Oxford Square Capital (OXSQ) Q3 2026 Earnings Call Transcript

DATE

Friday, Oct. 30, 2026

CALL PARTICIPANTS

• Chief Executive Officer - Jonathan Cohen
• President - Saul Rosenthal
• Chief Financial Officer - Bruce Rubin
• Managing Director and Portfolio Manager - Kevin P. Yonon

TAKEAWAYS

• Net Investment Income -- $4.9 million, or $0.04 per share, compared to $5.1 million, or $0.05 per share, in the prior quarter.
• Net Asset Value -- $1.21 per share, representing a decrease from $1.29 per share as of June 30, 2026.
• Total Investment Income -- $9.9 million, reflecting an increase from $9.4 million in the previous quarter.
• Debt Investment Income -- $5.6 million, derived from interest earned on the company's loan portfolio.
• CLO Equity Investment Income -- $3.6 million, representing income generated from collateralized loan obligation holdings.
• Total Expenses -- $5.0 million, compared to $4.3 million in the prior quarter, driven by higher interest and professional fees.
• Net Realized Losses -- $11.3 million, primarily resulting from two CLO equity positions reaching their terminus points.
• Net Unrealized Appreciation -- $7.9 million, driven by improved leveraged loan prices across the investment book.
• Investment Purchases -- $20.8 million, reflecting new capital deployment during the quarter.
• Investment Repayments -- $10.3 million, occurring as portfolio holdings settled existing debt obligations.
• Common Stock Issuance -- 14.1 million shares, resulting in net proceeds of $19.4 million via an at-the-market offering.
• Total Shares Outstanding -- 120.0 million shares, as of Sept. 30, 2026.
• Weighted Average Debt Yield -- 15.0% at current cost, compared to 14.9% as of June 30, 2026.
• CLO Equity Effective Yield -- 8.1% at current cost, maintaining stability from the prior quarter.
• CLO Equity Cash Distribution Yield -- 12.0% at current cost, down from 12.4% in the previous quarter.
• Total Debt-to-Equity Ratio -- 1.07, decreasing from 1.26 at the end of the first quarter as the company focused on deleveraging.
• Weighted Average Credit Rating -- 2.2 based on total fair value, compared to 2.1 as of June 30, 2026.
• Non-Accrual Status Investments -- $6.8 million in aggregate fair value, consisting of preferred equity in one portfolio company.
• Portfolio Turnover Rate -- 4.1%, slowing significantly from 12.7% reported one year ago.
• Declared Monthly Distributions -- $0.015 per share, set for each of the months ending Jan. 31, Feb. 28, and March 31, 2027.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Kevin P. Yonon reported that the default rate, including liability management exercises, "remained at an elevated level of 2.97% versus 2.77% as of June 30," indicating continued distress in certain segments of the loan market.
• Kevin P. Yonon noted that "CCC-rated loan prices [decreased] 286 basis points on average" during the quarter, reflecting significant pricing dispersion and weakness in lower-rated credits.
• Management reported that the distress ratio, representing the percentage of loans priced below 80% of par, rose to 7.05% from 6.87% at the end of June.

SUMMARY

Oxford Square Capital Corp. (NASDAQ:OXSQ) executed a strategic deleveraging plan during the third quarter, reducing its total debt-to-equity ratio from 1.26 to 1.07. The company utilized an at-the-market offering to raise capital and fund debt repayments, while shifting its portfolio composition toward first lien secured debt. Management reported that this orientation reflects a more conservative stance on market risk pricing. Consequently, the Board of Directors reduced future monthly distributions to $0.015 per share to better align with the fund's projected earnings power and its continued priority on debt reduction.

• Jonathan Cohen stated, "We have oriented the portfolio in such a way as to take a more -- reflect a more conservative view of the current price for risk in the primary and secondary markets."
• Jonathan Cohen noted that the company identifies "strong opportunities right now in the secondary market for CLO equity," whereas the primary market appears less compelling.
• Kevin P. Yonon reported that U.S. leveraged loan primary market issuance fell 20% year over year to $107.4 billion, driven by a decline in refinancing and merger activity.
• Jonathan Cohen clarified that realized losses were primarily due to two CLO equity investments that "had simply reached their terminus points" and were discharged.
• Management indicated that intra-quarter debt repayments have further lowered the leverage ratio beyond the 1.07 level reported at the end of September.

