10-Q: Oxford Square Capital Reports Q2 2025 Decline in Net Assets

Oxford Square Capital Corp. reported a decrease in net assets and net investment income for the second quarter of 2025, alongside strategic debt refinancing and an improved credit portfolio grading.

Summary

• Net assets decreased to $157.4 million as of June 30, 2025, from $160.7 million at December 31, 2024.
• Net asset value per common share declined to $2.06 as of June 30, 2025, from $2.30 at December 31, 2024.
• Total investment income for the six months ended June 30, 2025, was $19.7 million, down from $22.1 million in the prior year period.
• Net investment income for the six months ended June 30, 2025, decreased to $11.6 million from $14.3 million in the prior year period.
• The company experienced a net decrease in net assets from operations of $3.7 million for the six months ended June 30, 2025, compared to a net increase of $3.5 million in the prior year.
• A $10.0 million aggregate principal amount of 6.25% Unsecured Notes was redeemed on June 13, 2025, and another $10.0 million on July 18, 2025.
• A public offering of $65.0 million in 7.75% Unsecured Notes due 2030 was completed on August 7, 2025.
• The weighted average grade of the debt investment portfolio improved to 2.2 as of June 30, 2025, from 2.3 at December 31, 2024.
• Qualifying assets represented 67.6% of total assets as of June 30, 2025, still below the 70% requirement but an improvement from 63.8% at December 31, 2024.

Sentiment

Score: 4

Explanation: The company experienced declines in key financial metrics such as net assets, NAV per share, total investment income, and net investment income. The shift from net increase to net decrease in net assets from operations is a significant negative. While there were some positives like improved asset coverage and debt portfolio grading, the overall operational performance for the period was weaker, indicating challenges in generating returns and managing unrealized depreciation.

Positives

• Asset coverage for borrowed amounts improved to 235% as of June 30, 2025, from 227% at December 31, 2024, well above the 150% requirement.
• The weighted average annualized yield on debt investments increased to approximately 14.46% as of June 30, 2025, from 13.69% as of June 30, 2024.
• No debt investments were on non-accrual status as of June 30, 2025, an improvement from one debt investment on non-accrual status at December 31, 2024.
• The weighted average credit grade of the debt investment portfolio improved to 2.2 from 2.3, indicating better credit quality.
• The percentage of the debt portfolio in Grade 2 (full repayment expected) increased to 82.6% as of June 30, 2025, from 74.5% at December 31, 2024.
• The company successfully redeemed $10.0 million of 6.25% Unsecured Notes and issued $65.0 million of new 7.75% Unsecured Notes, demonstrating access to capital markets.
• Net realized losses on investments decreased to $14.5 million for the six months ended June 30, 2025, from $38.5 million in the prior year period.

Negatives

• Net assets decreased by $3.2 million to $157.4 million as of June 30, 2025, from $160.7 million at December 31, 2024.
• Net asset value per common share decreased to $2.06 as of June 30, 2025, from $2.30 at December 31, 2024.
• Total investment income for the six months ended June 30, 2025, decreased by $2.4 million to $19.7 million compared to $22.1 million in the prior year period, primarily due to lower interest income from debt investments.
• Net investment income for the six months ended June 30, 2025, decreased by $2.7 million to $11.6 million from $14.3 million in the prior year period.
• The company reported a net decrease in net assets from operations of $3.7 million for the six months ended June 30, 2025, a significant shift from a net increase of $3.5 million in the prior year.
• Net change in unrealized appreciation/depreciation on investments shifted from an appreciation of $27.8 million in the prior year to a depreciation of $0.8 million for the six months ended June 30, 2025.
• Qualifying assets under the 1940 Act remained below the 70% threshold at 67.6% of total assets, although it improved from 63.8%.
• The weighted average yield on CLO equity investments decreased to approximately 8.85% as of June 30, 2025, from 9.36% as of June 30, 2024.

Risks

• Exposure to market conditions, government spending, policies, interest rate changes, supply chain disruptions, and trade policies, which could lead to inflationary economic environments.
• Interest rate risks, including sensitivity of current and future earnings to interest rate volatility, variability of spread relationships, and re-pricing intervals between assets and liabilities.
• Market volatility, dramatic changes to interest rates, and/or unfavorable economic conditions could lower performance or impair the ability to achieve investment objectives.
• Failure by portfolio companies or CLO vehicles to satisfy financial covenants could lead to reduced payments, cross-defaults, and foreclosure on secured assets.
• Risk of bankruptcy of portfolio companies, where debt holdings might be re-characterized and subordinated by a bankruptcy court.
• Concentration risk due to investments in a limited number of portfolio companies, leading to significant loss if any company defaults or a sector experiences a downturn.
• Impact of social and political circumstances, including wars (Russia-Ukraine, Middle East), conflicts, terrorist acts, and catastrophic events, which could cause market volatility and economic uncertainties.
• Cash and cash equivalents may exceed Federal Deposit Insurance Corporation insured limits.

Future Outlook

The company expects to continue its investment strategy focused on corporate debt securities and CLOs, aiming to maximize total return. It anticipates potential interest rate volatility and its impact on net interest income and portfolio value. The company is also pursuing a new exemptive relief order for co-investment transactions with affiliates.

