UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number

811-22432

 

Oxford Lane Capital Corp.

(Exact name of registrant as specified in charter)

 

8 Sound Shore Drive, Suite 255 Greenwich, CT		06830
(Address of principal executive offices)		(Zip code)

 

Jonathan H. Cohen Chief Executive Officer Oxford Lane Capital Corp. 8 Sound Shore Drive, Suite 255 Greenwich, CT 06830

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

(203) 983-5275

 

Date of fiscal year end:	March 31
Date of reporting period:	December 31, 2012

 

 

Item 1. Schedule of Investments

 

OXFORD LANE CAPITAL CORP.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2012

(unaudited)

 

COMPANY(1)		INDUSTRY		INVESTMENT		PRINCIPAL AMOUNT				COST				FAIR VALUE(2)				% of Net Assets
Collateralized Loan Obligation - Debt Investments
ACA CLO 2007-1A		structured finance		CLO secured notes - Class E(3)(4)(5)		$	5,090,786			$	3,673,019			$	4,267,606
				(5.09%, due June 15, 2022)
Bridgeport CLO II		structured finance		CLO secured notes - Class D(3)(4)(5)			3,391,502				2,479,335				2,891,255
				(4.56%, due June 18, 2021)
Canaras Summit CLO 2007-1A		structured finance		CLO secured notes - Class E(3)(4)(5)			750,000				526,901				637,950
				(4.66%, due June 19, 2021)
Cent CDO 15		structured finance		CLO secured notes - Class D(3)(4)(5)			1,625,000				1,262,328				1,412,775
				(4.46%, due March 11, 2021)
CIFC Funding 2006-1X		structured finance		CLO secured notes - Class B2L(3)(4)(5)			5,730,501				4,214,196				4,596,435
				(4.32%, due October 20, 2020)
Colts 2007-1X		structured finance		CLO secured notes - Class E(3)(4)(5)			3,000,000				1,982,033				2,486,100
				(3.96%, due March 20, 2021)
Emporia III, Ltd. 2007-3A		structured finance		CLO secured notes - Class E(3)(4)(5)			3,594,000				2,824,218				2,803,320
				(4.02%, due April 23, 2021)
GSC VIII		structured finance		CLO secured notes - Class D(3)(4)(5)			2,112,137				1,398,405				1,605,224
				(3.73%, due April 17, 2021)
Hewett's Island CLO III		structured finance		CLO secured notes - Class D(3)(4)(5)			3,476,762				2,855,756				3,284,497
				(6.06%, due August 09, 2017)
Hewett's Island CLO IV		structured finance		CLO secured notes - Class E(3)(4)(5)			1,500,000				1,333,773				1,320,900
				(4.86%, due May 09, 2018)
Hewett's CLO V		structured finance		CLO secured notes - Class E(3)(4)(5)			1,707,884				1,133,438				1,429,670
				(6.06%, due August 09, 2017)
Kingsland V, Ltd. 2007-5X		structured finance		CLO secured notes - Class E(3)(4)(5)			4,000,000				2,893,634				3,120,000
				(4.59%, due July 14, 2021)
Mountain Capital CLO IV, Ltd 2005-4X		structured finance		CLO secured notes - Class B2L(3)(4)(5)			4,230,373				3,182,627				3,748,957
				(5.14%, due March 15, 2018)
Neuberger Berman CLO Ltd. 2012-13A		structured finance		CLO secured notes - Class F(3)(4)(5)			4,500,000				3,857,183				3,856,500
				(6.81%, due January 23, 2024)
PPM Grayhawk CLO 2007		structured finance		CLO secured notes - Class D(3)(4)(5)			1,869,138				1,423,426				1,411,199
				(3.92%, due April 18, 2021)
Sargas CLO I Ltd		structured finance		CLO secured notes - Class D(3)(4)(5)			4,500,000				3,285,376				3,712,500
				(4.31%, due August 27, 2020)
Waterfront CLO 2007		structured finance		CLO secured notes - Class D(3)(4)(5)			7,500,000				5,726,834				6,639,750
				(5.09%, due August 02, 2020)
Total Collateralized Loan Obligation - Debt Investments											44,052,482				49,224,638				56.06	%

 

(Continued on next page)

 

 

OXFORD LANE CAPITAL CORP.

