-Maturity.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

The higher the YTM is, the better the bond. Now let’s see, do they carry any call risk.

  • By Years-to-Call and Yield-to-Call

Source: Author’s database

  • Here’s the full list:

Source: Author’s database

Fixed-Rated Term Securities

The next chart contains all preferred stocks and baby bonds that trade on the national exchanges, pay fixed distribution and have less than 10 years to maturity with a positive YTC. For a clearer view, the baby bonds, issued by Medley Management (MDLQ and MDLX) are excluded.

  • By Years-to-Maturity and Yield-to-Maturity

Source: Author’s database

  • By Yield-to-Call and Yield-to-Maturity

Source: Author’s database

Mandatory Redemption for Asset Coverage

If we fail to maintain an asset coverage ratio (as defined below) of at least 200% as of the close of business on any Business Day on which asset coverage is required to be calculated, and such failure is not cured by the close of business on the date that is 30 calendar days following such Business Day (referred to in this prospectus supplement as an Asset Coverage Cure Date), then we are required to redeem, within 90 calendar days of the Asset Coverage Cure Date, shares of Preferred Stock equal to the lesser of (1) the minimum number of shares of Preferred Stock that will result in our having an asset coverage ratio of at least 200% and (2) the maximum number of shares of Preferred Stock that can be redeemed out of funds legally available for such redemption. Also, at our sole discretion, we may redeem such number of shares of Preferred Stock (including shares of Preferred Stock required to be redeemed) that will result in our having an asset coverage ratio of up to and including 285%. The Preferred Stock to be redeemed may include, at our sole option, any number or proportion of the Series 2027 Term Preferred Shares and other series of Preferred Stock. If the Series 2027 Term Preferred Shares are to be redeemed in such an event, they will be redeemed at a redemption price equal to their liquidation preference per share plus accumulated but unpaid dividends, if any, on such liquidation preference (whether or not declared, but excluding, interest on accrued but unpaid dividends, if any) to, but excluding, the date fixed for such redemption.

Source: 497 Filing by Oxford Lane Capital Corp

Addition to the iShares Preferred and Income Securities ETF

With the current market capitalization of around $87M, OXLCP cannot be an addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index, thus it will also not be added to the iShares Preferred and Income Securities ETF (PFF) which is important to us due to its influence on the behavior of all fixed-income securities.

Conclusion

OXLCP has an advantage when compared to the other preferred stocks in the sector as it has the highest YTW. The company uses the proceeds of the new issue for the redemption of OXLCO, thus saving itself an annual rate of 1.25% and is a matter of time for the company to announce a full redemption of the 2023 Term Preferred Stock. OXLCM has a 0.30% lower YTM than the OXLCP’s YTM but also it matures two and a half years earlier than the new issue. Moreover, its YTC is only 1%, which further tilts the scales toward OXLCP. In terms of the sector, only the Priority Income Fund’s preferred stocks give similar returns as the new IPO but it must be taken into account that the company is private, and although there’s the asset coverage protection, it’s hard for monitoring. On the other hand, OXLC is easily accessible to monitor and even to be used as a hedge if that’s necessary.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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