Management Comments

• Our investment objective is to maximize our portfolios total return.
• Our primary focus is to seek an attractive risk-adjusted total return by investing primarily in corporate debt securities and, to a lesser extent, in collateralized loan obligations (CLO).
• We generally expect to invest between $5 million and $25 million in each of our portfolio companies, although this investment size may vary proportionately as the size of our capital base changes and market conditions warrant.
• We expect that our investment portfolio will be diversified among a large number of investments with few investments, if any, exceeding 5.0% of the total portfolio.
• There can be no assurance that the weighted average annualized yield will remain at its current level.
• We have borrowed funds to make investments and may continue to borrow funds to make investments. As a result, we are exposed to the risks of leverage, which may be considered a speculative investment technique.
• Although we believe that the assumptions on which these forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions also could be inaccurate.
• Important assumptions include our ability to originate new loans and investments, certain margins and levels of profitability and the availability of additional capital.
• We expect that a portion of our investments will be in the grades 3, 4 or 5 categories from time to time, and, as such, we will be required to work with troubled portfolio companies to improve their business and protect our investment.
• We may not be able to achieve operating results that will allow us to make distributions at a specific level or to increase the amount of these distributions from time to time.
• We cannot assure stockholders that they will receive any distributions.

Industry Context

The U.S. loan market performance weakened during the second quarter of 2025 compared to the first quarter, although U.S. loan prices, as measured by the Morningstar/LSTA US Leveraged Loan Index, saw a slight increase. The company's focus on corporate debt and CLOs places it within a segment sensitive to interest rate fluctuations and broader economic conditions. The ongoing global conflicts and inflationary pressures mentioned in the risk factors reflect a challenging macroeconomic environment that could impact the performance of leveraged loan and CLO markets.

Corporate Governance

Legal Proceedings

• Not currently subject to any material legal proceedings. May be a party to certain legal proceedings in the ordinary course of business, including enforcement of rights under contracts with portfolio companies, but these are not expected to have a material effect on financial condition or results of operations.

Related Party Transactions

• Investment Advisory Agreement with Oxford Square Management, LLC, for a base investment advisory fee and incentive fees.
• Administration Agreement with Oxford Funds, LLC, for administrative services, including allocation of overhead, compensation of CFO, accounting staff, and other administrative support.
• Co-investment transactions with affiliates (Oxford Gate Master Fund, LLC, Oxford Gate, LLC, Oxford Gate (Bermuda), LLC, Oxford Bridge II, LLC, Oxford Lane Capital Corp., Oxford Park Income Fund, Inc.) under an SEC exemptive order.
• Jonathan H. Cohen (CEO) and Saul B. Rosenthal (President/COO) control Oxford Funds, LLC, which manages Oxford Square Management, LLC, and also serve as officers/directors for other affiliated entities (Oxford Gate Management, Oxford Lane Capital Corp., Oxford Park Income Fund, Inc.).
• Charles M. Royce, a Board member, holds a minority, non-controlling interest in Oxford Square Management.
• Bruce L. Rubin (CFO) and Gerald Cummins (CCO) also serve in similar roles for Oxford Gate Management, Oxford Lane Management, and Oxford Park Management.
• The company has a written policy for allocating investment opportunities among the company and its affiliates.

Stakeholder Impact

• Shareholders experienced a decrease in NAV per share and net assets from operations, but continued to receive stable distributions of $0.035 per share. The ATM offering and new note issuance could dilute existing shareholders but also provide capital for new investments.
• Creditors/Noteholders saw the redemption of $10.0 million of 6.25% Unsecured Notes and the issuance of $65.0 million of 7.75% Unsecured Notes, indicating active debt management. Improved asset coverage (235%) provides a stronger buffer for debt obligations.
• Portfolio Companies: The company continues to invest in new portfolio companies ($16.0 million in Q2 2025) and monitors existing ones, providing managerial assistance as required by its BDC status. Improved credit grading suggests better health for some portfolio companies.
• Employees/Management: Compensation expenses increased, reflecting the allocation of administrative services. Management's compensation structure includes base and incentive fees tied to performance.

Next Steps

• Continue to operate as a Business Development Company (BDC) and Regulated Investment Company (RIC).
• Manage investment activities through Oxford Square Management, LLC.
• Monitor and adjust estimated yields on CLO equity securities periodically.
• File federal income tax return for the year ended December 31, 2025, by October 15, 2026.
• Evaluate the impact of new accounting guidance (ASU 2024-03) on financial statements.
• Continue to make monthly distributions of $0.035 per share through December 2025.
• Potentially repurchase shares under Board authorization (though none authorized in current period).
• Seek a new exemptive relief order from the SEC for co-investment transactions with affiliates.
• Monitor and work with troubled portfolio companies in grades 3, 4, or 5 to improve business and protect investments.

Key Dates

Recommendation

While the company experienced a decline in net assets, NAV per share, and net investment income for the period, indicating weaker operational performance, there are mitigating factors. The improved asset coverage, better credit grading of the debt portfolio, and successful capital market activities (debt redemption and new note issuance) demonstrate financial prudence and access to capital. The consistent distribution per share also provides some stability. Given the mixed results and strategic adjustments, a 'hold' recommendation is appropriate, suggesting investors monitor future performance and the impact of the new debt structure and investment activities.

Keywords

Business Development Company, BDC, CLO, Collateralized Loan Obligation, Corporate Debt, Investment Management, Financial Reporting, SEC Filing, OXSQ, Fixed Income, Leveraged Loans, Asset Management, Net Asset Value, Interest Income, Unsecured Notes