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 primarily investing in corporate debt securities and, to a lesser extent, in collateralized loan obligations (CLOs).

OXSQ’s investment activities are managed by Oxford Square Management, LLC, a registered investment adviser. The company has elected to be treated as a regulated investment company (RIC) for tax purposes.

OXSQ generally invests between $5 million and $50 million in each portfolio company, with the goal of having a diversified portfolio with few investments exceeding 5% of the total portfolio. As of September 30, 2024, OXSQ’s debt investments had stated interest rates between 8.71% and 13.26% and a weighted average annualized yield of approximately 14.50%.

Critical Accounting Estimates

The key critical accounting estimate for OXSQ is the valuation of its investment portfolio. The company’s Board of Directors determines the fair value of the investments in accordance with ASC 820, Fair Value Measurement and Disclosure. OXSQ considers various inputs, including market data, financial performance of portfolio companies, and third-party valuations, to determine the appropriate fair value for each investment.

Portfolio Composition and Investment Activity

As of September 30, 2024, OXSQ’s total investment portfolio had a fair value of approximately $262.9 million, down from $266.9 million as of December 31, 2023. The decrease was primarily due to net realized losses of $51.4 million, debt repayments of $61.6 million, and sales of securities of $4.8 million, partially offset by $88.7 million in new investments and $33.6 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 are graded on a scale of 1 to 5, with the majority rated 2 or 3, indicating full repayment of OXSQ’s cost basis and interest is expected.

Results of Operations

Investment income for the three and nine months ended September 30, 2024 was $10.3 million and $32.5 million, respectively, down from $13.0 million and $39.5 million in the prior year periods. The decreases were primarily due to lower interest income and income from securitization vehicles.

Total expenses for the three and nine months ended September 30, 2024 were $4.2 million and $12.0 million, respectively, down from $6.6 million and $19.9 million in the prior year periods. The decreases were mainly due to lower net investment income incentive fees and interest expense.

OXSQ recognized net realized losses on investments of $12.9 million and $51.4 million for the three and nine months ended September 30, 2024, respectively, primarily from the extinguishment of loans. The company also had net unrealized appreciation of $5.8 million and $33.6 million for the respective periods.

Net investment income per share was $0.10 and $0.33 for the three and nine months ended September 30, 2024, compared to $0.11 and $0.37 in the prior year periods. The net increase in net assets resulting from operations per share was $(0.01) and $0.04 for the three and nine months ended September 30, 2024, compared to $0.12 and $0.47 in the prior year periods.

Liquidity and Capital Resources

As of September 30, 2024, OXSQ had cash and cash equivalents of $43.2 million, up from $5.7 million as of December 31, 2023. The company generated $31.9 million in net cash from operating activities during the nine months ended September 30, 2024, primarily from investment activity.

OXSQ has two series of unsecured notes outstanding, the 6.25% Unsecured Notes due 2026 and the 5.50% Unsecured Notes due 2028. As of September 30, 2024, the company’s asset coverage ratio was approximately 226%.

The company has an at-the-market (ATM) equity offering program through which it can issue up to $150 million in common stock. During the nine months ended September 30, 2024, OXSQ issued 8.3 million shares through the ATM program, raising $24.3 million in net proceeds.

Outlook

OXSQ continues to focus on maximizing the total return of its investment portfolio by selectively investing in corporate debt and CLO securities. The company’s diversified portfolio, disciplined investment approach, and prudent use of leverage position it to navigate the current market environment. However, OXSQ remains cautious about the potential impacts of economic conditions, interest rate volatility, and other risks on its portfolio companies and investments.