OXSQ

Business Context and Reporting Period

Oxford Square Capital Corp. (OXSQ), formerly TICC Capital Corp., 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 Form 10-Q covers the quarterly period ended September 30, 2018.

Key Financial Metrics

Material Changes vs. Prior Period

• Investment Income: For the nine months ended September 30, 2018, total investment income decreased to $41.1 million from $48.0 million in the prior year period. This decline was primarily driven by lower income from securitization vehicles and reduced interest income.
• Expenses: Total expenses for the nine months ended September 30, 2018, decreased significantly to $16.1 million from $24.9 million in the prior year. The reduction is largely attributable to the repayment of the TICC CLO 2012-1 secured notes and Convertible Notes in late 2017, which lowered interest expense and base management fees.
• Portfolio Composition: The portfolio fair value increased to $505.4 million from $418.4 million at year-end 2017. Senior Secured Notes comprised 57.5% of the portfolio, while CLO Equity investments represented 37.8%.
• Debt Structure: The company entered into a new $95.2 million Credit Facility in June 2018. As of September 30, 2018, the company held $87.7 million in principal under this facility and $64.4 million in 6.50% Unsecured Notes.

Guidance, Outlook, and Risks

• Share Repurchases: The company authorized a $25.0 million share repurchase program. As of September 30, 2018, approximately $9.9 million remained available. Subsequent to the period end, an additional $4.3 million was spent on repurchases.
• Credit Facility Amendment: On October 12, 2018, the company amended its Credit Facility to borrow an additional $37.3 million, posting additional collateral of approximately $76.4 million.
• Distributions: The Board declared a quarterly distribution of $0.20 per share, payable December 31, 2018. For the three months ended September 30, 2018, the estimated tax character was $0.12 per share from ordinary income and $0.08 per share as a return of capital.
• Regulatory Changes: The Small Business Credit Availability Act (SBCAA) allows the company to reduce its asset coverage requirement from 200% to 150% effective April 6, 2019, potentially allowing for increased leverage.
• Risks: Key risks include market illiquidity, adverse economic conditions affecting portfolio company repayment, interest rate volatility, and the potential for unrealized depreciation on Level 3 assets (which comprise the entire investment portfolio).

Investor Verification Checklist

• Verify the tax character of distributions (ordinary income vs. return of capital) upon receipt of the final Form 1099-DIV, as current figures are estimates.
• Monitor the company's asset coverage ratio as it approaches the April 2019 regulatory change allowing increased leverage.
• Review the performance of CLO equity investments, which represent a significant portion (37.8%) of the portfolio and are subject to effective yield accounting adjustments.
• Track the utilization of the new Credit Facility and the impact of the October 2018 amendment on liquidity and interest expense.
• Assess the impact of share repurchases on Net Asset Value (NAV) per share and the remaining authorization under the repurchase program.