SCHEDULE OF INVESTMENTS

DECEMBER 31, 2012

(unaudited)

 

COMPANY(1)		INDUSTRY		INVESTMENT		PRINCIPAL AMOUNT				COST				FAIR VALUE(2)				% of Net Assets
Collateralized Loan Obligation - Equity Investments
ACA CLO 2007-1A		structured finance		CLO income notes(4)(6)			12,212,500				8,788,125				11,235,500
				(Estimated yield 31.29%, maturity June 15, 2022)
Canaras Summit CLO 2007-1X		structured finance		CLO income notes(4)(6)			1,500,000				865,592				1,890,000
				(Estimated yield 60.12%, maturity June 19, 2021)
Carlyle Global Market Strategies CLO 2011-1X		structured finance		CLO income notes(4)(6)			6,000,000				5,122,255				7,500,000
				(Estimated yield 24.52%, maturity August 10, 2021)
Gale Force 4 CLO 2007-4A		structured finance		CLO income notes(4)(6)			1,500,000				790,707				1,473,750
				(Estimated yield 47.44%, maturity August 20, 2021)
Harbourview CLO 2006-1		structured finance		CLO income notes(4)(6)			4,380,000				2,305,425				3,854,400
				(Estimated yield 47.84%, maturity December 27, 2019)
Hillmark Funding Ltd. 2006-1A		structured finance		CLO income notes(4)(6)			2,000,000				1,115,729				1,700,000
				(Estimated yield 25.70%, maturity May 21, 2021)
Jersey Street CLO 2006-1A		structured finance		CLO income notes(4)(6)			3,185,000				1,884,562				2,993,900
				(Estimated yield 35.28%, maturity October 20, 2018)
Kingsland IV, Ltd. 2007-4A		structured finance		CLO income notes(4)(6)			2,350,000				1,684,153				2,526,250
				(Estimated yield 46.70%, maturity April 16, 2021)
Lightpoint CLO VII, Ltd. 2007-7X		structured finance		CLO income notes(4)(6)			2,000,000				1,007,366				1,760,000
				(Estimated yield 45.00%, maturity May 15, 2021)
Neuberger Berman CLO Ltd. 2012-13A		structured finance		CLO income notes(4)(6)			6,255,000				4,836,034				4,753,800
				(Estimated yield 15.40%, maturity January 23, 2024)
Octagon XI CLO 2007-1A		structured finance		CLO income notes(4)(6)			2,025,000				1,351,728				2,328,750
				(Estimated yield 48.63%, maturity August 25, 2021)
Rampart CLO 2007-1A		structured finance		CLO income notes(4)(6)			1,500,000				943,990				1,485,000
				(Estimated yield 37.17%, maturity October 25, 2021)
Total Collateralized Loan Obligation - Equity Investments											30,695,666				43,501,350				49.54	%
TOTAL INVESTMENTS										$	74,748,148			$	92,725,988				105.60	%
LIABILITIES IN EXCESS OF OTHER ASSETS															(4,917,827	)
NET ASSETS (equivalent to $17.41 per share based on 5,044,154 shares of common stock outstanding)														$	87,808,161

 

 

(1)

We do not "control" and are not an "affiliate" of any of our portfolio companies, each as defined in the Investment Company Act of 1940 (the "1940 Act"). In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting securities.

 

(2)

Fair value is determined in good faith by the Board of Directors of Oxford Lane Capital Corp.

 

(3)

Notes bear interest at variable rates.

 

(4)

Cost value reflects accretion of original issue discount or market discount, and amortization of premium.

 

(5)

The CLO secured notes generally bear interest at a rate determined by reference to LIBOR which resets quarterly. For each CLO debt investment, the rate provided is as of December 31, 2012.

 

(6)

The CLO subordinated notes and income notes are considered equity positions in the CLO funds. Equity investments are entitled to recurring distributions which are generally equal to the remaining cash flow of the payments made by the underlying fund's securities less contractual payments to debt holders and fund expenses. The estimated yield indicated is based upon a current projection of the amount and timing of these recurring distributions and the estimated amount of repayment of principal upon termination. Such projections are periodically reviewed and adjusted, and the estimated yield may not ultimately be realized.

 

See Accompanying Notes

 

 

OXFORD LANE CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2012

(unaudited)

 

NOTE 1. INVESTMENT VALUATION

 

The most significant estimates made in the preparation of Oxford Lane Capital Corp. (“OXLC”, “we” or the “Fund”) financial statements is the valuation of investments and the related amounts of unrealized appreciation and depreciation of investments recorded. OXLC believes that there is no single definitive method for determining fair value in good faith. As a result, determining fair value requires that judgment be applied to the specific facts and circumstances of each portfolio investment while employing a consistently applied valuation process for the types of investments OXLC makes. The Fund is required to specifically fair value each individual investment on a quarterly basis.

