OXSQ

Business Context and Reporting Period

Oxford Square Capital Corp. (OXSQ) is a non-diversified, closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The company invests primarily in corporate debt securities and Collateralized Loan Obligation (CLO) structured finance investments. This summary covers the quarterly period ended June 30, 2021.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Growth: Total investment portfolio fair value increased from $294.7 million at December 31, 2020, to $404.8 million at June 30, 2021. This was driven by $132.4 million in new purchases and $33.6 million in net unrealized appreciation.
• Debt Issuance: In May 2021, the company issued $80.5 million in aggregate principal amount of 5.50% Unsecured Notes due 2028. Proceeds were used to fund new investments.
• Income Trends: Net investment income for the six months ended June 30, 2021 ($7.6 million) decreased compared to the same period in 2020 ($10.7 million), primarily due to lower interest income from debt investments.
• Realized Gains/Losses: The company recognized net realized losses of approximately $12.9 million for the six months ended June 30, 2021, largely due to the extinguishment of a debt investment previously on non-accrual status. This contrasts with net realized gains of $1.2 million in the second quarter alone.
• Unrealized Appreciation: Significant unrealized appreciation of $33.6 million was recorded for the six-month period, including $21.4 million from reductions to CLO equity cost value (distributions received in excess of effective yield income).

Guidance, Outlook, and Risks

• Outlook: Management notes that the U.S. loan market strengthened in the second quarter of 2021. The company continues to seek attractive risk-adjusted returns through corporate debt and CLO equity investments.
• Distributions: The company declared monthly distributions of $0.035 per share. For the quarter ended June 30, 2021, management estimated a tax return of capital of approximately $0.02 per share.
• Risks:
  • Credit Risk: Two debt investments were on non-accrual status as of June 30, 2021, with a combined fair value of approximately $7.8 million (Grade 5).
  • Liquidity: CLO equity investments are characterized as illiquid securities with limited trading markets.
  • Interest Rate Risk: The portfolio is sensitive to interest rate changes; a 100 basis point increase in LIBOR is estimated to increase investment income by 7.7%.
  • LIBOR Transition: The company is monitoring the transition away from LIBOR as a reference rate.
• Commitments: As of June 30, 2021, the company had an outstanding commitment of approximately $5.4 million to purchase a senior secured note investment from RSA Security, LLC.

Investor Verification Checklist

• Non-Accrual Status: Verify the specific portfolio companies on non-accrual status (Premiere Global Services, Inc. and Unitek Global Services, Inc.) and the likelihood of recovery.
• CLO Equity Valuations: Review the methodology for valuing CLO equity investments, which rely heavily on Level 3 unobservable inputs and estimated cash flows.
• Debt Maturity Profile: Confirm the weighted average maturity of debt (5.1 years) and the impact of the new 5.50% Notes due 2028 on future interest expense.
• Qualifying Assets: Note that qualifying assets represented 62.2% of total assets as of June 30, 2021, which is below the 70% threshold required under the 1940 Act for acquiring additional non-qualifying assets.
• Realized Losses: Investigate the details of the $12.9 million net realized loss for the six-month period to understand the specific write-offs or extinguishments.