Overview

Oxford Square Capital Corp. (OXSQ) is a closed-end management investment company that operates as a business development company (BDC). The company’s investment objective is to maximize its portfolio’s total return by investing primarily in corporate debt securities and, to a lesser extent, in collateralized loan obligations (CLOs).

Portfolio Composition and Investment Activity

As of June 30, 2024, the total fair value of OXSQ’s investment portfolio was approximately $252.1 million, down from $266.9 million as of December 31, 2023. This decrease was due to net realized losses of $38.5 million, debt repayments of $32.1 million, and sales of securities of $6.4 million, partially offset by $40.9 million in new purchases and $27.8 million in net unrealized appreciation.

OXSQ’s portfolio is diversified across various industries, with the largest exposures in structured finance (CLOs), software, and business services. The company’s debt investments had a weighted average yield of 13.69% as of June 30, 2024.

Portfolio Grading

OXSQ monitors the quality of its debt investment portfolio using an internal credit grading system. As of June 30, 2024, the portfolio had a weighted average grade of 2.3, with 71% of the debt portfolio valued at Grade 2 (full repayment of OXSQ’s cost basis and interest is expected).

Results of Operations

Investment income for the three and six months ended June 30, 2024 was $11.4 million and $22.1 million, respectively, down from $13.5 million and $26.5 million in the prior-year periods. This decrease was primarily due to lower interest income and income from securitization vehicles.

Total expenses, including excise tax, for the three and six months ended June 30, 2024 were $3.7 million and $7.9 million, respectively, down from $6.8 million and $13.3 million in the prior-year periods. This decrease was mainly attributable to lower net investment income incentive fees and interest expense.

Net investment income for the three and six months ended June 30, 2024 was $7.7 million and $14.3 million, respectively, compared to $6.7 million and $13.2 million in the prior-year periods. The increase in net investment income was primarily due to the decrease in expenses.

OXSQ recognized net realized losses on investments of $30.4 million and $38.5 million for the three and six months ended June 30, 2024, respectively, compared to net realized losses of $17.1 million for the full year 2023. The company also recorded net unrealized appreciation of $28.0 million and $27.8 million for the three and six months ended June 30, 2024, respectively.

Liquidity and Capital Resources

As of June 30, 2024, OXSQ had $30.0 million in cash and cash equivalents, up from $5.7 million as of December 31, 2023. The company generated $26.7 million in net cash from operating activities during the six months ended June 30, 2024, which was used to fund investment purchases and pay distributions.

OXSQ has two series of unsecured notes outstanding, the 6.25% Unsecured Notes due 2026 and the 5.50% Unsecured Notes due 2028, with a total principal amount of $125.3 million as of June 30, 2024. The company’s asset coverage ratio was 220% as of June 30, 2024, well above the 150% minimum required by the 1940 Act.

Outlook

OXSQ continues to focus on maximizing the total return of its investment portfolio by selectively deploying capital into corporate debt securities and CLOs. The company’s diversified portfolio, conservative leverage, and experienced management team position it to navigate the current market environment. However, the company remains cautious about the potential impact of economic conditions, interest rate volatility, and other risks on its portfolio companies and investments.