Executive Summary / Key Takeaways

• Oxford Square Capital Corp. ($OXSQ) is a Business Development Company (BDC) focused on maximizing total return through strategic investments in corporate debt securities and Collateralized Loan Obligations (CLOs), particularly in technology-related sectors.
• The company actively manages its portfolio, demonstrated by recent capital structure optimization, including the issuance of $74.8 million in 7.75% Unsecured Notes due 2030 and the full repayment of $34.8 million in 6.25% Unsecured Notes in Q3 2025, enhancing its debt profile.
• Investment activity in Q3 2025 saw $58.1 million in purchases, primarily in long-dated CLO equity from top-tier managers and opportunistic leveraged loan trades, reflecting a focus on duration as a hedge and capturing spread in less liquid credits.
• While net investment income for Q3 2025 was approximately $5.6 million ($0.07 per share), the company recorded combined net unrealized and realized losses of $7.5 million ($0.09 per share), indicating ongoing portfolio adjustments and market volatility.
• $OXSQ maintains a "lightly levered" portfolio relative to its statutory limits, suggesting potential for increased leverage to enhance net investment income, alongside a recently authorized $25 million share repurchase program, signaling management's commitment to shareholder value.

A Specialized Approach to Credit Markets

Oxford Square Capital Corp. ($OXSQ) operates as a Business Development Company (BDC) with a clear mandate: to maximize total return for its shareholders. Established in 2003, the company has carved a niche by primarily investing in corporate debt securities and, to a lesser extent, Collateralized Loan Obligations (CLOs). This strategy positions $OXSQ within the dynamic landscape of middle-market financing, particularly targeting technology-related companies across various sub-sectors such as computer software, IT infrastructure, and telecommunications. The company's historical journey, marked by consistent portfolio management and adaptive capital structuring, underpins its current strategic responses to evolving market conditions.

The U.S. leveraged loan market, a core area for $OXSQ, has experienced notable shifts. In Q3 2025, market performance was stable, with the Morningstar LSTA U.S. Leveraged Loan Index showing a slight decrease from 97.07% to 97.06% of par. However, pricing dispersion was evident, with BB-rated loans decreasing by 11 basis points, B-rated loans increasing by 37 basis points, and CCC-rated loans decreasing by 227 basis points on average. The 12-month trailing default rate for the loan index rose to 1.47% by principal amount in Q3 2025, up from 1.11% in the prior quarter, with the broader default rate including liability management exercises remaining elevated at 4.32%. These trends highlight a market environment demanding selective and opportunistic investment strategies.

Investment Strategy and Portfolio Dynamics

$OXSQ's investment strategy is characterized by a dual focus on corporate debt and CLO equity, with typical individual portfolio company investments ranging from $5 million to $25 million. This approach aims for diversification, ensuring no single investment exceeds 5% of the total portfolio. As of September 30, 2025, the portfolio comprised debt securities in 19 companies with a fair value of approximately $142 million, CLO equity investments valued at $113.20 million, and equity and other investments totaling $5.30 million.

The company's CLO equity strategy emphasizes acquiring long-dated pieces from top-tier managers. Management views duration in this asset class as a critical hedge against economic dislocation or financial market disruption, aiming for steady and predictable cash flow. Joseph Kupka, Portfolio Manager, noted the purchase of "long-dated, top-tier managers that we felt good about," providing "steady, predictable cash flow that we expect to hold for quite a while." However, as of the reporting date, $OXSQ has reached its maximum capacity for adding new CLO equity without rotating the portfolio, implying future CLO equity purchases will be balanced with sales.

On the leveraged loan side, $OXSQ actively seeks opportunities in both primary and secondary markets. While the primary market has recently presented higher-quality credits with lower spreads, the company anticipates focusing more on the secondary market. This allows for opportunistic trades in "less sort of liquid credits... where we can capture a bit more spread" at or below par, which management sees as a decent opportunity. As of September 30, 2025, debt investments carried stated interest rates between 6.91% and 12.75% with maturities ranging from 2 to 94 months, and a weighted average annualized yield of approximately 14.60%. Notably, no debt investments were on non-accrual status as of that date, a positive indicator compared to the prior year.

Competitive Landscape and Market Positioning

$OXSQ operates within the competitive BDC market, vying with larger, more diversified players and specialized lenders. Key direct competitors include Ares Capital Corporation , Hercules Capital, Inc. , Main Street Capital Corporation , and BlackRock TCP Capital Corporation . While these firms operate in overlapping middle-market segments, $OXSQ distinguishes itself through its specialized focus on technology-related investments.

Compared to Ares Capital Corporation (ARCC), which often pursues larger deals and benefits from greater scale, $OXSQ's transaction sizes (typically $5 million to $30 million) position it for agility in niche technology segments. $OXSQ's specialized focus on technology-related debt investments, coupled with a 7-year exit horizon, may offer targeted expertise, though ARCC's broader diversification might lead to more stable profitability and cash flow generation. Against Hercules Capital, Inc. (HTGC), a BDC specializing in venture debt for technology and life sciences, $OXSQ's broader range of debt instruments and more conservative transaction caps may offer greater stability, contrasting with HTGC's higher-risk, growth-oriented venture approach.

