OXSQ

Business Context and Reporting Period

Oxford Square Capital Corp. (OXSQ) is a 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 summary covers the quarterly period ended June 30, 2022.

Key Financial Metrics

Material Changes vs. Prior Period

• Portfolio Valuation: The total fair value of the investment portfolio decreased from $420.8 million at December 31, 2021, to $369.4 million at June 30, 2022. This decline was primarily driven by net unrealized depreciation of approximately $59.7 million.
• Unrealized Losses: Significant unrealized depreciation occurred in CLO equity investments, with notable declines in Sound Point CLO XVI, Ltd., Octagon Investment Partners 49, Ltd., and Nassau 2019-I Ltd.
• Investment Income: Total investment income increased to $19.8 million for the six months ended June 30, 2022, compared to $17.2 million in the prior year period, largely due to higher interest income from a larger debt portfolio.
• Operating Expenses: Total expenses increased to $11.2 million for the six-month period (from $9.6 million in the prior year), driven by higher interest expense and base management fees due to increased gross assets.
• NAV Decline: NAV per share dropped from $4.92 at year-end 2021 to $3.67 at June 30, 2022, reflecting the impact of unrealized losses exceeding net investment income.

Guidance, Outlook, and Risks

• Market Conditions: Management noted weakness in the U.S. loan market, with the S&P/LSTA Leveraged Loan Index declining from 97.60% of par in March 2022 to 92.16% of par in June 2022.
• Interest Rate Sensitivity: The portfolio is sensitive to interest rate changes. A hypothetical 100 basis point increase in base rates would increase investment income by approximately 7.1%, while a 100 basis point decrease would reduce it by 6.0%.
• Risk Factors: Key risks include the ongoing impact of the COVID-19 pandemic, inflationary pressures, the conflict between Russia and Ukraine, and the transition from LIBOR to SOFR. The company also faces risks related to the illiquidity of CLO equity investments and potential covenant failures in CLO vehicles.
• Non-Accrual Status: As of June 30, 2022, three debt investments were on non-accrual status with a combined fair value of approximately $0.5 million and principal value of $27.5 million.
• Distributions: The company declared monthly distributions of $0.035 per share. For the six months ended June 30, 2022, management estimated that a portion of distributions ($0.04 per share) represented a tax return of capital.

Investor Verification Checklist

• CLO Equity Valuations: Verify the specific valuation methodologies and third-party inputs used for the significant unrealized losses in CLO equity positions (e.g., Sound Point, Octagon, Nassau).
• Non-Accrual Assets: Review the status and recovery prospects of the three debt investments currently on non-accrual status.
• Asset Coverage: Confirm the company remains compliant with the 150% asset coverage requirement under the 1940 Act (currently at 194%).
• Debt Maturities: Assess the impact of upcoming debt maturities, specifically the $64.4 million 6.50% Notes due in March 2024.
• LIBOR Transition: Monitor the progress of transitioning variable rate investments from LIBOR to SOFR and the associated contractual amendments.