Oxford Square Capital Corp. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Oxford Square Capital Corp. is a closed-end investment company regulated as a business development company and taxed as a regulated investment company. It invests primarily in corporate debt securities and collateralized loan obligation (CLO) structured-finance investments. The filing covers the quarter and nine months ended September 30, 2023; financial statements are unaudited.
Financial results and key metrics
| Metric | Three months ended September 30, 2023 | Nine months ended September 30, 2023 |
|---|---|---|
| Total investment income | $13.0 million | $39.5 million |
| Net investment income | $6.4 million | $19.6 million |
| Net investment income per share | $0.11 | $0.37 |
| Net increase in net assets from operations | $6.7 million | $24.5 million |
| Net increase from operations per share | $0.12 | $0.47 |
| Distributions per share | $0.225 | $0.435 |
- Investment income consisted primarily of $25.5 million of debt interest income and $12.8 million of income from securitization vehicles for the nine-month period. No PIK interest or PIK preferred-stock dividend income was recognized.
- Approximate net investment income margin was 49% of investment income for both the quarter and nine-month period.
- Net unrealized appreciation was $13.9 million for the quarter and $21.9 million for the nine-month period. Net realized losses were $13.6 million and $17.0 million, respectively, largely reflecting CLO equity sales and related transactions.
- Total assets were $303.0 million and net assets were $160.9 million at September 30, 2023. NAV was $2.78 per share, unchanged from December 31, 2022.
- Portfolio fair value was $285.5 million, comprising $193.7 million of senior secured notes, $84.1 million of CLO equity and $7.7 million of equity and other investments. Approximately 67.8% of the portfolio was senior secured notes and 29.5% was CLO equity.
- Debt investments had a reported weighted-average annualized yield of approximately 13.10%, excluding non-accrual investments. Three debt investments were on non-accrual status, with approximately $30.3 million of principal but only $0.5 million of fair value.
- Cash and cash equivalents were $12.4 million at September 30, 2023, compared with $9.0 million at year-end 2022. Operating activities provided $55.7 million of cash, while financing activities used $52.3 million.
- Outstanding unsecured notes had $139.7 million of principal and $137.2 million of carrying value at quarter-end. Asset coverage for borrowings was 213%, compared with 171% at December 31, 2022. Weighted-average stated borrowing cost was 5.84% and weighted-average maturity was 3.7 years.
- Expense ratios, annualized, were 17.72% of average net assets for the nine-month period, including a 3.34% net investment income incentive-fee component. The filing does not present a conventional operating-company gross margin.
Material changes versus prior comparable periods
- Quarterly investment income increased to $13.0 million from $11.4 million, and nine-month investment income increased to $39.5 million from $31.2 million, primarily due to higher interest income and higher portfolio yields.
- Quarterly net investment income increased to $6.4 million from $5.6 million; nine-month net investment income increased to $19.6 million from $14.1 million.
- Quarterly operations changed from a $11.1 million decrease in net assets in 2022 to a $6.7 million increase in 2023. For the nine-month period, operations changed from a $62.8 million decrease to a $24.5 million increase.
- Expenses increased to $6.6 million for the quarter and $19.9 million for the nine-month period, versus $5.8 million and $17.1 million, respectively. The increase primarily reflected new net investment income incentive fees and higher excise tax, partially offset by lower base fees and interest expense.
- The Company repaid $40.0 million of its 6.50% unsecured notes in July 2023 and $10.0 million in September 2023, reducing principal outstanding from approximately $64.4 million at year-end to $14.4 million at quarter-end.
- Portfolio fair value declined from $314.7 million at December 31, 2022 to $285.5 million, reflecting repayments, sales and CLO equity cost reductions, partly offset by unrealized appreciation.
- The Company acquired $8.2 million of investments, received $15.0 million of debt repayments and $15.8 million of sale proceeds, compared with $84.2 million of investment purchases during the comparable 2022 period.
- Equity capital increased through a June rights offering that issued approximately 6.5 million shares for gross proceeds of $17.2 million and an ATM offering that issued 1.4 million shares during the quarter for approximately $4.4 million net proceeds. Approximately 1.7 million rights-offering shares were purchased by affiliates of Oxford Square Management.
Guidance, outlook, commentary, risks and unusual items
- The filing provides no specific earnings, NAV or distribution guidance. Management states that results are subject to interest rates, portfolio-company performance, CLO cash flows, valuation changes and access to capital.
- Management reported that the U.S. leveraged-loan market improved during the quarter, with the Morningstar/LSTA leveraged-loan index increasing from 94.24% to 95.56% of par. The Company’s debt portfolio had a weighted-average credit grade of 2.2, unchanged from year-end 2022.
- All portfolio debt investments were variable-rate instruments, with approximately $290.4 million of principal. Management estimates that a 100-basis-point change in SOFR would change investment income by approximately 5%, before considering other portfolio or financing changes.
- LIBOR ceased representative publication on June 30, 2023. Two investments still referenced LIBOR as of quarter-end, and two were expected to use synthetic U.S.-dollar LIBOR until its expected cessation at the end of September 2024. The transition to SOFR or other alternatives could affect investment values, income and liquidity.
- Most investments were valued using Level 3 inputs and significant management judgment. Portfolio fair value is therefore sensitive to market quotes, discount rates, CLO cash-flow projections, credit performance and valuation assumptions.
- CLO equity income is based on estimated future cash flows and may differ from cash distributions received; stated CLO yields may not ultimately be realized. The portfolio also includes significant net unrealized tax depreciation of approximately $204.5 million.
- Key risks include portfolio concentration, defaults and covenant breaches, non-accrual investments, inflation, interest-rate volatility, market illiquidity, leverage, cybersecurity and geopolitical disruptions. The Company held no commitments to purchase additional investments and reported no material legal proceedings.
- Subsequent to quarter-end, the Company redeemed an additional $7.0 million of 6.50% unsecured notes on November 3, 2023. The Company declared regular distributions of $0.035 per share for each of October, November and December 2023 and January, February and March 2024 payment dates.
Most important facts for investors to verify
- Whether the three non-accrual debt investments, totaling approximately $30.3 million of principal, generate recoveries consistent with their very low aggregate fair value.
- The sustainability of investment income and distributions, particularly given the reliance on floating-rate debt and estimated CLO equity cash flows.
- The accuracy and sensitivity of Level 3 portfolio valuations, including CLO assumptions, discount rates and credit marks.
- The Company’s ability to refinance or repay the remaining 6.50% notes due March 2024 and manage the $44.8 million of 6.25% notes due 2026 and $80.5 million of 5.50% notes due 2028.
- The effect of LIBOR replacement, SOFR movements and changes in portfolio-company credit quality on net investment income, NAV and asset coverage.
- The ultimate tax characterization of 2023 distributions, which management states remains subject to year-end tax reporting and may differ from current estimates.
- The impact of equity issuance and related-party participation on NAV per share, leverage, fee calculations and potential conflicts of interest.