Oxford Square Capital (OXSQ) Q3 2026 Earnings Call: NAV Falls, Deleveraging Continues

Key Takeaways

• Oxford Square Capital Corp. (NASDAQ: OXSQ) reported Q3 2026 net investment income of $4.9 million, or $0.04 per share, down from $5.1 million, or $0.05 per share, in the prior quarter.
• Net asset value declined to $1.21 per share from $1.29, while combined net realized and unrealized investment losses widened to $3.3 million from $1.1 million.
• Total investment income increased sequentially to $9.9 million from $9.4 million. Investment purchases totaled $20.8 million, compared with $10.3 million of repayments.
• The quarter-end debt-to-equity ratio was 1.07, down from 1.26 at the end of Q1 2026. Management said leverage subsequently fell further following an additional debt repayment.
• The board declared monthly distributions of $0.015 per share for January, February and March 2027. Management linked the lower payout to near-term earnings power, continued deleveraging and preserving capacity for secondary-market opportunities.
• Management said the portfolio’s shift toward a more conservative risk profile was deliberate and expects further rotation as opportunities emerge.

Key Financial Data

Business and Operating Performance

Management described the portfolio repositioning as a conscious response to the pricing of risk in U.S. syndicated corporate loans and CLO equity. The company has increased its emphasis on first-lien secured debt while reducing exposure to second-lien secured debt and CLO equity.

Oxford Square sees attractive secondary-market opportunities in CLO equity but fewer compelling opportunities in the primary market. Management intends to balance selective investment activity with moderate deleveraging and risk control.

The Morningstar LSTA US Leveraged Loan Index rose from 94.96% of par on June 30 to 95.32% on September 30. BB-rated loan prices increased by 8 basis points and B-rated prices rose by 119 basis points, while CCC-rated prices fell by 286 basis points.

The trailing 12-month loan default rate declined to 0.55% by principal amount from 0.97%. However, the rate including liability management exercises remained elevated at 2.97%, compared with 2.77% at the end of June. The distress ratio increased to 7.05% from 6.87%.

U.S. leveraged loan primary issuance, excluding amendments and repricing transactions, totaled $107.4 billion in Q3 2026, down 20% from Q3 2025. Loan fund inflows were approximately $1.28 billion.

Management Guidance

Management expects continued portfolio rotation to capture opportunistic investments while supporting further moderate deleveraging. No specific leverage target was provided; the pace of debt reduction will depend on the balance between investment opportunities and maintaining appropriate leverage ratios.

The board declared distributions of $0.015 per share for each month from January through March 2027. Management said the level reflects the portfolio’s current and expected near-term earnings power, the objective of reducing leverage and the need to retain flexibility for secondary-market investments.

Risks and Areas to Watch

• NAV per share declined by $0.08 sequentially, and combined net realized and unrealized losses increased to $3.3 million.
• CCC-rated loan prices fell by 286 basis points during the quarter, contrasting with gains in higher-rated categories.
• The default rate including liability management exercises rose to 2.97%, while the loan distress ratio increased to 7.05%.
• Management sees fewer compelling primary-market CLO equity opportunities and is maintaining a more conservative approach to risk.
• The lower distribution level reflects management’s assessment of near-term portfolio earnings power and its deleveraging priorities.

Analyst Q&A Highlights

• Portfolio mix: Management confirmed that the shift toward first-lien debt and away from second-lien debt and CLO equity was deliberate. Further rotation is expected as attractive investments become available.
• Leverage: The debt-to-equity ratio fell from 1.26 at the end of Q1 2026 to 1.07 at the end of Q3. Management said an additional repayment reduced leverage further, with future reductions dependent on investment opportunities.
• Realized losses: The losses primarily reflected two CLO equity positions reaching their termination points. The positions had already been carried at essentially no value or only option value, resulting mainly in a shift from unrealized to realized losses.
• Unrealized appreciation: Management attributed the quarter’s unrealized appreciation of just under $8 million primarily to broad increases in leveraged loan prices, with a few positions producing outsized returns.
• Distribution decision: The board based the $0.015 monthly distribution for Q1 2027 on near-term earnings power, moderate deleveraging goals and the desire to preserve capital for secondary-market opportunities.

Full Earnings Call Transcript

Complete Earnings Call Transcript

Management Remarks

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.

Question-and-Answer Session

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.