May 26, 2023
We call this an update about Oxford Square Capital (OXSQ), but this is the first time we've put digital pen to digital paper about this small, idiosyncratic BDC which invests both in syndicated loans and in CLO investments. No other BDC has a similar strategy, and we think we know why.
However, the Expected Return Table does show both what the BDC has earned and paid out in dividends in recent years, the analyst earnings projections and our own estimates of future payouts and a future valuation, just like everyone else we track. Admittedly, though, a glance at the Table shows that we don't have very high hopes for OXSQ, projecting annual distributions will begin to drop next year from the current $0.42 yearly level and fall by half by 2027. Our Total Return projected over 5 years is 60% or 12% per annum. By comparison with its peers, OXSQ - in our view - offers a much lower return than most BDCs.
In The Air
Now even that sub-par return is in doubt. We're writing this Update to place the BDC under review. As we've written in the BDC Reporter, and as you'll see on any financial news site, OXSQ has chosen to raise a significant amount of equity, and increase its share count by one-third or so. We won't get into all the details here, but the plan is to raise just short of $50mn and use the proceeds to repay most of one of its three unsecured Baby Bonds - the BDC's only source of debt.
If that succeeds, the earnings per share of the BDC could materially change. More importantly, there's also a chance that this capital raise may not succeed. At that point, the BDC would face a serious liquidity challenge with $64mn of unsecured notes coming due in March of next year, but with only $10mn of cash to play with. A whole series of alternatives could then occur, from a deliberate campaign of selling down assets to pay off the debt to a - gulp - bankruptcy filing. Also possible is a deliberate liquidation by the current management or the sale of the portfolio to one or more third parties.
The key point is that we don't know and can't say with any confidence what the BDC's future might look like if matters go awry. Even if the equity does get raised as planned, the large number of new shares issued and the likely absence of any new income-producing assets means we'd like to reconsider our long-term dividend projections.
For the moment - and till this uncertainty gets resolved in one way or another - we're putting our projections and valuations for OXSQ on hold. Look for another Update when the situation clears up.