INDUSTRY GLOSSARY

• At-the-Market (ATM) Offering: A method for publicly traded companies to raise capital by selling shares directly into the secondary market at prevailing market prices.
• BDC: Business Development Company, a type of closed-end investment fund that invests in small and mid-sized companies.
• CLO: Collateralized Loan Obligation, a security backed by a pool of corporate loans.
• First Lien Secured Debt: Debt that has the highest priority for repayment and is secured by specific collateral.
• LSTA: Loan Syndications and Trading Association, which provides benchmarks for the leveraged loan market.
• NAV: Net Asset Value, representing the total value of the company's assets minus its liabilities, divided by shares outstanding.
• Non-Accrual: An investment status where the company stops recognizing interest income because the borrower is unlikely to meet payment obligations.

Full Conference Call Transcript

Operator: Thank you for standing by. My name is Carly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Oxford Square Capital Corp. Third Quarter 2026 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Jonathan Cohen, CEO. Please go ahead.

Jonathan Cohen: Good morning, everyone. Welcome to the Oxford Square Capital Corp. Third Quarter 2026 Earnings Conference Call. I'm joined today by Saul Rosenthal, our President; Bruce Rubin, our CFO; and Kevin Yonon, our Managing Director and Portfolio Manager. Bruce, could you open the call with the disclosure regarding forward-looking statements?

Bruce Rubin: Sure, Jonathan. Today's conference call is being recorded. An audio replay of the conference call will be available for 30 days. Replay information is included in our press release that was issued earlier this morning. Please note that this call is the property of Oxford Square Capital Corp. Any unauthorized rebroadcast of this call in any form is strictly prohibited. At this point, please direct your attention to the customary disclosure in this morning's press release regarding forward-looking information. Today's conference call includes forward-looking statements and projections that reflect the company's current views with respect to, among other things, future events and financial performance.

We ask that you refer to our most recent filings with the SEC for important factors that could cause actual results to differ materially from those indicated in these projections. We do not undertake to update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website at www.oxfordsquarecapital.com. With that, I'll turn the presentation back to Jonathan.

Jonathan Cohen: Thank you, Bruce. For the quarter ended September, Oxford Square's net investment income was approximately $4.9 million or $0.04 per share compared with approximately $5.1 million or $0.05 per share in the prior quarter. Our net asset value per share stood at $1.21 compared to a net asset value per share of $1.29 for the prior quarter. During the quarter, we distributed $0.105 per share to our common stock shareholders. For the third quarter, we recorded total investment income of approximately $9.9 million compared to approximately $9.4 million in the prior quarter.

In the third quarter, we recorded combined net unrealized and realized losses on investments of approximately $3.3 million or $0.03 per share compared to combined net unrealized and realized losses on investments of approximately $1.1 million or $0.01 per share for the prior quarter. During the third quarter, our investment activity consisted of purchases of approximately $20.8 million and repayments of approximately $10.3 million. During the quarter ended September, we issued a total of approximately 14.1 million shares of our common stock pursuant to an at-the-market offering, resulting in net proceeds of approximately $19.4 million.

On October 28, our Board of Directors declared monthly distributions of $0.015 per share for each of the months ending January, February and March of 2027. Additional details regarding record and payment date information can be found in our press release that was issued this morning. And with that, I'll turn the call over to our Portfolio Manager, Kevin Yonon. Kevin?

Kevin P. Yonon: Thank you, Jonathan. During the quarter ended September 30, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA US Leveraged Loan Index, increased from 94.96% of par as of June 30 to 95.32% of par as of September 30. According to LCD, during the quarter, there was some pricing dispersion with BB-rated loan prices increasing 8 basis points, B-rated loan prices increasing 119 basis points and CCC-rated loan prices decreasing 286 basis points on average. According to PitchBook LCD, the 12-month trailing default rate for the loan index decreased to 0.55% by principal amount at the end of the quarter from 0.97% at the end of June.

Additionally, the default rate, including various forms of liability management exercises, which are not captured in the aforementioned default rate, remained at an elevated level of 2.97% versus 2.77% as of June 30. The distress ratio, defined as a percentage of loans with prices below 80% of par, ended the quarter at 7.05% compared to 6.87% at the end of June. During the quarter ended September 30, 2026, U.S. leveraged loan primary market issuance, excluding amendments and repricing transactions, was $107.4 billion, representing a 20% decrease versus the quarter ended September 30, 2025. This was driven by lower refinancing, dividend and M&A activity, partly offset by higher LBO activity versus the prior year comparable quarter.

At the same time, U.S. loan fund inflows, as measured by Lipper, were approximately $1.28 billion for the quarter ended September 30. We continue to focus on portfolio management strategies designed to maximize our long-term total return. And as a permanent capital vehicle, we historically have been able to take a longer-term view towards our investment strategy. With that, I will turn the call back over to Jonathan.

