Oxford Square Capital Corp. — Form 10-K Summary
Business Context and Reporting Period
Oxford Square Capital Corp. is a closed-end, non-diversified business development company and regulated investment company. Its objective is to maximize total return through investments primarily in senior secured corporate debt and collateralized loan obligation equity. The filing covers the fiscal year ended December 31, 2021, with quarterly information for the fourth quarter of 2021.
At December 31, 2021, the investment portfolio consisted of approximately 62.8% senior secured notes, 37.0% CLO equity and 0.2% equity and other investments. The portfolio’s debt investments had a weighted average annualized yield of approximately 7.70%, compared with 8.03% at December 31, 2020.
Key Financial Metrics
| Metric | 2021 | 2020 |
|---|---|---|
| Total investment income | $37.2 million | $35.9 million |
| Net investment income | $16.1 million | $19.7 million |
| Net investment income per share | $0.32 | $0.40 |
| Net realized losses | $15.0 million | $8.2 million |
| Net change in unrealized appreciation | $38.5 million | $(9.8) million |
| Net increase in net assets from operations | $39.6 million | $1.7 million |
| Net increase in net assets per share | $0.80 | $0.03 |
| Net assets at year-end | $244.6 million | $225.4 million |
| NAV per share | $4.92 | $4.55 |
| Investment portfolio at fair value | $420.8 million | $294.7 million |
| Cash and cash equivalents | $9.0 million | $59.1 million |
| Total debt principal | $189.7 million | $109.2 million |
| Asset coverage for borrowings | 227% | 304% |
Operating expenses increased to $21.1 million from $16.2 million, principally because of higher interest expense and base advisory fees. Interest expense was $10.5 million, compared with $7.9 million in 2020, while the base fee was $6.3 million, compared with $4.5 million.
Quarterly distributions totaled $0.105 per share in each quarter of 2021, or $0.420 per share for the year. The year-end NAV was $4.92 per share, while the fourth-quarter trading range was $3.79 to $4.47. The common stock traded below NAV during the quarter and at approximately a 16.5% discount to December 31, 2021 NAV on March 1, 2022.
Material Changes Versus the Prior Comparable Period
- Investment income increased 3.4%, driven primarily by higher income from securitization vehicles and investments, partially offset by lower stated interest income from senior secured loans.
- Net investment income declined 18.3% because expense growth exceeded the increase in investment income.
- Net assets from operations increased substantially, from $1.7 million to $39.6 million, due mainly to a $38.5 million net unrealized appreciation in 2021 versus a $9.8 million net unrealized depreciation in 2020.
- The investment portfolio increased by $126.1 million, or approximately 43%, to $420.8 million. Purchases rose to $178.9 million from $93.8 million, while repayments and sales declined to $39.5 million from $134.6 million.
- Senior secured notes increased to $264.5 million from $172.2 million, and CLO equity increased to $155.6 million from $122.5 million.
- The company issued approximately $80.5 million of 5.50% unsecured notes due 2028 in May 2021. Total debt increased by approximately $80.5 million, and asset coverage declined from 304% to 227%.
- Cash declined by approximately $50.1 million to $9.0 million, primarily reflecting substantial investment purchases and distributions, partly offset by the new debt issuance.
- The debt portfolio’s weighted average credit grade remained 2.1, but Grade 5 principal value represented 9.0% of debt investments at year-end, compared with 12.7% in 2020. Three debt investments were on non-accrual status versus two in the prior year.
Guidance, Outlook, Risks and Unusual Items
- Management expects to continue investing primarily in corporate debt and CLO equity, but provides no quantitative earnings, NAV or distribution guidance.
- Management described the corporate loan and CLO markets as generally strong in 2021, with loan defaults declining to 0.29% at year-end from 3.83% at year-end 2020.
- The company recognized a $15.0 million net realized investment loss, primarily related to the extinguishment of a debt investment previously on non-accrual status.
- CLO equity distributions of approximately $55.8 million exceeded the $18.3 million of effective-yield income recognized on those investments, resulting in a $37.5 million reduction to CLO equity cost value. GAAP income from CLO investments depends on estimated future cash flows and may differ materially from cash distributions.
- All investments were classified as Level 3 fair value measurements, making reported NAV sensitive to management assumptions, non-binding indicative bids, discount rates, EBITDA multiples and projected CLO cash flows.
- COVID-19, inflation, supply-chain disruptions, labor shortages, geopolitical conflict, sanctions and capital-market volatility could adversely affect portfolio companies, investment valuations, liquidity and distributions.
- The company’s investments are concentrated in below-investment-grade borrowers and highly leveraged CLO structures. CLO equity is subordinate to senior CLO debt and could experience significant or total loss.
- The company has substantial refinancing exposure, including $64.4 million of notes maturing in 2024 and $44.8 million maturing in 2026. It also has $80.5 million of notes due in 2028.
- LIBOR transition may affect portfolio investment yields, borrowing costs, valuation and the terms of investments extending beyond the applicable LIBOR cessation dates.
- The investment adviser did not earn income incentive fees or capital gains incentive fees in 2021. However, the base fee remains payable on gross assets, and the fee structure may create conflicts regarding leverage, investment selection and allocation of opportunities among affiliated funds.
- The company remains subject to RIC distribution requirements and may recognize taxable income before receiving corresponding cash, particularly from CLO investments, original issue discount or other deferred-income instruments.
- Subsequent to year-end, the Board declared monthly distributions of $0.035 per share for January through June 2022 and amended the company’s bylaws effective March 1, 2022.
Most Important Facts for Investors to Verify
- Confirm the sustainability of the $0.035 monthly distribution against recurring cash investment income, CLO cash distributions and taxable income.
- Review the valuation assumptions supporting the $420.8 million investment portfolio, particularly the $155.6 million CLO equity portfolio and all Level 3 measurements.
- Assess the liquidity impact of only $9.0 million of cash against $189.7 million of debt principal and expected portfolio funding needs.
- Evaluate refinancing plans and covenant headroom for the 2024, 2026 and 2028 unsecured notes.
- Monitor the three non-accrual investments, Grade 5 debt exposure and the restructuring of Premiere Global Services, including the replacement revolver maturing March 31, 2022.
- Determine whether the 2021 increase in NAV and operating results reflects durable credit performance or primarily temporary unrealized appreciation and CLO valuation changes.
- Verify the final tax characterization of 2021 distributions, which the filing states was not yet finalized and could differ from the estimates.
- Track the effects of LIBOR replacement, rising interest rates, inflation and changes in CLO collateral performance on income and borrowing costs.