Business Context and Reporting Period
Oxford Square Capital Corp. is a Maryland-based business development company regulated under the Investment Company Act of 1940 and taxed as a regulated investment company. Its objective is to maximize total return primarily through corporate debt securities and collateralized loan obligation (CLO) investments. The unaudited Form 10-Q covers the quarter ended March 31, 2023, with comparisons to the quarter ended March 31, 2022 and December 31, 2022 balance-sheet data.
Financial Position and Key Metrics
| Metric | March 31, 2023 | Comparable / Prior Period |
|---|---|---|
| Total assets | $335.2 million | $328.0 million at December 31, 2022 |
| Net assets | $139.8 million | $138.7 million at December 31, 2022 |
| Net asset value per share | $2.80 | $2.78 at December 31, 2022; $4.65 at March 31, 2022 |
| Investment portfolio at fair value | $319.7 million | $314.7 million at December 31, 2022 |
| Cash and cash equivalents | $10.8 million | $9.0 million at December 31, 2022 |
| Total debt carrying value | $186.6 million | $186.3 million at December 31, 2022 |
| Asset coverage for borrowings | 172% | 171% at December 31, 2022 |
The portfolio consisted of approximately $218.7 million of senior secured notes, $95.9 million of CLO equity, and $5.1 million of equity and other investments. Software represented 24.8% of portfolio fair value, business services 16.6%, healthcare 9.8%, and telecommunications services 6.6%. CLO equity represented 30.0% of portfolio fair value.
Quarterly Results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total investment income | $12.9 million | $9.9 million | Increased approximately 31% |
| Interest income | $8.3 million | $5.3 million | Increased approximately $3.0 million |
| CLO and securitization income | $4.4 million | $4.4 million | Broadly stable |
| Total expenses | $6.5 million | $5.6 million | Increased approximately $0.8 million |
| Net investment income | $6.5 million | $4.3 million | Increased approximately 53% |
| Net realized gains | $0 | $1.0 million | Decreased |
| Net unrealized depreciation | $0.2 million | $13.5 million | Materially improved |
| Net increase/(decrease) in net assets from operations | $6.3 million | $(8.2) million | Turned positive |
| Net investment income per share | $0.13 | $0.09 | Increased |
| Distribution per share | $0.105 | $0.105 | Unchanged |
Annualized expenses were 18.53% of average net assets, including a 3.53% net investment income incentive fee, while annualized net investment income was 18.65% of average net assets. Before incentive fees, expenses were $5.2 million versus $5.6 million in the prior-year quarter, primarily because of lower base management fees. A $1.2 million net investment income incentive fee was recorded in Q1 2023; none was recorded in Q1 2022.
Cash Flow, Leverage and Liquidity
- Operating activities generated $6.8 million of cash, compared with $11.2 million in Q1 2022.
- The company purchased approximately $8.2 million of investments, including $3.5 million of additional investments in existing portfolio companies and $4.7 million in a new portfolio company.
- Debt repayments were approximately $0.3 million; no portfolio investments were sold.
- Financing activities used $5.1 million, primarily for distributions, resulting in a $1.7 million increase in cash and cash equivalents.
- Outstanding unsecured notes had principal amounts of $64.4 million due March 2024, $44.8 million due April 2026, and $80.5 million due July 2028. Weighted-average stated interest was 6.02%, and weighted-average maturity was 3.3 years.
- The company reported no commitments to purchase additional investments and no material off-balance-sheet commitments.
Material Changes and Unusual Items
- Portfolio fair value increased $5.0 million from year-end, primarily reflecting $8.2 million of purchases, partially offset by $0.3 million of repayments, $3.0 million of reductions to CLO equity cost value, and $0.2 million of net unrealized depreciation.
- Debt investment yield increased to approximately 12.36% from approximately 8.01% in the comparable prior-year period, primarily reflecting higher base interest rates and portfolio changes.
- Three debt investments were on non-accrual status. Their aggregate principal value was approximately $28.7 million, but their combined fair value was only approximately $0.1 million. No PIK interest or preferred-stock dividend income was recognized during the quarter.
- Approximately $1.2 million of PIK dividends were entitled to be received during the quarter but were deemed uncollectible.
- All fair-valued investments were classified as Level 3, using significant unobservable inputs. The board determines fair value in good faith, and valuations may be sensitive to market quotes, discount rates, enterprise values and CLO cash-flow assumptions.
- As part of a distressed investment restructuring, the Premiere Global replacement revolver maturity was amended to April 7, 2023; the instrument was on non-accrual status at March 31, 2023. The filing also identifies a springing maturity issue for related Premiere Global debt.
Outlook, Risks and Contingencies
Management did not provide formal earnings guidance. The company expects to continue investing primarily in variable-rate corporate debt and CLO securities, but cautions that portfolio yield, investment income, distributions and NAV may fluctuate materially.
- All debt investments were variable-rate instruments, generally indexed to SOFR, LIBOR, Prime or Treasury rates. Management estimates that a 100-basis-point increase in base rates would increase annualized investment income by approximately 5.6%, while a 100-basis-point decrease would reduce it by approximately 5.6%, excluding CLO equity and other factors.
- Higher rates may support interest income but can reduce the fair value, liquidity and credit quality of portfolio investments. The company also faces LIBOR transition risk.
- CLO equity investments are subordinated, thinly traded and dependent on collateral performance, overcollateralization and interest-coverage tests. CLO distributions may decline or cease if these tests are breached.
- The portfolio is concentrated in software, business services and structured finance, and losses at individual portfolio companies could materially affect NAV and cash flows.
- The company’s distributions may exceed GAAP net investment income in a period and could ultimately be characterized as return of capital for tax purposes. The final tax characterization for 2023 had not been determined.
- The company reported no material legal proceedings, no defaults upon senior securities, and effective disclosure controls as of March 31, 2023.
Investor Verification Items
- Verify the repayment, refinancing or other resolution of the $64.4 million 6.50% unsecured notes due March 30, 2024.
- Monitor non-accrual exposures, particularly the Premiere Global replacement revolver and other investments with approximately $28.7 million of principal on non-accrual status.
- Reconcile GAAP net investment income, cash CLO distributions and the sustainability of the $0.035 monthly distribution.
- Review the valuation sensitivity of the predominantly Level 3 portfolio, including CLO equity assumptions and portfolio-company enterprise values.
- Assess whether the 172% asset-coverage ratio provides sufficient cushion against further portfolio depreciation or debt-related obligations.
- Review subsequent filings for changes in interest rates, CLO test performance, portfolio credit grades and the final tax characterization of distributions.