Business Context and Reporting Period
Company: Oxford Square Capital Corp. (OXSQ), formerly TICC Capital Corp. (name changed March 19, 2018).
Reporting Period: Quarterly period ended March 31, 2018 (Form 10-Q).
Business Model: 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.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net Investment Income | $8.72 million | $8.28 million |
| Net Increase in Net Assets from Operations | $11.49 million | $12.05 million |
| Net Asset Value (NAV) per Share | $7.60 | $7.53 |
| Total Assets | $468.05 million | $454.12 million (Dec 31, 2017) |
| Cash and Cash Equivalents | $48.81 million | $30.01 million (Dec 31, 2017) |
| Notes Payable (6.50% Unsecured Notes) | $62.42 million (net of deferred costs) | $62.34 million (Dec 31, 2017) |
| Portfolio Fair Value | $414.2 million | $418.4 million (Dec 31, 2017) |
| Weighted Average Yield on Debt | 9.90% | 8.40% (Q1 2017) |
| Asset Coverage Ratio | 693.2% | N/A |
Material Changes vs. Prior Period
- Investment Income: Decreased by approximately $3.2 million to $13.35 million, primarily due to a $1.8 million decrease in income from securitization vehicles (CLO equity) resulting from lower effective yields.
- Expenses: Total expenses decreased significantly by approximately $3.6 million to $4.62 million. This was driven by a reduction in interest expense (from $3.3 million to $1.1 million) following the repayment of Convertible Notes and TICC CLO 2012-1 secured notes in late 2017.
- Net Realized Gains: The Company recognized net realized gains of $0.29 million in Q1 2018, compared to net realized losses of $5.88 million in Q1 2017.
- Unrealized Appreciation: Net change in unrealized appreciation/depreciation was $2.48 million, a decrease from $9.65 million in the prior year period.
- Share Repurchases: The Company repurchased 990,260 shares for approximately $5.95 million during the quarter, reducing the share count to 50,489,149.
Guidance, Outlook, and Risks
- Regulatory Change: The Board approved the modified asset coverage requirements under the Small Business Credit Availability Act (SBCAA). Effective April 6, 2019, the asset coverage requirement for senior securities will decrease from 200% to 150%, potentially allowing for increased leverage.
- Distributions: The Board declared a quarterly distribution of $0.20 per share, payable June 29, 2018. The Company maintains an "opt-out" dividend reinvestment plan.
- Portfolio Strategy: Management continues to rotate the corporate loan portfolio into higher-yielding, less liquid loans, contributing to the increase in the weighted average yield on debt investments.
- Risks: Key risks include market illiquidity, adverse economic conditions affecting portfolio company repayment ability, and the impact of leverage on net asset value. The Company notes that a significant portion of its portfolio (CLO equity) is valued using Level 3 inputs (unobservable data).
Investor Verification Checklist
- CLO Equity Valuation: Verify the methodology and assumptions used for valuing CLO equity investments, which represent 37.2% of the portfolio and are subject to significant unobservable inputs.
- Asset Coverage Ratio: Monitor the impact of the upcoming regulatory change (effective 2019) allowing the asset coverage ratio to drop to 150% and the Company's potential response regarding leverage.
- Share Repurchase Program: Track the remaining $19.1 million authorization under the current repurchase program and the discount to NAV at which shares are being bought back.
- Interest Rate Sensitivity: Assess the impact of rising interest rates on the Company's variable-rate debt portfolio (approx. 99.7% of debt principal) versus its fixed-rate liabilities.
- Tax Characterization: Confirm the tax character of distributions (ordinary income vs. return of capital) once the annual tax returns are finalized, as GAAP income differs from taxable income due to CLO accounting.