Company Overview
Oxford Square Capital Corp. (OXSQ) is a prominent business development company that has established itself as a leading player in the syndicated bank loan and collateralized loan obligation (CLO) investment landscape. With a focus on maximizing total returns, OXSQ has consistently sought to provide its shareholders with exposure to these specialized asset classes, which can offer attractive risk-adjusted returns.
Incorporated on July 21, 2003, under the General Corporation Laws of the State of Maryland, OXSQ is a closed-end investment company that has elected to be regulated as a business development company (BDC) under the Investment Company Act of 1940, as amended. The company has also chosen to be treated for tax purposes as a regulated investment company (RIC) under Subchapter M of the Internal Revenue Code of 1986, as amended, beginning with its 2003 taxable year.
OXSQ's investment activities are managed by Oxford Square Management, LLC, an investment adviser registered under the Investment Advisers Act of 1940. Oxford Square Management is owned by Oxford Funds, LLC, its managing member, and Charles M. Royce, a member of the company's Board of Directors, who holds a minority, non-controlling interest in Oxford Square Management.
Historical Challenges and Milestones
Throughout its history, OXSQ has faced various challenges, particularly in the aftermath of the 2008 financial crisis. During this period, the company had to navigate a difficult market environment and focus on preserving capital by closely monitoring its portfolio companies and taking a selective approach to new investments. Additionally, OXSQ has weathered periods of volatility in the leveraged loan and CLO markets, which are core components of its investment strategy.
Despite these challenges, OXSQ has achieved several notable milestones. In 2017, the company received co-investment exemptive relief from the SEC, allowing it to co-invest with certain affiliates in negotiated transactions. This development has provided OXSQ with access to a broader array of investment opportunities. Furthermore, the company has successfully raised capital through public offerings of unsecured notes, strengthening its balance sheet and funding capabilities.
Investment Portfolio and Strategy
OXSQ's portfolio composition as of September 30, 2024, reflects its commitment to this investment strategy. The company's investment portfolio was valued at approximately $262.90 million, with 58.10% allocated to senior secured notes, 39.30% in CLO equity investments, and the remaining 2.60% in other equity and debt investments. This diversified allocation underscores OXSQ's prudent approach to risk management and its ability to identify attractive opportunities across the fixed-income landscape.
One of the key drivers of OXSQ's performance has been its expertise in the CLO market. CLOs are complex structured finance vehicles that predominantly invest in senior secured corporate loans, and OXSQ has established itself as a savvy investor in both CLO equity and debt. As of September 30, 2024, the company's CLO equity investments amounted to $103.50 million, or 39.30% of its total portfolio. These investments have historically provided attractive yields, contributing significantly to OXSQ's overall investment income.
In addition to its CLO investments, OXSQ has also demonstrated a strong focus on corporate debt securities, particularly senior secured notes. As of September 30, 2024, senior secured notes accounted for $152.70 million, or 58.10% of the company's total investment portfolio. This allocation highlights OXSQ's ability to identify and capitalize on opportunities within the syndicated loan market, leveraging its deep industry knowledge and relationships to source and analyze potential investments.
The senior secured note investments span multiple industries including business services, healthcare, industrials, software, and telecommunications services. These investments have stated interest rates ranging from 8.71% to 13.26% and maturities between 0 and 76 months. The weighted average annualized yield on the debt investments was approximately 14.50% as of September 30, 2024.
OXSQ's CLO equity investments, valued at $103.50 million, are in the structured finance segment and provide exposure to portfolios of corporate loans. These investments have estimated yields ranging from 0% to 29.31%. The company also holds equity and other investments, including common stock, preferred stock, and warrants in various portfolio companies, valued at approximately $6.80 million.
Financials
OXSQ's financial performance has been a reflection of its investment strategy and disciplined approach. For the nine months ended September 30, 2024, the company reported net investment income of $20.45 million, or $0.33 per share. While this represents a slight decrease compared to the same period in the prior year, it is a testament to OXSQ's ability to navigate the challenges presented by the evolving market environment.
For the most recent fiscal year (2023), OXSQ reported revenue of $22.75 million and net income of $17.24 million. Operating cash flow (OCF) and free cash flow (FCF) for the same period were both $65.69 million. However, the most recent quarter (Q3 2024) saw a decline in performance, with revenue of -$2.56 million and net income of -$0.87 million. OCF and FCF for Q3 2024 were both $31.90 million.
The year-over-year decreases in revenue, net income, OCF, and FCF for Q3 2024 compared to the prior year quarter were primarily due to lower interest income and income from securitization vehicles, partially offset by decreases in interest expense and incentive fees.
In the previous quarter (Q2 2024), OXSQ reported net investment income of $7.7 million or $0.13 per share. This decreased to $6.2 million or $0.10 per share in Q3 2024. The company's net asset value per share also decreased from $2.43 in Q2 2024 to $2.35 in Q3 2024. During the third quarter, OXSQ distributed $0.105 per share to common shareholders.
Liquidity and Balance Sheet Strength
One of the key strengths of OXSQ is its commitment to maintaining a strong balance sheet and liquidity position. As of September 30, 2024, the company had $43.19 million in cash and cash equivalents, providing it with the flexibility to capitalize on new investment opportunities as they arise. Additionally, OXSQ's leverage ratios remain well within regulatory limits, with an asset coverage ratio of 226.00% as of the same date, well above the required 150.00% threshold.
OXSQ's debt-to-equity ratio stood at 0.82 as of September 30, 2024, indicating a moderate level of leverage. The company's current ratio and quick ratio were both 2.04, suggesting a strong ability to meet short-term obligations. It's worth noting that OXSQ does not disclose any available credit facilities or credit lines.
Future Outlook
Looking ahead, OXSQ's management team remains cautiously optimistic about the company's prospects. Despite the broader market volatility and macroeconomic uncertainties, the company's diversified investment approach, robust risk management practices, and disciplined capital allocation have positioned it well to navigate the challenges and capitalize on any emerging opportunities.
OXSQ's Board of Directors has declared monthly distributions of $0.035 per share for each of the months ending January, February, and March of 2025, demonstrating confidence in the company's ability to generate consistent returns for shareholders.
Conclusion
In conclusion, Oxford Square Capital Corp. (OXSQ) has established itself as a respected player in the corporate debt and CLO investment space. With a long-standing track record of successfully navigating the complexities of these specialized asset classes, OXSQ continues to provide its shareholders with exposure to attractive risk-adjusted returns. As the company navigates the evolving market landscape, investors can take comfort in OXSQ's proven ability to adapt and capitalize on new opportunities, while maintaining a steadfast commitment to sustainable growth and shareholder value creation.