10-Q: Oxford Square Capital Reports Q3 Net Asset Decline Amid Market Volatility

Oxford Square Capital Corp. reported a decrease in net investment income and net assets from operations for the third quarter and nine months ended September 30, 2025, alongside a decline in net asset value per share.

Summary

• Net asset value per common share decreased to $1.95 as of September 30, 2025, from $2.30 as of December 31, 2024.
• Total investment income for the nine months ended September 30, 2025, was $29.9 million, down from $32.5 million in the prior year period.
• Net investment income for the nine months ended September 30, 2025, was $17.2 million, a decrease from $20.4 million in the same period of 2024.
• The company experienced a net decrease in net assets resulting from operations of $5.8 million for the nine months ended September 30, 2025, compared to a net increase of $2.6 million in the prior year period.
• Net change in unrealized depreciation on investments was $8.3 million for the nine months ended September 30, 2025, a significant shift from $33.6 million in unrealized appreciation in the prior year.
• Cash and cash equivalents increased to $50.8 million as of September 30, 2025, from $34.9 million as of December 31, 2024.
• The company redeemed $44.8 million in aggregate principal amount of its 6.25% Unsecured Notes due 2026 and issued $74.8 million of new 7.75% Unsecured Notes due 2030.
• Qualifying assets represented 64.3% of total assets as of September 30, 2025, remaining below the 70% threshold required for BDCs at the time of acquiring additional non-qualifying assets.
• The Board authorized a 12-month share repurchase program of up to $25.0 million, commencing October 30, 2025.

Sentiment

Score: 4

Explanation: The filing indicates a challenging period with declines in net asset value, investment income, and a significant shift to unrealized depreciation. While there are some positives like reduced realized losses and strategic debt management, the overall financial performance and NAV per share decline suggest a negative sentiment. The share repurchase program is a positive signal but doesn't fully offset the financial downturn.

Positives

• Net realized losses on investments were significantly lower at $14.5 million for the nine months ended September 30, 2025, compared to $51.4 million in the prior year period.
• Income from securitization vehicles and investments increased to $12.1 million for the nine months ended September 30, 2025, from $11.3 million in the prior year period.
• No debt investments were on non-accrual status as of September 30, 2025, an improvement from three debt investments with a combined fair value of approximately $0.5 million on non-accrual status as of September 30, 2024.
• The company successfully refinanced debt by redeeming $44.8 million of 6.25% Unsecured Notes and issuing $74.8 million of new 7.75% Unsecured Notes, extending maturity and managing its capital structure.
• Cash and cash equivalents increased by $15.9 million to $50.8 million, providing enhanced liquidity.

Negatives

• Net asset value per common share decreased by $0.35, from $2.30 at December 31, 2024, to $1.95 at September 30, 2025.
• Total investment income decreased by $2.5 million for the nine months ended September 30, 2025, primarily due to a decrease in interest income from debt investments.
• Net investment income decreased by $3.2 million for the nine months ended September 30, 2025, compared to the prior year period.
• The company reported a net decrease in net assets from operations of $5.8 million for the nine months ended September 30, 2025, a reversal from a net increase of $2.6 million in the prior year.
• A significant shift to net unrealized depreciation of $8.3 million for the nine months ended September 30, 2025, compared to net unrealized appreciation of $33.6 million in the prior year period, indicates a decline in portfolio valuations.
• Qualifying assets remained below the 70% threshold at 64.3% of total assets, which restricts the acquisition of additional non-qualifying assets.

Risks

• Market volatility, dramatic changes to interest rates, and/or unfavorable economic conditions may lower performance or impair the company's ability to achieve its investment objective.
• Economic downturns could impair portfolio companies' and CLO investments' ability to continue to operate, potentially leading to losses on investments.
• A contraction of available credit and/or an inability to access equity markets could impair lending and investment activities.
• Interest rate volatility could adversely affect results, particularly due to the use of leverage in the investment strategy.
• Inflation and its impact on investment activities and the industries in which the company invests pose a risk.
• Currency fluctuations could adversely affect the results of investments in foreign companies, especially if payments are received in foreign currency.
• The company is exposed to risks from information technology system failures, data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks.
• Various social and political circumstances (including wars, conflicts, trade policies, terrorist acts, catastrophic events, and global health epidemics) may contribute to increased market volatility and economic uncertainties.

Future Outlook

The company's investment objective remains to maximize total return by investing primarily in corporate debt securities and CLOs. It expects to continue investing between $5 million and $25 million in each portfolio company, diversifying its portfolio. The company may continue to borrow funds to make investments, exposing it to leverage risks. Management believes its analysis is indicative of existing interest rate sensitivity but notes that actual results could differ materially due to changes in credit quality, portfolio composition, and other business developments.

