Oxford Square Capital NASDAQ: OXSQ reported third-quarter net investment income of approximately $4.9 million, or $0.04 per share, down from approximately $5.1 million, or $0.05 per share, in the prior quarter, as the company continued to reposition its portfolio and reduce leverage.
Net asset value per share was $1.21 at the end of September, compared with $1.29 at the end of the previous quarter. The company distributed $0.105 per share to common shareholders during the third quarter.
Total investment income rose to approximately $9.9 million from $9.4 million in the second quarter. However, Oxford Square recorded combined net unrealized and realized investment losses of approximately $3.3 million, or $0.03 per share, compared with losses of approximately $1.1 million, or $0.01 per share, in the prior quarter.
Investment activity and capital raising
During the quarter ended Sept. 30, Oxford Square purchased approximately $20.8 million of investments and received approximately $10.3 million in repayments. The company also issued about 14.1 million common shares through an at-the-market offering, generating net proceeds of approximately $19.4 million.
Chief Executive Officer Jonathan Cohen said the company’s portfolio positioning has been deliberate, reflecting a more conservative assessment of risk pricing across the U.S. syndicated loan and collateralized loan obligation, or CLO, equity markets.
“We have oriented the portfolio in such a way as to reflect a more conservative view of the current price for risk in the primary and secondary markets,” Cohen said in response to an analyst question.
Cohen said Oxford Square sees strong opportunities in the secondary CLO equity market but fewer compelling opportunities in the primary market. The company’s portfolio changes have also reflected a desire to reduce leverage, he said.
Oxford Square’s debt-to-equity ratio declined to 1.07x at the end of the third quarter from 1.26x at the end of the first quarter. Cohen said the ratio had moved lower following additional debt repayments made during the quarter.
The company expects to continue rotating investments selectively, balancing opportunistic investment possibilities with its goal of moderately deleveraging the portfolio and maintaining appropriate risk-management levels, Cohen said.
Losses, valuation gains and distributions
Addressing the quarter’s realized losses, Cohen said they were tied to two CLO equity positions that had reached their end points and were discharged or unwound. Those investments had been carried at essentially no value, or option value only, before the losses moved from unrealized to realized, he said.
Managing Director and Portfolio Manager Kevin Yonon said the quarter’s unrealized appreciation was driven primarily by rising leveraged-loan prices across much of the company’s loan portfolio, though a small number of positions produced outsized returns.
Oxford Square’s board declared monthly distributions of $0.015 per share for each of January, February and March 2027. Cohen said the decision to set the lower monthly distribution level was based on the current and likely near-term earnings power of the portfolio, as well as the company’s plans to reduce leverage and retain flexibility for secondary-market investment opportunities.
Loan market conditions
Yonon said the U.S. loan market improved during the third quarter. The Morningstar LSTA U.S. Leveraged Loan Index rose to 95.32% of par at Sept. 30 from 94.96% at June 30.
According to LCD data cited by the company, BB-rated loan prices increased by 8 basis points and B-rated loan prices rose by 119 basis points during the quarter, while CCC-rated loan prices declined by 286 basis points on average.
The 12-month trailing loan default rate decreased to 0.55% by principal amount at the end of the quarter from 0.97% at the end of June, according to PitchBook LCD. However, the default rate including liability-management exercises remained elevated at 2.97%, compared with 2.77% at the end of the second quarter.
The percentage of loans priced below 80% of par, referred to as the distress ratio, increased to 7.05% from 6.87%. U.S.-syndicated corporate loan issuance, excluding amendments and repricings, totaled $107.4 billion during the quarter, down 20% from the year-earlier period. Loan funds recorded approximately $1.28 billion of inflows during the quarter, based on Lipper data cited by the company.
About Oxford Square Capital (NASDAQ:OXSQ)
Oxford Square Capital Corp. NASDAQ: OXSQ is a business development company that invests primarily in debt securities and other investments related to middle-market companies. The company seeks to generate current income and, to a lesser extent, capital appreciation through a portfolio that may include senior secured loans, subordinated debt, and equity investments.
Oxford Square also invests in collateralized loan obligations (CLOs), which are securities backed primarily by pools of corporate loans.
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