Business Overview and History
Oxford Square Capital Corp. (OXSQ) is a closed-end, non-diversified management investment company that has established itself as a prominent business development company (BDC) in the middle-market lending space. With a primary focus on corporate debt securities and collateralized loan obligation (CLO) investments, OXSQ has navigated the complexities of the credit markets, delivering a diversified portfolio and attractive returns to its shareholders.
OXSQ was incorporated in July 2003 under the General Corporation Laws of the State of Maryland and completed its initial public offering in November of the same year. The company has elected to be regulated as a BDC under the Investment Company Act of 1940 and has also elected to be treated as a regulated investment company (RIC) for U.S. federal income tax purposes starting from its 2003 taxable year.
Over the years, OXSQ has established itself as a leading provider of debt financing to middle-market companies, with a particular emphasis on senior secured loans and CLO investments. The company's investment objective is to maximize its portfolio's total return by investing primarily in corporate debt securities and CLO structured finance instruments.
OXSQ's investment strategy has evolved to adapt to changing market conditions. During the global financial crisis of 2008-2009, the company faced challenges due to volatility and disruption in the capital markets, which negatively impacted its business and operations. However, OXSQ successfully navigated this difficult period and continued to execute its investment strategy.
In 2017, OXSQ completed two public debt offerings, issuing approximately $64.4 million in 6.50% unsecured notes due 2024 and $44.8 million in 6.25% unsecured notes due 2026. These debt financings provided the company with additional capital to deploy into its investment portfolio. While the 6.50% unsecured notes were fully redeemed by 2023, the 6.25% unsecured notes remain outstanding.
Throughout its history, OXSQ has grown its investment portfolio, which as of December 31, 2024, had a total fair value of approximately $260.9 million. The portfolio is diversified across various industries, with investments primarily in senior secured notes, CLO equity, and other debt and equity securities. The company has navigated market cycles and upheld its commitment to providing shareholder returns through periodic distributions.
Financial Performance and Ratios
As of December 31, 2024, OXSQ reported total assets of $299.73 million, with investments and advances comprising $260.85 million, or 87.0% of total assets. The company's net asset value (NAV) per share stood at $2.30 as of the same date, compared to $2.55 as of December 31, 2023, and $2.35 at the end of the previous quarter.
For the year ended December 31, 2024, OXSQ reported net investment income of $26.44 million, or $0.42 per share, and a net increase in net assets resulting from operations of $5.88 million, or $0.09 per share. The company's debt-to-equity ratio was 0.87x as of December 31, 2024, indicating a relatively conservative capital structure.
In the most recent quarter (Q4 2024), OXSQ reported revenue of $10.22 million and net income of $3.26 million. This represents a 1% decrease in revenue from $10.34 million in Q3 2024 and a 73% decrease in net income from $12.32 million in Q4 2023. The decrease in revenue and net income was primarily due to lower investment income. For the quarter ended December 2024, OXSQ reported net investment income of approximately $6 million or $0.09 per share, compared to $6.2 million or $0.10 per share in the prior quarter.
OXSQ's investment portfolio is well-diversified, with investments across various industries, including business services, software, healthcare, and telecommunications services. As of December 31, 2024, the company's top ten portfolio investments accounted for 52.4% of the total portfolio, reflecting a balanced approach to risk management.
The company's investment portfolio consisted of 57.8% senior secured notes, 40.1% CLO equity, and 2.1% equity and other investments. OXSQ's senior secured notes investments span a variety of industries, including business services, software, healthcare, industrials, food and beverage, telecommunication services, aerospace and defense, materials, and IT consulting. These senior secured notes have stated interest rates ranging from 7.61% to 13.13% and maturity dates between 3 and 82 months. As of December 31, 2024, the weighted average annualized yield on OXSQ's debt investments was approximately 15.76%.
Liquidity and Dividend Payments
OXSQ has maintained a strong liquidity position, with cash and cash equivalents of $34.93 million as of December 31, 2024. The company's free cash flow for the year ended December 31, 2024, was $25.71 million, providing ample resources to support its investment activities and dividend payments.
As of December 31, 2024, OXSQ had $123.60 million in total debt and $160.67 million in total equity, resulting in a Debt/Equity ratio of 0.77. This relatively low debt-to-equity ratio indicates a conservative capital structure and financial flexibility.
OXSQ has a history of providing regular cash distributions to its shareholders. During Q4 2024, OXSQ distributed $0.105 per share to its common stock shareholders. Looking ahead, the company's Board of Directors has declared monthly distributions of $0.035 per share for each of the months ending April, May, and June 2025, maintaining its commitment to delivering income to investors.
Risks and Challenges
As with any investment, OXSQ faces several risks and challenges that investors should consider. These include:
1. Credit risk: The company's investments in corporate debt securities and CLO vehicles expose it to the risk of defaults or underperformance by its portfolio companies or the underlying borrowers in the CLO collateral pools.
2. Interest rate risk: As a leveraged investor, OXSQ is susceptible to the impact of interest rate fluctuations on its cost of borrowing and the yields of its investments.
3. Liquidity risk: The illiquid nature of some of OXSQ's investments, particularly in the CLO market, could make it difficult to sell these assets quickly or at favorable prices if needed.
4. Regulatory risk: As a BDC, OXSQ must comply with various regulations, including the requirement to invest at least 70% of its total assets in eligible portfolio companies. Changes in these regulations could impact the company's operations and investment strategies.
5. Competition: OXSQ operates in a highly competitive market, facing strong competition from other BDCs, private equity firms, and traditional financial institutions for attractive middle-market lending and CLO investment opportunities.
Outlook and Conclusion
Despite the challenges, OXSQ has demonstrated its ability to navigate the evolving credit landscape and deliver consistent returns to its shareholders. The company's diversified portfolio, prudent risk management, and focus on high-yielding investments in the corporate debt and CLO markets have positioned it well for continued success.
OXSQ's investment strategy, which includes a mix of senior secured notes, CLO equity, and other investments, provides a balance of income and potential capital appreciation. The company's focus on middle-market corporate debt and structured finance investments differentiates it from more traditional business development companies and offers investors exposure to a unique segment of the credit market.
As OXSQ looks to the future, investors will be closely watching the company's ability to maintain its strong liquidity position, adapt to changing market conditions, and capitalize on new investment opportunities that align with its core strategies. The recent decrease in revenue and net income highlights the importance of monitoring the company's performance in the face of market fluctuations and changes in investment income.
With its experienced management team, robust underwriting processes, and commitment to shareholder value, OXSQ remains an intriguing option for investors seeking exposure to the middle-market lending and structured finance sectors. The company's continued focus on delivering monthly distributions to shareholders, as evidenced by the recently declared dividends for the coming months, underscores its commitment to providing regular income to investors.
As OXSQ navigates the evolving credit landscape, its ability to maintain a diversified portfolio, manage risks effectively, and capitalize on attractive investment opportunities will be crucial in driving long-term value for shareholders. Investors should continue to monitor the company's financial performance, portfolio composition, and broader market conditions to assess its potential for future growth and income generation.