One Step Forward, One Step Back

Oxford Square Capital (OXSQ) has an idiosyncratic, somewhat “shareholder chilly” approach to earnings season. Admittedly one of the first to report, OXSQ only gives us all a couple of hours to read the press release before holding a conference call where – typically – only one analyst asks questions. Answers are also typically curt and non-informative. The 10-Q only follows many days later. Our “first look” is affected by these factors but here goes anyway. GAAP Net Investment was unchanged in the period from the prior quarter at $0.09. Total investment income was only slightly higher thanks to a slightly juicier yield on debt investments and the CLO portfolio. We still expect some CLOs owned were not fully distributing in the quarter thanks to the difficult credit conditions but none of that was covered in the press release and we missed most of the conference call except for the last 2 questions. Most of what was notable happened below the line. As usual, there were realized losses to the tune of ($4.4mn), which were probably CLO-related. On the plus side, though, in the unrealized column the net gain was $20.9mn, which boosted NAV Per Share by 8.8% in the period, the highest of the three BDCs to have reported third quarter numbers so far. See the BDC NAV Change Table. Still, OXSQ remains (25%) below its pre-pandemic NAV Per Share level. Likewise, the monthly dividend of $0.035 remains unchanged through March 2021 since being reduced by (48%) in reaction to the pandemic. That lower LIBOR rate wreaked havoc in the income received from both its loan and CLO portfolio. In the latter the result is multiplied given the highly leveraged nature of the instrument. From a credit standpoint – and going by only what’s mentioned in the press release – OXSQ still has two loans and one preferred investment in the non-performing column. A full update of the credit metrics in the BDC Credit Table will have to await the 10-Q. We can say this: given that in the IQ 2020 virtually every portfolio company was underperforming, the fact that only two loans are now non-accruing is a reassuring fact. We can’t say much about the CLO portfolio till “all the returns are in”. Liquidity, though, is worrying on a prima facie basis. The BDC has no secured revolver financing and cash on the balance sheet is only $2mn as of September, down from $20.0mn three months ago. Management probably figures they can sell liquid loans or even CLOs into a more receptive market if cash is needed. However, any further growth in OXSQ’s portfolio is now unlikely and shrinking might be the way forward.  The question mark about liquidity – which we’ve downgraded from GOOD to POOR – is the main reason we rate this quarter’s results -as only FAIR, notwithstanding the higher NAV Per Share and stable earnings and dividend. We are keeping the longer term Outlook as FAIR – see the BDC Performance Table – but could see ourselves downgrading to POOR. We worry that continuing restrictions on CLO investments and further loan defaults – not to mention a maxed out portfolio – might result in yet another dividend cut in 2021. Already, GAAP Net Investment Income is not quite keeping up with the payout to shareholders. 2021 could yet be a rough year for OXSQ. No wonder one of the questions we did catch was the analyst asking if the BDC might merge with its sister public company Oxford Lane (OXLC), which is not a BDC. Management would not be drawn on the subject.