Executive Summary / Key Takeaways

• Specialized Investment Focus: Oxford Square Capital Corp. (OXSQ) maintains a distinct investment strategy, primarily targeting corporate debt and CLO equity in technology-related sectors, leveraging its expertise in this niche for long-term total return.
• Improving Portfolio Quality: Despite a decrease in the fair value of its investment portfolio, OXSQ has demonstrated an improvement in the credit quality of its debt investments, with a weighted average grade improving to 2.20 and no debt investments on non-accrual status as of June 30, 2025.
• Strategic Capital Management: The company actively manages its capital structure, evidenced by recent debt redemptions and a new $65.00 million public offering of 7.75% Unsecured Notes due 2030, alongside consistent ATM equity offerings to support liquidity and investment capacity.
• Consistent Shareholder Distributions: OXSQ has declared steady monthly distributions of $0.035 per share through December 2025, reflecting its commitment to shareholder returns, supported by a 20-year history of consistent dividends.
• Market Headwinds and Opportunities: While facing broader market risks from interest rate volatility, inflation, and geopolitical conflicts, OXSQ's long-term investment view and specialization in technology position it to capitalize on sector-specific trends like AI-driven growth.

The Enduring Strategy of Oxford Square Capital

Oxford Square Capital Corp. (OXSQ) operates as a Business Development Company (BDC), carved out of its original identity as TICC Capital Corp. in 2003. Its foundational mission has always been clear: to maximize total return for shareholders by investing predominantly in corporate debt securities and, to a lesser extent, in Collateralized Loan Obligations (CLOs). This strategy positions OXSQ within the dynamic leveraged loan and structured finance markets, with a distinct focus on technology-related companies.

The company's history reflects a consistent pursuit of this mandate, adapting to market shifts while maintaining its core investment philosophy. Early strategic moves, such as the 2016 fee waiver by Oxford Square Management and the 2017 SEC exemptive order for co-investment transactions, underscore a proactive approach to optimizing its operational framework and expanding investment opportunities. This long-term perspective, as a permanent capital vehicle, allows OXSQ to navigate market cycles with a disciplined, patient investment horizon.

Competitive Landscape and Market Positioning

OXSQ operates in a competitive arena alongside other BDCs, each vying for opportunities in the middle-market lending space. Key direct competitors include Ares Capital Corporation (ARCC), Hercules Capital (HTGC), Golub Capital BDC (GBDC), and Main Street Capital Corporation (MAIN). OXSQ differentiates itself through a specialized focus on technology-related companies, including sectors like computer software, IT infrastructure, telecommunications, and healthcare technology. This targeted approach contrasts with the broader, more diversified portfolios of some larger peers.

Compared to Ares Capital, OXSQ's offerings emphasize targeted investments in smaller tech companies, positioning it as more specialized in niche markets. While ARCC leverages its scale for broader deal access and is known for strong revenue growth and profitability, OXSQ's expertise in specific tech subsectors provides a unique value proposition and tailored solutions for emerging tech firms. Hercules Capital also specializes in venture debt for technology, but OXSQ's broader inclusion of equity stakes alongside debt offers a more comprehensive financing solution. This allows OXSQ to potentially lead in strategic adaptability for diversified tech exposures, even if it may lag in overall growth rates and cash flow generation compared to HTGC's track record in high-growth venture areas.

Against Golub Capital BDC, which leans heavily on debt, OXSQ's blend of debt and equity investments provides a more holistic approach. While GBDC exhibits strong efficiency and growth from its conservative, debt-focused strategy, OXSQ's agility in smaller-cap tech markets and its 7-year exit focus enable potentially superior strategic adaptability. Main Street Capital offers a diversified portfolio, but OXSQ's tech-centric strategy provides a unique value proposition in specialized technology investments. OXSQ's strengths in equity investments offer differentiation, while MAIN's broader focus may mean less depth in specific tech subsectors.

Indirect competitors, such as venture capital firms and private equity funds, also exert pressure by offering alternative financing. However, OXSQ's established BDC structure and regulatory framework provide a defensive edge against these players. OXSQ's overall market positioning is that of a niche player with deep sector knowledge in technology, which allows it to compete effectively in specialized segments, even if its smaller scale might lead to lower overall growth compared to its larger, more diversified counterparts.

Investment Strategy and Technological Edge

OXSQ's core "technology" is not a proprietary product, but rather its specialized investment methodology and deep expertise in identifying, underwriting, and managing investments within the technology-related sectors. This strategic focus allows the company to develop a nuanced understanding of market trends and company-specific dynamics in areas like software, IT consulting, and telecommunications. This specialization is a key differentiator, enabling OXSQ to offer tailored financing solutions that might be overlooked by generalist lenders.

The company's ability to invest across the capital structure—from senior secured notes to CLO equity, common stock, and warrants—provides flexibility in structuring deals that align with the specific needs of technology companies. This comprehensive approach fosters stronger relationships with portfolio companies, potentially leading to enhanced customer loyalty and better risk-adjusted returns. While specific R&D initiatives for internal proprietary technology are not detailed, OXSQ's "tech specialization might enable quicker adaptation to trends like AI-driven investments," as noted in competitive analysis. This "innovation speed" in its investment strategy allows it to capitalize on emerging opportunities within the rapidly evolving technology landscape, contributing to its competitive moat and long-term growth strategy.

