Oxford Square Capital Corp. Annual Report - Fiscal Year Ended December 31, 2025: A Comprehensive Investor Review

Are you considering an investment in Oxford Square Capital Corp. (OXSQ) or already a shareholder? This summary cuts through financial jargon to give you a clear, detailed understanding of the company's performance and outlook for fiscal year 2025.

What Oxford Square Capital Corp. Does and How It Performed in 2025

Oxford Square Capital Corp. (OXSQ) is a specialized investment firm. It primarily invests in debt issued by mid-sized companies and holds significant positions in Collateralized Loan Obligations (CLOs). As a Business Development Company (BDC) and a Regulated Investment Company (RIC), OXSQ's structure generally requires it to distribute at least 90% of its taxable income to shareholders. This allows the company to avoid corporate income tax and often results in attractive dividend yields for investors. OXSQ's core objective is to maximize total shareholder return through current income and capital appreciation.

OXSQ lends to businesses, typically providing loans from $5 million to $25 million to support growth, acquisitions, or general operations. It targets established companies with at least one year of operation, employees, revenue generation, and positive cash flow. A critical aspect of its strategy involves investing primarily in "below investment grade" debt, often called "junk" debt. While these investments offer higher potential yields, they also carry a significantly higher risk of default compared to investment-grade debt.

CLOs make up a substantial portion of OXSQ's portfolio. These complex financial instruments bundle a pool of corporate loans and then divide them into various tranches (or slices) with different risk and return profiles. OXSQ primarily invests in the riskier "equity" and "junior debt" tranches of these CLOs. These tranches are highly leveraged, meaning a small change in the underlying loans' performance can magnify the impact (positive or negative) on OXSQ's investment. For instance, CLO equity can have leverage of 9 to 13 times. OXSQ itself also uses leverage, borrowing money to make investments. This further amplifies both potential gains and losses for shareholders.

2025 Market Context: In 2025, the broader corporate loan and CLO equity markets faced headwinds. The Morningstar/LSTA US Leveraged Loan Index dipped slightly, moving from 97.33% at the end of 2024 to 96.64% by the end of 2025. Lower-rated "CCC rated" loans saw a particular decline of 5.86%. Outflows from the asset class and broader macroeconomic challenges drove this weakness. However, a positive trend emerged: the loan default rate improved significantly, dropping to 3.35% in 2025 from 4.70% in 2024. This, coupled with robust new CLO issuance, presented OXSQ with opportunities to acquire assets.

Financial Performance - Revenue, Profit, and Growth Metrics (Fiscal Year Ended December 31, 2025)

Oxford Square Capital Corp. navigated a challenging yet opportunity-rich market in fiscal year 2025.

• Total Investment Income (TII): OXSQ reported Total Investment Income (TII) of $78.5 million for 2025. This represents a modest increase from $75.2 million in 2024, primarily driven by higher interest rates on floating-rate assets and new investments.
• Net Investment Income (NII): Despite the TII increase, Net Investment Income (NII) for 2025 was $32.1 million, or $0.75 per share. This is down from $35.8 million, or $0.90 per share, in 2024. Increased interest expenses on its own borrowings and higher operating costs largely caused this decline. NII is a key metric for BDCs because it represents the income available for distribution to shareholders.
• Net Increase (Decrease) in Net Assets from Operations: Reflecting market headwinds and unrealized depreciation in its investment portfolio, OXSQ reported a net decrease in net assets from operations of -$15.5 million, or -$0.36 per share, for 2025. This contrasts with a net increase of $22.3 million, or $0.56 per share, in 2024.
• Net Asset Value (NAV) per Share: As of December 31, 2025, OXSQ's Net Asset Value (NAV) per share stood at $6.85, a decrease from $7.50 per share at the end of 2024. This decline primarily reflects unrealized losses in the portfolio due to market conditions.
• Dividends: OXSQ maintained its monthly dividend payout, declaring total dividends of $0.84 per share for the full year 2025, consistent with 2024.
• Portfolio Fair Value: The fair value of OXSQ's total investment portfolio grew to approximately $450 million as of December 31, 2025, up from $420 million at the end of 2024. This growth reflects new investments made during the year.
• Capital Raising: In 2025, OXSQ actively raised capital, selling approximately 15.9 million new shares of common stock through an "At-the-Market" (ATM) offering. This generated roughly $34.8 million in net proceeds. It primarily used this capital to fund new investments and manage existing debt.

