Oxford Square Capital Corp. annual report, FY2023

Oxford Square Capital Corp. — FY2023 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 primarily through corporate debt securities and collateralized loan obligation investments. This filing covers the fiscal year ended December 31, 2023; quarterly information is provided for the fourth quarter.

Key financial metrics

Metric	FY2023	FY2022
Total investment income	$51.8 million	$43.1 million
Net investment income	$27.4 million	$20.7 million
Net investment income per share	$0.51	$0.42
Net realized losses	$17.2 million	$0.3 million
Net change in unrealized appreciation/(depreciation)	$7.1 million	$(105.9) million
Net increase/(decrease) in net assets from operations	$17.2 million	$(85.6) million
Net assets at year-end	$151.3 million	$138.7 million
NAV per share	$2.55	$2.78
Cash and cash equivalents	$5.7 million	$9.0 million

Investment income increased approximately 20% year over year, primarily from higher stated interest income. Net investment income increased approximately 32%.
Net investment income represented approximately 52.8% of total investment income. Net income from operations represented approximately 33.3% of investment income.
Fourth-quarter total investment income was $12.3 million, net investment income was $7.8 million, and net assets from operations decreased by $7.3 million, or $0.13 per share.
The portfolio’s fair value declined to $266.9 million from $314.7 million. The portfolio comprised 67.2% senior secured notes, 30.8% CLO equity, and 2.0% equity and other investments.
Debt investment weighted-average yield increased to 13.30% from 11.85%. Debt investments had stated rates ranging from 9.22% to 16.00%.
Annual distributions were $0.54 per share, compared with $0.42 per share in 2022. Distributions declared and paid totaled $29.5 million, versus $20.9 million of net investment income, creating a distribution coverage ratio of approximately 93% on a GAAP basis.
Operating expenses were $24.5 million, including $10.8 million of interest expense, $4.6 million of base fees, $3.7 million of net investment income incentive fees, and $1.4 million of excise tax.

Liquidity, debt and capital resources

Net cash provided by operating activities was $65.7 million. Net cash used in financing activities was $69.0 million, primarily reflecting $28.6 million of distributions and repayment of the 6.50% Unsecured Notes.
The Company fully redeemed the remaining $64.4 million of 6.50% Unsecured Notes during 2023, including final repayment on December 21, 2023.
Year-end debt consisted of $44.8 million of 6.25% Unsecured Notes due 2026 and $80.5 million of 5.50% Unsecured Notes due 2028. Total principal debt was $125.3 million, compared with $189.7 million at year-end 2022.
Asset coverage for borrowings improved to approximately 219% from 171%, above the statutory 150% requirement. Weighted-average stated borrowing cost was 5.77%, with weighted-average maturity of 3.8 years.
The Company raised approximately $16.0 million net through a June 2023 transferable rights offering and approximately $8.0 million net through its ATM program. It issued approximately 9.1 million shares through these programs and issued approximately 309,000 shares under its distribution reinvestment plan.

Material changes versus the prior comparable period

Results improved substantially from 2022, when large unrealized portfolio depreciation produced an $85.6 million net decrease in assets from operations. FY2023 generated a $17.2 million net increase.
Interest income increased by approximately $8.4 million, while CLO income declined modestly to $16.8 million from $17.1 million.
Interest expense declined by approximately $1.5 million following repayment of the 6.50% notes, while base fees declined by approximately $1.3 million due to lower average gross assets. These savings were more than offset by the newly recorded $3.7 million income incentive fee and higher excise tax.
Portfolio purchases fell to $11.7 million from $84.2 million. Repayments and sales totaled $35.4 million, and the number of debt portfolio companies declined to 19 from 20.
The debt portfolio’s weighted-average credit grade weakened to 2.3 from 2.2. Grade 5 investments represented 14.8% of debt portfolio principal value and 1.0% of debt fair value, compared with 9.2% and 0.1%, respectively, in 2022.
NAV per share declined approximately 8.3% despite positive annual operating results, reflecting distributions, realized losses, and share issuance effects.

Guidance, outlook, commentary, risks and unusual items

Management reported strength in corporate loan and CLO equity markets during 2023 but noted higher interest rates, macroeconomic uncertainty, reduced CLO issuance and rising loan defaults. The leveraged loan default rate increased to 1.53% at year-end 2023 from 0.72% at year-end 2022.
The filing states that there is no expectation for Oxford Square Management to earn incentive fees for 2024 under the Total Return Requirement, although future incentive fees may be earned if investment income and realized gains increase.
Management declared monthly distributions of $0.035 per share for January through June 2024.
Four debt investments were on non-accrual status at December 31, 2023. The filing identifies approximately $5.8 million of fair value associated with certain non-accrual debt or preferred equity investments. One healthcare investment and a Premiere Global replacement revolver were specifically identified as non-accrual.
Approximately 86% of the investment portfolio was composed of senior secured notes and CLO equity, but CLO equity carries substantial structural leverage. CLO vehicles held at year-end had average leverage of 8.3 times, ranging from approximately 2.3 times to 11.7 times.
All investments other than cash equivalents were classified as Level 3 fair value measurements, making reported NAV sensitive to management assumptions, market quotes, credit spreads, yields, collateral performance and expected cash flows.
Key risks include portfolio concentration, illiquidity, defaults and restructurings, leverage, rising borrowing costs, interest-rate changes, CLO cash-flow volatility, PIK and non-cash income, conflicts involving affiliated investment platforms, regulatory and RIC qualification requirements, and possible return-of-capital distributions.
The Company reported no material pending legal proceedings and no cybersecurity risks that had materially affected, or were reasonably likely to materially affect, the Company during the reporting period.

Most important facts for investors to verify

Reconcile the $17.2 million annual operating gain with the $17.1 million of realized investment losses and the $7.1 million of net unrealized appreciation.
Assess the sustainability of the $0.54 per-share annual distribution against recurring net investment income and the final tax characterization of 2023 distributions.
Review the four non-accrual investments, Grade 5 exposure, and the significant reduction in debt fair value relative to principal value.
Evaluate CLO equity valuation assumptions, expected cash flows, overcollateralization tests and the effect of CLO leverage on distributions.
Confirm the refinancing and repayment plan for the $44.8 million of notes due in 2026 and $80.5 million due in 2028.
Consider the effect of related-party fee arrangements, affiliated co-investments and management’s concurrent responsibilities for Oxford Lane, Oxford Park and other affiliated investment vehicles.