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Stock Watch: Oxford Square Stock Price Drops

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NEWS

As reported in the Daily News Table, CLO-focused BDC Oxford Square (OXSQ) reported IIQ 2018 results.

See the press release and Investor Presentation attached.


ANALYSIS

The BDC Reporter is holding off any in-depth analysis till the 10-Q is released, and we’ve read the Conference Call transcript.

Down

However, OXSQ’s stock price has dropped substantially following the results.

The stock opened at $7.37 and dropped as low as $7.02 in early morning trading.

That’s a (4.8%) decrease in minutes.

For the latest stock price, click here.

Background Briefing

OXSQ’s stock price has been on a long upward trajectory that began February 5, 2018 at a price of $5.27.

Since then OXSQ has peaked – just a few days ago – at $7.48, a 42% increase.

Even at the lowest intra-day price on July 31, OXSQ is up 33%.

Unchanged

There has been no change in the BDC’s distribution level during this period.

The BDC has paid the same $0.20 quarterly payout for seven quarters in a row, including the latest announcement of an unchanged dividend in the IIIQ 2018.

Investor enthusiasm followed a period when concerns about the BDC’s performance and business model caused the stock price to drop from $11.0 a share in late 2013.

The price has now reflated.

At $7.48 OXSQ traded at very close to the latest book value of $7.56.

The price represents a 10.3x multiple of current adjusted recurring earnings annualized.


VIEWS

Topped Out ?

As the numbers above suggest, the great upward swing in OXSQ’s stock price may have reached a top for the moment.

We’re guessing investors have been intrigued for some time about the under-leveraged nature of the BDC.

For the IVQ of 2017 and IQ 2018 OXSQ’s Debt To Equity was 0.16x and 0.17x respectively.

This did – and has – allowed – the BDC to substantially increase its balance sheet size this quarter.

Twice as many assets were added – almost all loans as opposed to CLO equity investments – as were repaid in the quarter.

Investment assets increased by 9% in the quarter and debt to equity jumped to 0.42x.

OXSQ can still grow modestly larger but the heavy CLO component in the portfolio – which external lenders are loath to see as collateral – limits the expansion.

Moreover – judging from the numbers given in the press release and Investor Presentation – there is continuing pressure on both loan and CLO yields to contend with.

Projection

We’d surmise that in future quarters in 2018 the BDC will just be able to boost recurring earnings up to the level of its dividend, but not much more.

This may have been the market’s conclusion, and the reason for the (moderate) sell-off following the results.

Some investors may have been expecting even higher Adjusted Net Investment Income than OXSQ actually achieved.

Not Now

What might happen in 2019 when OXSQ will be eligible to take advantage of the higher leverage permitted under the Small Business Credit Availability Act is a subject for another time.

We want to review the BDC’s options and get a sense of what management is cooking up.

Our Theory

For our part – and in the short run – we still hold out the possibility that the External Manager of OXSQ might merge the BDC with its sister public company Oxford Lane (OXLC).

With OXLC trading above book and OXSQ (following a major stock buy-back effort this last quarter) just cents off, a combination of the two funds still seems a reasonable prospect.

(We’ve held this oipinion for some time).

Admittedly, this is our own idiosyncratic view and not something that the External Manager has been discussing.

Anyway, given the current stock prices a merger of the two public companies would have little impact on the stock price following that vertiginous increase in OXSQ’s price in recent months.

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