 

In May 2011, the FASB issued ASU 2011-04, ‘‘Fair Value Measurement which represents amendments to achieve common fair value measurement and disclosure requirements in US GAAP and IFRS.’’ The amendments are of two types: (i) those that clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and (ii) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements relate to (i) measuring the fair value of the financial instruments that are managed within a portfolio; (ii) application of premium and discount in a fair value measurement; and (iii) additional disclosures about fair value measurements. The update is effective for interim and annual periods beginning after December 15, 2011 and as such OXLC has adopted this ASU beginning with the nine months ended December 31, 2012. OXLC has increased its disclosures related to Level 3 fair value measurement, in addition to other required disclosures. There were no related impacts on OXLC’s financial position or results of operations.

 

The Fund complies with ASC 820-10, Fair Value Measurements and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements. ASC 820-10 clarified the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities in markets that are not active; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions. The Fund has determined that due to the general illiquidity of the market for the Fund’s investment portfolio, whereby little or no market data exists, all of the Fund’s investments are valued based upon Level 3 inputs as of December 31, 2012. The Fund’s Board of Directors determines the value of OXLC’s investment portfolio each quarter. The prices used by the Fund to value securities may differ from the value that would be realized if the securities were sold, and these differences could be material to the Fund’s financial statements.

 

OXLC has acquired a number of debt and equity positions in collateralized loan obligation (‘‘CLO’’) investment vehicles, which are special purpose financing vehicles. In valuing such investments, OXLC considers the operating metrics of the specific investment vehicle, including compliance with collateralization tests, defaulted and restructured securities, and payment defaults, if any. In addition, OXLC considers indicative prices provided by a recognized industry pricing service as well as the indicative prices provided by the broker who arranges transactions in such investment vehicles, to the extent available, as well as any available information on other relevant transactions including trades, if any, and firm bids and offers in the market. Oxford Lane Management, LLC (“OXLC Management”) or the Valuation Committee may request an additional analysis by a third-party firm to assist in the valuation process of CLO investment vehicles. All information is presented to the Board for its determination of fair value of these investments.

 

The Fund may also invest directly in senior secured loans (either in the primary or secondary markets). In valuing such investments, OXLC Management will prepare an analysis of each loan, including a financial summary, covenant compliance review, recent trading activity in the security, if known, and other business developments related to the portfolio company. All available information, including non-binding indicative bids obtained from a recognized industry pricing service and large agent banks which may not be considered reliable, will be presented to the Valuation Committee of the Fund’s Board of Directors to consider in its determination of fair value. In some instances, there may be limited trading activity in a security even though the market for the security is considered not active. In such cases the Fund’s Board of Directors will consider the number of trades, the size and timing of each trade and other circumstances around such trades, to the extent such information is available, in its determination of fair value. At December 31, 2012, the Fund did not have any direct investments in senior secured loans.

 

 

OXFORD LANE CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2012

(unaudited)

 

NOTE 1. INVESTMENT VALUATION – (continued)

 

ASC 820-10-35, ‘‘Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,’’ provides guidance on factors that should be considered in determining when a previously active market becomes inactive and whether a transaction is orderly. In accordance with ASC 820-10-35, the Fund’s valuation procedures specifically provide for the review of indicative quotes supplied by the brokers or large agent banks that make a market for each CLO investment or senior secured loan, respectively.

 

The Fund’s assets measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820-10-35 at December 31, 2012, were as follows:

 

($ in millions)		Fair Value Measurements at Reporting Date Using
Assets			Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Total
CLO debt		$	-			$	-			$	49.2			$	49.2
CLO equity			-				-				43.5				43.5
Total		$	-			$	-			$	92.7			$	92.7

 

Significant Unobservable Inputs for Level 3 Investments

 

In accordance with ASU 2011-04, the following table provides quantitative information about the Fund’s Level 3 fair value measurements as of December 31, 2012. The Fund’s valuation policy, as described above, establishes parameters for the sources and types of valuation analysis, as well as the methodologies and inputs that the Fund uses in determining fair value. If the Valuation Committee or OXLC Management determines that additional techniques, sources or inputs are appropriate or necessary in a given situation, such additional work will be undertaken. The table, therefore, is not all-inclusive, but provides information on the significant Level 3 inputs that are pertinent to the Fund’s fair value measurements. The weighted average calculations in the table below are based on principal balances for all CLO debt and equity investments.