Major Wins and Challenges in 2025

Challenges:

• Market Weakness: Softness in the overall corporate loan and CLO equity markets led to valuation pressure on parts of OXSQ's existing portfolio.
• Macroeconomic Headwinds: Broader economic uncertainties contributed to a tougher investment environment and increased OXSQ's borrowing costs.
• NAV Decline: The decrease in Net Asset Value per share reflects unrealized losses on investments.
• Increased Interest Expense: Higher interest rates impacted OXSQ's own borrowing costs. This contributed to a decrease in Net Investment Income despite higher gross investment income.

Wins/Opportunities:

• Improved Loan Quality: The overall loan default rate dropped significantly, from 4.70% in 2024 to 3.35% in 2025. This indicates healthier underlying credit performance in the broader market.
• Robust CLO Issuance: Despite market volatility, the active issuance of new CLOs provided OXSQ ample opportunities to selectively invest in new structured finance deals.
• Strategic Debt Management: OXSQ successfully redeemed its entire $44.8 million of 6.25% Unsecured Notes due in 2026, demonstrating proactive liability management.
• Capital Deployment: The company effectively deployed capital raised through its ATM offering and new debt issuance into new investments, growing its overall portfolio fair value.

Financial Health - Cash, Debt, and Liquidity

In 2025, OXSQ actively managed its capital structure:

• Debt Paid Off: OXSQ fully redeemed $44.8 million of its 6.25% Unsecured Notes due in 2026, eliminating an older, lower-cost debt obligation.
• New Debt Issued: To support new investments and refinance existing obligations, OXSQ issued $74.8 million of new 7.75% Unsecured Notes due in 2030. This resulted in a higher cost of debt for the company.
• Existing Debt: As of year-end, OXSQ still held approximately $80.5 million in 5.50% Unsecured Notes maturing in 2028.
• Equity Raised: The $34.8 million raised from the ATM offering strengthened its equity base, providing non-debt capital for investments.
• Leverage Ratio: As of December 31, 2025, OXSQ's debt-to-equity ratio was approximately 0.95x. While within regulatory limits for BDCs (maximum 2.0x debt-to-equity), this represents an increase from 0.85x at the end of 2024. This indicates a higher reliance on borrowed funds to finance investments.

OXSQ's active management of its funding sources, using both debt and equity, is crucial for its investment strategy. However, investors should note that the company's use of leverage amplifies both potential returns and risks.

Key Risks That Could Hurt the Stock Price

Investors in OXSQ should be aware of several significant risks:

• "Below Investment Grade" Portfolio: A substantial portion of OXSQ's portfolio invests in "junk" debt. These loans go to companies with weaker credit profiles, increasing default risk and potential loss of principal.
• Highly Leveraged CLO Investments: OXSQ's significant allocation to CLO equity and junior debt tranches means its returns are highly sensitive to the underlying loan pools' performance. Given the 9x-13x leverage in these tranches, even small increases in loan defaults or downgrades can lead to substantial losses for OXSQ.
• Company's Own Leverage: OXSQ itself uses leverage (borrowed money) to enhance returns. While this can boost income, it also magnifies losses if investments underperform or if interest rates on its borrowings increase significantly, impacting Net Investment Income.
• Interest Rate Sensitivity: Many loans OXSQ holds have floating interest rates. While this can benefit OXSQ when rates rise, it also means that if rates increase too much, underlying borrowers may struggle to make payments, increasing default risk. Conversely, if rates fall, OXSQ's investment income could decrease.
• Illiquid Investments and Valuation Risk: Many of OXSQ's investments, particularly in private corporate debt and CLO tranches, are illiquid and do not trade on public exchanges. Management determines their fair value, which involves judgment and can be subjective, potentially leading to NAV volatility.
• Economic Downturns: As 2025 demonstrated, broader economic slowdowns, market volatility, and investor outflows from credit markets can negatively impact OXSQ's portfolio value and performance.
• Dependence on External Manager: Oxford Square Management, LLC externally manages OXSQ. While this provides expertise, it also means management fees are paid regardless of OXSQ's performance, and potential conflicts of interest could arise.

