OXSQ

Business Context and Reporting Period

Oxford Square Capital Corp. (OXSQ) is a closed-end, non-diversified 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, to a lesser extent, collateralized loan obligation (CLO) structured finance investments. This summary covers the fiscal year ended December 31, 2025.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Performance: The portfolio fair value decreased by approximately $9.2 million year-over-year. This decline was driven by $24.3 million in net unrealized depreciation and $16.8 million in net realized losses, partially offset by $92.1 million in new investment purchases.
• Income Decline: Total investment income decreased by $2.3 million, primarily due to a $7.1 million drop in stated interest income from debt investments resulting from restructurings, refinancings, and lower average outstanding principal.
• Expense Increase: Total operating expenses increased by $1.5 million to $17.7 million, largely attributable to a $1.4 million increase in interest expense due to new debt issuances.
• Debt Restructuring: The company fully redeemed its $44.8 million 6.25% Unsecured Notes during 2025. Concurrently, it issued $74.8 million in 7.75% Unsecured Notes due 2030, increasing total debt principal by $30 million.
• Equity Capital: The company raised approximately $34.8 million net of costs through its At-the-Market (ATM) offering, selling 15.9 million shares.

Guidance, Outlook, and Risks

Management Commentary: Management noted that the broader corporate loan and CLO equity markets displayed weakness in 2025, with the Morningstar/LSTA US Leveraged Loan Index decreasing. However, credit quality improved as the default rate decreased to 3.35% from 4.70% in 2024. The company maintains a strategy of focusing on small to medium-sized broadly syndicated loans and private deals to maintain liquidity.

Outlook: The company continues to seek attractive risk-adjusted total returns. It has authorized a $25.0 million share repurchase program effective October 30, 2025, though no shares were repurchased during the fiscal year.

Risks and Contingencies:

• Valuation Risk: Substantially all investments are Level 3 assets, requiring significant management judgment and unobservable inputs for fair value determination.
• Leverage Risk: The company uses leverage to enhance returns, which magnifies potential losses. The asset coverage ratio remains above the 150% regulatory requirement but declined from 227% to 191%.
• Interest Rate Risk: Most debt investments are variable rate. A 100 basis point increase in rates is estimated to increase investment income by 4.5%, while a 100 basis point decrease would reduce it by 4.4%.
• Conflicts of Interest: The investment adviser manages other funds (Oxford Lane, Oxford Park, Oxford Gate) and must allocate investment opportunities fairly among them.

Key Facts for Investor Verification

• NAV Decline: Verify the impact of the $24.3 million unrealized depreciation on the $1.69 NAV per share, representing a significant drop from the prior year's $2.30.
• Debt Cost: Confirm the weighted average interest rate on debt increased to 6.58% in 2025 from 5.77% in 2024 due to the new 7.75% note issuance.
• Distribution Coverage: Note that distributions of $0.42 per share exceeded GAAP net investment income of $0.30 per share, indicating a potential return of capital component or drawdown of retained earnings.
• Portfolio Concentration: Review the top 10 portfolio investments, which represent 48.3% of the total portfolio fair value, with a significant portion in Structured Finance (CLOs).
• Qualifying Assets: Verify that qualifying assets represented 68.8% of total assets as of year-end, slightly below the 70% threshold required for acquiring non-qualifying assets, though no such acquisitions were made during the period.