Oxford Square Capital Corp. 10-Q Summary
Business context and reporting period
Oxford Square Capital Corp. is a closed-end business development company regulated as a BDC and taxed as a regulated investment company. Its objective is to maximize total return through investments primarily in corporate debt securities and collateralized loan obligation (CLO) structured-finance investments. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2023, with comparisons to the comparable 2022 periods.
Key financial metrics
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Total investment income | $13.5 million | $9.9 million | $26.5 million | $19.8 million |
| Net investment income | $6.7 million | $4.3 million | $13.2 million | $8.6 million |
| Net increase/(decrease) in net assets from operations | $11.6 million | ($43.4 million) | $17.9 million | ($51.6 million) |
| Net investment income per share | $0.13 | $0.09 | $0.26 | $0.17 |
| Operations per share | $0.23 | ($0.87) | $0.36 | ($1.04) |
| Distributions per share | $0.105 | $0.105 | $0.210 | $0.210 |
- Net investment income increased primarily because of higher interest income, reflecting higher portfolio yields. The weighted average yield on debt investments was 12.85% at June 30, 2023, versus 9.01% at June 30, 2022.
- Total expenses were $6.8 million for the quarter and $13.3 million for the six months. Net investment income incentive fees were $1.3 million and $2.5 million, respectively; no such fees were recorded in the comparable 2022 periods.
- Annualized net investment income as a percentage of average net assets was 18.46% for the quarter and 18.55% for the six months, compared with 8.39% and 7.73% in the prior-year periods. These ratios include incentive fees and are not conventional operating margins.
- Net asset value increased to $162.4 million, or $2.88 per share, at June 30, 2023, from $138.7 million, or $2.78 per share, at December 31, 2022.
- The investment portfolio had a fair value of $306.1 million, consisting of $209.5 million of senior secured notes, $88.2 million of CLO equity and $8.4 million of other equity investments. Approximately 75.3% of total assets were qualifying assets under the 1940 Act.
- Cash and cash equivalents totaled $43.0 million at June 30, 2023, compared with $9.0 million at December 31, 2022. Operating activities provided $28.1 million of cash during the first six months, and financing activities provided $5.9 million.
- Debt principal totaled $189.7 million, with a carrying value of $186.8 million and fair value of $176.4 million. Asset coverage was 184%, versus 171% at December 31, 2022. Weighted average stated borrowing cost was 6.02%, and weighted average maturity was 3.1 years.
Material changes versus prior comparable periods
- Investment income increased 36% for the quarter and 34% for the six-month period, primarily from higher stated interest income on floating-rate debt investments.
- Net investment income increased 53% for the quarter and 53% for the six-month period, despite the introduction of net investment income incentive fees.
- Results benefited from net unrealized appreciation of $8.3 million for the quarter and $8.0 million for the six months, compared with substantial unrealized depreciation in the prior-year periods. The company nevertheless recognized net realized investment losses of $3.3 million in both 2023 periods.
- The portfolio shifted modestly toward senior secured notes and away from CLO equity. Senior secured notes represented 68.4% of portfolio fair value at June 30, 2023, versus 67.2% at year-end 2022; CLO equity declined to 28.8% from 31.4%.
- The company purchased $8.2 million of investments and received $0.8 million of principal repayments and $13.9 million from investment sales during the first six months. CLO equity cost value was reduced by $7.4 million, reflecting distributions in excess of effective-yield income.
- On June 22, 2023, the company issued approximately 6.5 million shares in a transferable rights offering at $2.66 per share, generating gross proceeds of approximately $17.2 million. Affiliates of Oxford Square Management purchased approximately 1.7 million shares.
- On July 24, 2023, after quarter-end, the company redeemed $40.0 million of its $64.4 million outstanding 6.50% unsecured notes at par plus accrued interest.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings or portfolio guidance. Management stated that U.S. leveraged-loan prices improved during the quarter and expects continued emphasis on variable-rate investments. Future results will depend on portfolio-company performance, CLO cash flows, credit conditions, interest rates, refinancing and access to capital.
- Three debt investments were on non-accrual at June 30, 2023, with approximately $29.2 million of principal but only $0.5 million of aggregate fair value. The filing states that no PIK interest or preferred-stock dividend income was recognized during the period.
- Approximately 99% of investment fair value was classified as Level 3, reflecting significant reliance on unobservable inputs, valuation models and non-binding indicative bids. Changes in discount rates, market prices, EBITDA and valuation multiples could materially affect NAV.
- CLO equity investments are subordinate positions whose distributions depend on underlying loan performance, collateralization tests, defaults and payments to senior CLO debt holders. Reported CLO income is based on estimated cash flows and may differ from cash distributions received.
- All portfolio debt investments were variable-rate, and several investments still referenced LIBOR at quarter-end despite the end of representative U.S.-dollar LIBOR publication. The filing identifies LIBOR transition risk, interest-rate volatility, inflation, economic downturns, defaults, illiquidity, concentration, leverage and geopolitical events as key risks.
- The company had no commitments to purchase additional investments and was not subject to material legal proceedings at June 30, 2023. Management concluded that disclosure controls were effective and that no material changes occurred in internal control over financial reporting.
- Post-quarter-end distributions included a $0.120 per-share special distribution and regular monthly distributions of $0.035 per share for October through December 2023. The tax character of 2023 distributions remains subject to final determination.
Important facts for investors to verify
- Confirm the effect of the July 24, 2023 partial redemption of the 6.50% notes on future interest expense, liquidity and debt maturities.
- Review the three non-accrual investments, their restructuring status and the potential for additional realized losses or reductions in investment income.
- Assess the sustainability of the 12.85% debt-portfolio yield and the extent to which higher short-term rates are offset by funding costs, defaults or declining credit quality.
- Examine the valuation sensitivity of the predominantly Level 3 portfolio, particularly CLO equity and lower-rated senior secured investments.
- Compare recurring net investment income with regular and special distributions, including the final tax characterization and any potential return of capital.
- Monitor the transition of remaining LIBOR-linked investments to replacement benchmarks and the resulting effects on income, valuation and contractual terms.