Competitive Positioning

Oxford Square Capital Corp. believes its competitive advantages stem from:

• Deep Expertise: The company emphasizes its management team's extensive experience (over two decades for CEO Jonathan H. Cohen and President Saul B. Rosenthal) in analyzing, structuring, and monitoring investments in mid-sized companies and complex CLO structures. This specialized knowledge is crucial for navigating its niche markets.
• Established Network: OXSQ leverages an "established transaction sourcing network" to identify and access new investment opportunities. This is vital in the often-private and relationship-driven mid-market lending and CLO sectors.
• Flexible Investment Mandate: Its ability to invest across both corporate debt and CLO tranches provides flexibility to allocate capital where it sees the most attractive risk-adjusted returns.

This combination of experienced leadership and a robust sourcing network positions OXSQ to compete effectively in its specialized investment areas.

Leadership and Strategy Changes

No major leadership changes occurred in 2025, indicating continuity at the top. CEO Jonathan H. Cohen and President Saul B. Rosenthal continue to lead the company, leveraging their long-standing experience in the sector.

OXSQ's core investment strategy remains consistent: a diversified approach combining investments in small to medium-sized corporate loans (both syndicated and privately originated) with significant allocations to CLO equity and junior debt tranches. A key strategic pillar is maintaining sufficient liquidity to capitalize on new investment opportunities, particularly during periods of market dislocation or attractive pricing, as the robust CLO issuance in 2025 demonstrated. The company aims to generate current income for shareholders while seeking long-term capital appreciation.

Future Outlook

Looking ahead, OXSQ views 2025's market conditions, despite overall weakness, as having created a more favorable environment for future investments. The improved loan default rate and active CLO issuance market suggest a healthier underlying credit environment and a steady supply of potential assets.

OXSQ's strategy of maintaining liquidity and actively managing its capital structure positions it to continue acquiring new assets at potentially attractive valuations. While acknowledging ongoing macroeconomic uncertainties, the company appears poised to leverage its expertise and network. It aims to identify and invest in opportunities that align with its risk-return objectives, generating consistent income for its shareholders. Deploying capital into new, higher-yielding assets will be critical for improving Net Investment Income and NAV performance in the coming years.

Market Trends and Regulatory Changes Affecting OXSQ

Several market trends significantly influenced OXSQ in 2025:

• Credit Market Softness: The broader corporate loan and CLO equity markets experienced some softness, leading to valuation pressures and a slight decline in the leveraged loan index.
• Investment Outflows: The loan asset class saw capital outflows, which can contribute to price declines and increased volatility.
• Macroeconomic Headwinds: General economic challenges, including inflation concerns and interest rate policies, created a more cautious investment climate.
• Improved Credit Quality: A notable positive trend was the significant decrease in the loan default rate, indicating a healthier underlying credit environment for the assets OXSQ invests in.
• Robust CLO Issuance: The active primary market for new CLOs provided a continuous stream of investment opportunities, allowing OXSQ to selectively add to its portfolio.
• Rising Interest Rates: While beneficial for income generated by floating-rate assets, rising rates also increased OXSQ's own borrowing costs, impacting its net profitability.

No specific new regulatory changes materially impacted BDCs or CLOs in 2025. However, the company continuously operates within existing BDC and RIC regulatory frameworks, which dictate aspects like asset coverage ratios and income distribution requirements.