Jonathan Cohen: Thank you, Kevin. Additional information about Oxford Square's third quarter performance has been posted to our website at www.oxfordsquarecapital.com. And with that, operator, we're happy to open the call up for any questions.

Operator: [Operator Instructions] Your first question is from Erik Zwick with Lucid Capital Markets.

Erik Zwick: Jonathan, I want to start maybe with just a bigger picture question as I look through the material. I noticed that the portfolio turnover rate relative to a year ago had slowed from 12.7% down to 4.1%. And then if I look at Slide 4 in the slide deck, just looking at the composition of the investment portfolio, there's been increased concentration in the first lien secured debt and the other category and then declines in the second lien secured debt and CLO equity. So just curious, as the last year has played out, how much of that change in the portfolio composition was conscious and on your part relative to maybe just market opportunity?

And curious, would we continue to see that portfolio composition change over the next few quarters? Or do you feel like the current composition is well suited for today?

Jonathan Cohen: Thank you, Erik, very much. So from an overarching perspective, I think the decision-making has been entirely conscious. We have oriented the portfolio in such a way as to take a more -- reflect a more conservative view of the current price for risk in the primary and secondary markets so far as both U.S. syndicated corporate loans are concerned and also CLO equity. We do see strong opportunities right now in the secondary market for CLO equity, but we see many fewer compelling opportunities in the primary market.

So the combination of a desire to delever the portfolio somewhat and an overall reflection of our approach to risk management, those are the things that has led -- have led to the current composition of the portfolio.

Erik Zwick: That's helpful. And I guess, do you feel like the portfolio is in a good position today? Or would you continue some remixing in favor of maybe first liens and maybe secondary CLO equity investments going forward?

Jonathan Cohen: I think you can reasonably expect to see continued portfolio rotation with the idea of both taking advantage of opportunistic investment possibilities as they arise and also reflecting, hopefully, the continued desire to moderately delever the portfolio while maintaining the appropriate levels of risk management.

Erik Zwick: Yes. That makes sense. And I did want to follow up kind of on the leverage topic. I think leverage is down to 1.07 now at this point. It sounds like maybe with your comments, we could see a little bit further deleveraging going forward? And if so, do you have a kind of target range in mind where you'd like it to settle?

Jonathan Cohen: So intra-quarter, Erik, you may have seen that we paid down some additional debt. So it's lower than that still. And our expectation is that we're going to continue to pay down debt depending on the balance that we see between investment opportunity and the necessity to maintain our leverage ratios at the appropriate levels. But you're absolutely right. You can see at the end of the first quarter, we were sitting at a total debt-to-equity ratio of 1.26. We closed out the third quarter at 1.07. And per my earlier comment, we're lower still on the back of the intra-quarter repayment.

Erik Zwick: Yes. And then moving to the net realized losses in the quarter. I know there were no sales during the quarter. So curious what drove those realized losses?

Jonathan Cohen: So essentially, on at least, I believe, 2 deals, on actually the 2 deals, those were CLO equity positions that had simply reached their terminus points. So they were essentially discharged and unwound as ongoing investments. They were being carried at essentially no value or option value only at that point.

Erik Zwick: Got you. So was that a switch from unrealized to realized? Was that considered kind of what happened as they wound down?

Jonathan Cohen: Precisely right, Erik. Yes, exactly.

Erik Zwick: Got it. Got you. Okay. And then on the flip kind of the unrealized appreciation in the quarter, just shy of $8 million. And I know Kevin mentioned increases in leveraged loan prices during the quarter. Is that primarily the driver there? Or were there some other factors at play as well?

Kevin P. Yonon: Primarily increases in leveraged loan prices, more or less across the book, except for a few positions that were sort of outsized returns, but fairly balanced across the loan portfolio.

Erik Zwick: Excellent. And then last one for me, and I'll step aside, just on the dividend payment in January going forward. Lower now, but seems to be more in line with the earnings power of the current portfolio. Just kind of curious if you could run us through the decision and how you came to that number?

Jonathan Cohen: Sure. The Board's decision, Erik, was taken on the back of exactly what you just mentioned, which is the current and likely prospective near-term earnings power of the fund, combined with the things that we had talked about earlier, which were, firstly, a desire to continue to moderately delever the portfolio, which obviously paying out a lower distribution is helpful with. And then secondly, being in an appropriate position to take advantage of principally secondary market opportunities as they arise.

Operator: I show no further questions at this time. With that, I'll turn the call back over to Mr. Jonathan Cohen, CEO, for any closing remarks.

Jonathan Cohen: Thank you very much. Thank you, everyone, for being on this call and for your continued interest in Oxford Square. We look forward to speaking to you again soon. Thanks very much.

Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.