Main Street Capital Corporation (MAIN) offers flexible financing to lower middle-market companies across various sectors. While MAIN's diversification provides resilience, $OXSQ's narrower tech-specific focus could yield specialized insights and quicker adaptation to sector changes. BlackRock TCP Capital Corporation (TCPC), with its affiliation to BlackRock, benefits from extensive deal sourcing resources. $OXSQ's specialized tech portfolio offers a focused edge, potentially allowing for faster innovation cycles within its niche, though TCPC's scale might lead to more robust financial metrics.

$OXSQ's competitive advantages stem from its deep understanding of technology sectors and its established network in debt financing. This specialization can foster stronger customer loyalty among tech firms, potentially leading to recurring revenue and superior margins through targeted expertise. However, its smaller scale and concentration in technology sectors also present vulnerabilities, limiting access to larger deals and increasing exposure to sector-specific risks during downturns. Regulatory requirements and access to capital markets act as significant barriers to entry in the BDC industry, helping $OXSQ defend its position while also benefiting larger, established competitors.

Financial Performance and Liquidity

For the third quarter ended September 30, 2025, $OXSQ reported net investment income of approximately $5.6 million, or $0.07 per share, a slight increase from $5.5 million ($0.08 per share) in the prior quarter. Total investment income for Q3 2025 was approximately $10.2 million, up from $9.5 million in the preceding quarter. However, the company recorded combined net unrealized and realized losses on investments of approximately $7.5 million, or $0.09 per share, a significant increase from $1.1 million ($0.01 per share) in the prior quarter. This reflects ongoing portfolio adjustments and market volatility.

For the nine months ended September 30, 2025, total investment income was $29.92 million, a decrease from $32.46 million in the same period of 2024. This decline was primarily driven by a decrease in interest income from debt investments, which fell to $15.78 million from $19.56 million year-over-year. Conversely, income from securitization vehicles and investments increased to $12.11 million from $11.35 million, and other income rose to $2.03 million from $1.55 million over the same nine-month period. Total expenses for the nine months ended September 30, 2025, increased to $12.76 million from $12.02 million, primarily due to higher interest expense.

Liquidity and capital resources remain a key focus. Cash and cash equivalents increased to approximately $50.80 million as of September 30, 2025, from $34.90 million at December 31, 2024. This increase was primarily a timing issue related to at-the-market (ATM) equity issuances.

Net cash used in operating activities for the nine months ended September 30, 2025, was approximately $15.60 million, reflecting investment purchases and net unrealized depreciation, partially offset by realized losses and proceeds from repayments and sales. Net cash provided by financing activities was approximately $31.50 million, driven by proceeds from ATM common stock issuance ($27.40 million) and the issuance of $74.8 million in 7.75% Unsecured Notes due 2030, partially offset by distribution payments and the repayment of $44.80 million of 6.25% Unsecured Notes. The company's asset coverage for borrowed amounts stood at approximately 200% as of September 30, 2025, compared to 227% at December 31, 2024. The weighted average stated interest rate on outstanding debt increased to 6.58% with a weighted average maturity of 3.80 years, up from 5.77% and 2.80 years, respectively, at the end of 2024.

Outlook and Risk Considerations

$OXSQ's forward-looking strategy is anchored in maximizing long-term total return, a perspective enabled by its permanent capital vehicle structure. Management continues to evaluate opportunities to enhance net investment income (NII), noting that the company is "running a relatively lightly levered portfolio at the moment relative to our statutory limitation," suggesting that increased leverage is a potential lever for income generation.

On October 30, 2025, the Board of Directors declared monthly distributions of $0.035 per share for January, February, and March of 2026. Additionally, the Board authorized a 12-month share repurchase program, allowing for the repurchase of up to $25 million of outstanding common stock in the open market, effective until October 30, 2026. This program, while not obligatory, signals management's confidence and commitment to shareholder value.

Key risks for $OXSQ include market volatility, significant interest rate changes, and unfavorable economic conditions, which could impair performance or the ability to achieve investment objectives. The company is exposed to financial market risks, including interest rate fluctuations that can affect net interest income and portfolio value. Global social and political circumstances, including conflicts and trade policy shifts, also contribute to market volatility and economic uncertainties. As a BDC, $OXSQ must maintain qualifying assets at a minimum of 70% of its total assets; as of September 30, 2025, qualifying assets represented 64.30% of total assets, though no additional non-qualifying assets were acquired during periods below this threshold.

Conclusion

Oxford Square Capital Corp. continues to execute a specialized investment strategy focused on corporate debt and CLO equity within technology-related sectors. The company's recent capital structure adjustments and active portfolio management demonstrate a proactive approach to optimizing its financial position and adapting to market dynamics. While recent quarters have seen a decrease in net investment income and some unrealized losses, the strategic focus on long-dated CLO equity and opportunistic leveraged loan trades, coupled with a relatively low leverage profile, provides avenues for future income enhancement.

$OXSQ's competitive edge lies in its niche expertise in technology financing, allowing for targeted investments and potentially stronger relationships with portfolio companies. However, its smaller scale compared to industry giants necessitates careful risk management and a keen eye on market opportunities. The authorized share repurchase program and consistent distributions underscore management's commitment to shareholder returns. Investors should monitor the company's ability to leverage its specialized focus to drive NII growth and navigate broader market risks, particularly given the elevated default rates in the leveraged loan market.