 

($ in millions)

Quantitative Information about Level 3 Fair Value Measurements

Assets

Fair Value as of December 31, 2012

Valuation Techniques / Methodologies

Unobservable Input

Range / Weighted Average

CLO debt

$

49.2

market quotes

NBIB (1)

75.5%-94.47%/84.03%

CLO equity

43.5

market quotes

NBIB (1)

76.0%-126.0% /96.87%

Total Fair Value for Level 3 Investements

$

92.7

 

(1)

The Fund generally uses prices provided by an independent pricing service or broker or agent bank non-binding indicative bid prices (‘‘NBIB’’) on or near the valuation date as the primary basis for the fair value determinations for CLO debt and equity investments. These bid prices are non-binding, and may not be determinative of fair value. Each bid price is evaluated by the Valuation Committee in conjunction with additional information compiled by OXLC Management, including actual trades and firm bids and offers, if any, financial performance, recent business developments, and, in the case of CLO debt and equity investments, performance and covenant compliance information as provided by the independent trustee.

 

Significant increases or decreases in any of the unobservable inputs in isolation may result in a significantly lower or higher fair value measurement.

 

 

OXFORD LANE CAPITAL CORP.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2012

(unaudited)

 

NOTE 2. INVESTMENT INCOME RECOGNITION

 

Interest income from debt positions in CLO investment vehicles is recorded on the accrual basis to the extent that such amounts are expected to be collected. Amortization of premium or accretion of discount is recognized on the effective yield method.

 

Interest income from investments in the “equity” class securities of CLO investment vehicles (typically income notes or subordinated notes) is recorded based upon an estimation of an effective yield to maturity utilizing assumed cash flows. The Fund monitors the expected cash flows from its CLO equity investments, including the expected residual payments, and effective yield is determined and updated periodically, as needed. For the quarter ended December 31, 2012, the Fund updated the effective yields on its CLO equity investments, generally reflecting higher yields to maturity.

 

NOTE 3. FEDERAL INCOME TAXES

 

The Fund intends to operate so as to qualify to be taxed as a RIC under Subchapter M of the Internal Revenue Code and, as such, to not be subject to federal income tax on the portion of its taxable income and gains distributed to stockholders. To qualify for RIC tax treatment, OXLC is required to distribute at least 90% of its investment company taxable income, as defined by the Code.

 

Because federal income tax regulations differ from accounting principles generally accepted in the United States, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statement to reflect their tax character. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

As of December 31, 2012, the federal tax cost and net unrealized depreciation on securities were as follows:

 

Cost for federal income tax purposes		$	83,286,820
Gross unrealized appreciation		$	10,162,630
Gross unrealized depreciation			(723,462	)
Net unrealized appreciation		$	9,439,168

 

 

Item 2. Controls and Procedures

 

(a)

Based on an evaluation of the Disclosure Controls and Procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, the “Disclosure Controls”) as of a date within 90 days prior to the filing date (the “Filing Date”) of this Form N-Q (the “Report”), the Chief Executive Officer (its principal executive officer) and Chief Financial Officer (its principal financial officer) have concluded that the Disclosure Controls are reasonably designed to ensure that information required to be disclosed by the Registrant in the Report is recorded, processed, summarized and reported by the Filing Date, including ensuring that information required to be disclosed in the Report is accumulated and communicated to the Registrant's management, including the Registrant's principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b)

There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the Registrant’s last fiscal quarter that have materially affected or are reasonably likely to materially affect the Registrant’s internal control over financial reporting.

 

Item 3. Exhibits.

 

Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

OXFORD LANE CAPITAL CORP.

 

 

By:	/s/ Jonathan H. Cohen
	Name: Jonathan H. Cohen
	Title: Chief Executive Officer
	Date: February 26, 2013

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

By:	/s/ Jonathan H. Cohen		By:	/s/ Patrick F. Conroy
	Name: Jonathan H. Cohen			Name: Patrick F. Conroy
	Title: Chief Executive Officer			Title: Chief Financial Officer, Chief Compliance
	(Principal Executive Officer)			Officer and Corporate Secretary (Principal Financial Officer)
	Date: February 26, 2013		Date: February 26, 2013