Oxford Square Capital Corp. Q3 FY2026 earnings call

• Portfolio Strategy Shift: Management consciously shifted the portfolio composition toward first-lien secured debt and away from second-lien secured debt and CLO equity. This reflects a more conservative risk posture due to fewer compelling opportunities in primary markets.
• Deleveraging Efforts: The firm is actively reducing leverage, with the total debt-to-equity ratio falling from 1.26 at the end of Q1 to 1.07 at the end of Q3. Further intra-quarter repayments were made, indicating an intent to continue moderate deleveraging.
• Market Conditions: U.S. leveraged loan prices improved slightly (LSTA Index rose from 94.96% to 95.32%). Primary market issuance dropped 20% year-over-year to $107.4 billion, driven by lower refinancing and M&A activity.
• Dividend Adjustment: The board declared a reduced monthly distribution of $0.015 per share for Jan-Mar 2027. This aligns distributions with current earnings power while preserving capital for deleveraging and opportunistic secondary market investments.

The company reported Net Investment Income (NII) of approximately $4.9 million ($0.04 per share), a slight decrease from $5.1 million ($0.05 per share) in the prior quarter. Total investment income increased to approximately $9.9 million from $9.4 million in the previous quarter. However, the company recorded combined net unrealized and realized losses on investments of approximately $3.3 million ($0.03 per share), compared to $1.1 million ($0.01 per share) loss in the prior quarter. Net Asset Value (NAV) per share declined to $1.21 from $1.29 in the prior quarter.

• Distribution Guidance: The dividend has been lowered to $0.015 per share monthly for early 2027, reflecting a maintenance/reduction strategy aligned with current earnings power rather than growth expectations.
• Leverage Trajectory: Management indicated continued downward pressure on leverage ratios, expecting further paydowns depending on the balance between investment opportunities and risk management requirements.
• Investment Activity: No specific quantitative revenue guidance was provided; however, the strategic focus remains on opportunistic secondary market deals, particularly in CLO equity where pricing dispersion offers potential value.

• Realized Losses from Winding Positions: Significant realized losses were driven by CLO equity positions reaching their terminus points and being unwound, highlighting risks associated with structured credit product lifecycles.
• Primary Market Contraction: A 20% drop in primary leveraged loan issuance reduces pipeline volume and may limit new high-yield origination opportunities.
• Credit Quality Dispersion: While BB-rated loans improved, CCC-rated loans saw significant price declines (-286 basis points), and the distress ratio (loans below 80% of par) rose to 7.05%, indicating rising credit stress in lower-tier borrowers.
• NAV Pressure: The combination of unrealized losses and lower NII contributed to a decline in NAV per share, potentially impacting shareholder equity and borrowing capacity.

Q: Eric Zwick asked about the conscious shift in portfolio composition toward first-lien debt and away from CLO equity, and whether this trend would continue. / A: Jonathan Cohen confirmed the shift was intentional to reflect a more conservative risk view given fewer primary market opportunities. He stated that continued portfolio rotation is expected to capitalize on opportunistic secondary market deals while moderately deleveraging the portfolio.

Q: Zwick followed up on leverage targets, noting the ratio fell to 1.07, and asked if there is a target range. / A: Cohen clarified that leverage is currently lower than 1.07 due to intra-quarter repayments. The firm plans to continue paying down debt, balancing investment opportunities against the need to maintain appropriate leverage ratios for risk management.

Q: Zwick inquired about the drivers of net realized losses despite no sales during the quarter. / A: Cohen explained that losses stemmed from two CLO equity positions reaching their terminus points and being discharged. These assets were carried at minimal or option-only value, resulting in a switch from unrealized to realized losses upon winding up.

Q: Zwick asked if unrealized appreciation was primarily driven by leveraged loan price increases. / A: Kevin Yonon confirmed that increases in leveraged loan prices across the book were the main driver of the nearly $8 million unrealized appreciation, with only minor outsized returns from specific positions.

Q: Zwick questioned the rationale behind the lower dividend payment for January 2027. / A: Cohen stated the reduction aligns with near-term earnings power and supports the dual goals of continuing portfolio deleveraging and retaining capital to pursue principal secondary market opportunities as they arise.