Market value: $426.3 million
Distribution rate: 16.2%*
Oxford Lane Capital (OXLC, $10.02) might give you a headache no matter when you buy in.
Oxford Lane is a closed-end fund (CEF) that invests primarily in collateralized loan obligations (CLOs), which are pools of loans that have been packaged into tradable securities. CLOs earned themselves a bad reputation, as they and other exotic products helped blow up the world economy in 2008.
Clearly, you should tread carefully in this sector.
But investor revulsion toward CLOs helps to explain why the yields are so high today. At current prices, OXLC offers up a whopping 16.2% distribution rate – but note that a not-insignificant chunk of that will be eaten by expenses.
The appeal of collateralized loan obligations is that they reduce the risk of any single borrower by spreading the risk across a diversified pool. But during times of stress and rising delinquencies, CLOs can and do lose money. The underlying loans tend to be to riskier corporate borrowers that aren’t always the most financially stable. With the global economy looking a little wobbly, this probably isn’t the best time for a major new allocation.
Keep Oxford Lane on your watch list and consider it for purchase next time it sells off. During the energy rout of 2014 to 2016, OXLC saw its stock price drop by more than 60%. But in the ensuing recovery, the shares rose by more than 60%, and that doesn’t include the value of dividends paid.
* Distribution rate can be a combination of dividends, interest income, realized capital gains and return of capital, and is an annualized reflection of the most recent payout. Distribution rate is a standard measure for CEFs.
** This figure includes a 4.91% baseline expense that includes management, as well as a 5.75% interest expense that will vary over time.
Charles Sizemore was long IRM, LVS and MO as of this writing.