Management Comments

• "Our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms."
• "The current periods results of operations are not necessarily indicative of results that may be achieved for the year."
• "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."
• "There can be no assurance that the weighted average annualized yield will remain at its current level."
• "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."

Industry Context

The U.S. loan market performance was stable during the three months ended September 30, 2025, with U.S. loan prices (Morningstar/LSTA US Leveraged Loan Index) decreasing marginally from 97.07% to 97.06% of par. This indicates a relatively flat market environment for leveraged loans, which form a significant part of Oxford Square Capital Corp.'s portfolio. The company's increased income from securitization vehicles suggests potential resilience or strategic positioning within the CLO market, despite broader market stability. However, the overall decline in investment income and net assets from operations suggests that the company may be facing headwinds that are either specific to its portfolio or more pronounced than the general market trend.

Comparison to Industry Standards

• The company's qualifying assets at 64.3% of total assets are below the 70% threshold for Business Development Companies (BDCs) at the time of acquiring additional non-qualifying assets. This could limit future investment flexibility compared to BDC peers that maintain higher qualifying asset ratios.
• The weighted average yield on debt investments of 14.60% and CLO equity investments of 9.7% are generally competitive within the leveraged finance and CLO equity markets, which typically offer higher yields to compensate for increased risk compared to investment-grade debt.
• The shift from net unrealized appreciation to depreciation in the portfolio, while significant, should be assessed against broader market trends for similar asset classes. Many BDCs and CLO managers have faced valuation pressures due to interest rate hikes and economic uncertainty, making a direct comparison without specific peer data challenging.
• The asset coverage ratio of 200% remains above the 150% statutory minimum for BDCs, indicating a healthy compliance level with regulatory leverage limits, comparable to well-managed BDC peers.

Corporate Governance

Legal Proceedings

• The company is not currently subject to any material legal proceedings. From time to time, it may be a party to certain legal proceedings in the ordinary course of business, including those related to enforcing contractual rights with portfolio companies, but does not expect these to have a material effect on financial condition or results of operations.

Related Party Transactions

• The company pays Oxford Square Management a base investment advisory fee and incentive fees under the Investment Advisory Agreement, with fees calculated under a 2016 Fee Waiver to ensure the lower of two combined results is adopted.
• Oxford Funds provides administrative services to the company, for which the company pays an allocable portion of overhead and other expenses, including compensation for the Chief Financial Officer, accounting staff, and other administrative support personnel.
• Jonathan H. Cohen (CEO) and Saul B. Rosenthal (President/COO) control Oxford Funds, which manages Oxford Square Management, creating potential conflicts of interest.
• Messrs. Cohen and Rosenthal also serve as executive officers for other affiliated investment entities (Oxford Gate Management, Oxford Lane Capital Corp., Oxford Park Income Fund, Inc.), which are subject to an allocation policy for investment opportunities.
• The company has an existing SEC exemptive order for co-investment transactions with affiliates, and has applied for a new order to supersede it.

Stakeholder Impact

• Shareholders: Experienced a decrease in Net Asset Value per share, but will benefit from consistent distributions and the newly authorized share repurchase program, which could provide support for the stock price.
• Creditors (Noteholders): The redemption of the 6.25% Unsecured Notes and issuance of new 7.75% Unsecured Notes impacts the company's debt maturity profile and interest expense, affecting their risk and return.
• Employees/Management: Compensation expenses for administrative services are allocated from Oxford Funds, indicating continued operational costs related to management structure.
• Portfolio Companies: The company continues to invest in debt securities and CLOs, providing capital to these entities, and actively monitors and works with troubled companies to protect its investments.

Next Steps

• The company will continue to pay declared distributions of $0.035 per share on October 31, 2025, November 28, 2025, and December 31, 2025.
• Further distributions of $0.035 per share are scheduled for January 30, 2026, February 27, 2026, and March 31, 2026.
• The company plans to commence a 12-month share repurchase program of up to $25.0 million on October 30, 2025.
• Management will continue to monitor and work with portfolio companies, especially those in lower credit grades, to improve their business and protect investments.

Key Dates

Recommendation

The company's net asset value per share has declined, and net investment income has decreased, indicating underperformance in the recent period. However, the company has taken proactive steps to manage its debt maturity profile by refinancing notes and has authorized a share repurchase program, which could provide some support to the stock price. The absence of debt investments on non-accrual status is also a positive operational sign. Given the mixed financial results and strategic actions, a 'hold' recommendation is appropriate, suggesting investors monitor the effectiveness of the share repurchase program and any improvements in portfolio valuations and income generation in future periods before making further investment decisions.

Keywords

Business Development Company, BDC, CLO, Collateralized Loan Obligations, Corporate Debt, Investment Income, Net Asset Value, Unrealized Depreciation, Share Repurchase, SEC Filing, Financial Results, Leveraged Loans, Fixed Income