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 March 31, 2021.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: The investment portfolio fair value increased by approximately $25.9 million from December 31, 2020, to March 31, 2021. This was driven primarily by net unrealized appreciation of $31.0 million and new purchases of $32.9 million, partially offset by realized losses of $14.1 million and debt repayments of $16.4 million.
• Operating Results: The company reported a net increase in net assets from operations of $21.8 million, a significant improvement from the $79.4 million net decrease in the same period in 2020. The 2020 period was heavily impacted by unrealized depreciation due to the onset of the COVID-19 pandemic.
• Investment Income: Total investment income decreased by approximately $1.5 million compared to Q1 2020, primarily due to a reduction in interest income as the principal value of income-producing debt investments declined.
• Realized Losses: Net realized losses of $14.1 million were recognized, primarily reflecting the extinguishment of a debt investment previously on non-accrual status (Imagine Print Solutions, LLC).
• Liquidity: Cash equivalents decreased by $19.4 million from the prior quarter, largely due to investment purchases and distribution payments.

Guidance, Outlook, Risks, and Unusual Items

• Management Commentary: Management noted that the U.S. loan market strengthened in Q1 2021, with loan prices increasing from 96.19% of par to 97.55% of par. The weighted average annualized yield on debt investments was approximately 7.67% as of March 31, 2021.
• Unusual Items: The $14.1 million realized loss was a significant non-recurring item related to the write-off of a non-performing asset. Additionally, $6.0 million in reductions to CLO equity cost value were recorded, representing distributions received in excess of effective yield income.
• Risks: The filing highlights ongoing risks related to the COVID-19 pandemic, including potential economic downturns, borrower defaults, and valuation uncertainties. The company also notes exposure to interest rate risk, as most debt investments are variable-rate, and the impending transition away from LIBOR.
• Outlook: The company maintains its investment objective to maximize total return. No specific forward-looking financial guidance was provided beyond the standard cautionary statements regarding market volatility and the impact of the pandemic.

Investor Verification Checklist

• Non-Accrual Status: Verify the status of the one debt investment currently on non-accrual (approx. $3.6 million fair value) and the potential for further credit deterioration.
• CLO Equity Valuations: Review the methodology for valuing CLO equity investments, which constitute 39.7% of the portfolio and are subject to significant unobservable inputs (Level 3).
• Distribution Sustainability: Confirm the tax characterization of distributions, as a portion ($0.018 per share in Q1 2021) was estimated as a return of capital.
• Debt Maturity Profile: Assess the impact of the $109.2 million in outstanding debt, with the 6.50% notes maturing in 2024 and 6.25% notes in 2026.
• Qualifying Assets: Note that qualifying assets represented 63.8% of total assets, below the 70% threshold required to acquire additional non-qualifying assets under the 1940 Act.