Financial Performance and Portfolio Quality

OXSQ's financial performance in recent quarters reflects both market dynamics and its active portfolio management. For the six months ended June 30, 2025, the company reported net investment income of approximately $11.6 million, a decrease from $14.3 million in the prior year period. Total investment income also saw a decline, reaching approximately $19.7 million for the six months ended June 30, 2025, compared to $22.1 million in the same period of 2024. This decrease was primarily driven by a reduction in interest income from debt investments.

Despite the decline in overall investment income, there are positive indicators regarding portfolio quality. The total principal value of income-producing debt investments decreased from $221.00 million to $183.20 million year-over-year, yet the weighted average annualized yield on debt investments improved to approximately 14.46% as of June 30, 2025, up from 13.69% a year prior. Crucially, as of June 30, 2025, OXSQ had no debt investments on non-accrual status, a significant improvement from the three debt investments on non-accrual with a combined fair value of $0.50 million in the prior year. This suggests a healthier underlying debt portfolio.

The company's net asset value (NAV) per share stood at $2.06 as of June 30, 2025, a decrease from $2.30 at the end of 2024. This was influenced by combined net unrealized and realized losses on investments, which amounted to approximately $14.2 million in Q1 2025 and net realized losses of $14.5 million for the six months ended June 30, 2025. However, the net change in unrealized appreciation was approximately $1.3 million for Q2 2025, partially offsetting earlier depreciation. The weighted average credit grade of the debt investment portfolio improved from 2.30 to 2.20, with 82.60% of the debt portfolio at fair value graded 2 (full repayment expected), indicating a strengthening in credit quality.

Liquidity and Capital Structure Management

OXSQ maintains a proactive approach to liquidity and capital management. As of June 30, 2025, cash and cash equivalents were approximately $29.8 million. The company generated approximately $4.4 million in net cash from operating activities for the six months ended June 30, 2025. Financing activities, however, utilized approximately $9.5 million, reflecting distributions paid and strategic debt repayments.

In a notable move to optimize its debt profile, OXSQ redeemed $10.0 million of its 6.25% Unsecured Notes on June 13, 2025, followed by another $10.0 million redemption on July 18, 2025. This was complemented by a new public offering of $65.0 million in 7.75% Unsecured Notes due 2030 on August 7, 2025, demonstrating active management of its liabilities. The new notes mature on July 31, 2030, and bear interest quarterly. The company's asset coverage for borrowed amounts improved to approximately 235.00% as of June 30, 2025, well above the 150% regulatory requirement for BDCs, indicating a robust financial position.

Equity capital has also been a consistent source of funding. Through its At-the-Market (ATM) offering program, OXSQ issued 4.94 million shares during Q2 2025, generating net proceeds of approximately $11.6 million. This program has been a steady contributor, with total net proceeds of $15.1 million from 6.28 million shares issued for the six months ended June 30, 2025. This continuous access to capital allows OXSQ to fund new investments and manage its balance sheet effectively.

Outlook and Risks

OXSQ's outlook is anchored by its commitment to consistent shareholder distributions and its long-term investment strategy in technology-related sectors. The Board of Directors has declared monthly distributions of $0.035 per share for each month through December 2025, extending its 20-year history of consistent dividends. This commitment is supported by the company's status as a Regulated Investment Company (RIC), requiring it to distribute at least 90% of its taxable income annually.

However, the investment landscape presents several risks. Market conditions, including changes in interest rates, inflation, and disruptions in supply chains, could materially affect OXSQ's portfolio companies and CLO investments. While the weighted average stated interest rate on borrowings decreased slightly to 5.73% as of June 30, 2025, interest rate volatility remains a concern, potentially impacting the fair value of its income-paying investments. The risk of portfolio company or CLO defaults, particularly if financial covenants are breached, could reduce payments to OXSQ. Furthermore, geopolitical conflicts, such as those in Russia-Ukraine and the Middle East, introduce unpredictable market volatility that could adversely affect the company's operations and financial condition.

Concentration risk is also a factor, as the portfolio may be concentrated in a limited number of companies, making it susceptible to significant losses if any of these companies default or if specific sectors experience downturns. OXSQ mitigates this by actively working with troubled portfolio companies and maintaining a long-term view, but these risks are inherent to its investment model.

Conclusion

Oxford Square Capital Corp. stands as a specialized BDC, distinguished by its deep focus on technology-related debt and CLO equity investments. Its investment thesis revolves around generating attractive total returns through a disciplined, long-term approach within this niche, supported by active portfolio and capital management. The company's recent financial performance, while showing a decrease in investment income, highlights an improving credit quality in its debt portfolio, with no non-accrual investments as of June 30, 2025.

OXSQ's strategic capital initiatives, including recent debt redemptions and new note offerings, alongside consistent ATM equity raises, demonstrate a robust financial footing and flexibility to adapt to market conditions. The commitment to steady shareholder distributions underscores its income-generating appeal. While macroeconomic headwinds and inherent investment risks persist, OXSQ's specialized expertise in technology sectors and its permanent capital structure position it to pursue opportunities and maintain its yield-focused strategy for discerning investors.