Oxford Square Capital: Transferable Rights Offering Underway
NEWS
As previously announced, Oxford Square Capital (OXSQ) is in the process of undertaking a secondary common stock offering aimed at increasing its equity capital. This is being done by way of issuing “transferable subscription rights” which allow the holder to acquire the new shares at a favorable price. Those rights will trade in the public markets until June 14, 2023, under the ticker OXSQR. Here is an extract from the BDC’s Prospectus which explains what’s going on:
We are issuing transferable subscription rights to our stockholders of record as of 5:00 p.m., New York City time, on May 23, 2023, entitling the holders thereof to subscribe for up to an aggregate of 16,633,723 shares of our common stock. Record date stockholders will receive one right for each three outstanding shares of common stock owned on the record date. The rights entitle the holders to purchase one new share of common stock for every right held. In addition, record date stockholders who fully exercise their rights will be entitled to subscribe, subject to the limitations described in this prospectus supplement and subject to allotment, for additional shares that remain unsubscribed as a result of any unexercised rights. Rights holders who exercise their rights will have no right to rescind their subscriptions after receipt of their completed subscription certificates together with payment for shares or a notice of guaranteed delivery by the subscription agent.
Members of our senior management, who own approximately 3.26 million shares of our common stock, have indicated that they intend to fully exercise their primary subscription rights.Oxford Square Capital – Prospectus Filed 5/24/2023
Here are the key dates for this capital raise:
Important Dates to Remember(1)
| Record Date | May 23, 2023 | |
| Subscription Period | from May 24, 2023 to June 14, 2023(1) | |
| Rights Expected to Begin Trading on Nasdaq | May 24, 2023 | |
| Last Day it is Expected that Rights Can be Traded | June 14, 2023(1) | |
| Expiration Date | June 14, 2023 at 5:00 p.m. New York City Time(1) | |
| Deadline for Delivery of Subscription Certificates and Payment for Shares | June 14, 2023 at 5:00 p.m., New York City Time(1) | |
| Deadline for Delivery of Notice of Guaranteed Delivery and Payment for Shares | June 14, 2023 at 5:00 p.m., New York City Time(1) | |
| Deadline for Delivery of Subscription Certificates for Shares pursuant to Notice of Guaranteed Delivery(2) | June 16, 2023 at 5:00 p.m., New York City Time(1) | |
| Final Payment Date(3) | June 28, 2023(1) |
Oxford Square Capital – Prospectus Filed 5/24/2023
ANALYSIS
Uncertainties Abound
We know for certain that OXSQ seeks to raise new capital, and that will amount to something between $40mn and $50mn if this offering operates as expected.
However, there are many “known unknowns” in this process – which may explain why this mechanism is rarely used by BDC issuers.
Volunteers
First, we don’t know how many investors will step up to purchase the right to acquire new shares in OXSQ, including how many existing shareholders.
(As noted, management has promised to buy its pro-rata share but their common stock holdings account for only 2% of total shares outstanding of 49,885,954).
The would-be buyers will not be known until June 14 as the new OXSQR security will be traded back and forth in the market before that date – a process already underway.
Unknown
Then, the price of the new shares to be issued will not be known until after June 14, as the prospectus makes clear:
The subscription price per share will be the greater of (1) 92.5% of the volume-weighted average of the sales prices of our shares of common stock on the Nasdaq Global Select Market for the five consecutive trading days preceding the expiration date of the offering and (2) 95.0% of our last reported net asset value. Because the subscription price will be determined on the expiration date, rights holders who decide to acquire shares pursuant to their primary subscription rights or pursuant to the over-subscription privilege will generally not know the actual purchase price of those shares when they make that decision.Oxford Square Capital – Prospectus Filed 5/24/2023
Side Note
(The biggest uncertainty of all is whether a sufficient number of would-be shareholders turn up to fund the new shares and bring in the new capital OXSQ needs.
We’ll circle back in a future article should that occur).
Usage
Technically, OXSQ is indicating the $45mn or so that might be raised in this manner will be used for any of repaying indebtedness, investing in CLO and loan assets, and general corporate purposes.
However, it’s clear that essentially all the funds will be used to PARTIALLY prepay one of OXSQ’s 3 Baby Bonds – the one maturing in March 2024 with a value of $64mn and which can be prepaid in part or full at any time. The ticker is OXSQL.
That will reduce total debt outstanding by (23%) and increase total shares outstanding by 33%. Total investments will remain the same.
Before & After
See the pro-forma capitalization in the prospectus:
| As of March 31, 2023 | ||
| Actual | As Adjusted for this Offering | |
| Assets: | ||
| Non-affiliate/non-control investments (cost: $500,195,807 and $500,195,807, respectively) | $ 314,599,117 | $ 314,599,117 |
| Affiliated investment (cost: $16,836,822 and $16,836,822, respectively) | 5,070,307 | 5,070,307 |
| Cash and cash equivalents | 10,763,167 | 10,763,167 |
| Interest and distributions receivable | 4,047,953 | 4,047,953 |
| Other assets | 736,375 | 736,375 |
| Total assets | $ 335,216,919 | $ 335,216,919 |
| Liabilities: | ||
| Notes payable – 6.50% Unsecured Notes, net of deferred issuance costs | $ 64,044,632 | $ 18,135,557 |
| Notes payable – 6.25% Unsecured Notes, net of deferred issuance costs | 44,071,474 | 44,071,474 |
| Notes payable – 5.50% Unsecured Notes, net of deferred issuance costs | 78,441,304 | 78,441,304 |
| Other liabilities(1) | 8,820,361 | 9,056,361 |
| Total liabilities | 195,377,771 | 149,704,696 |
| Net Assets: | ||
| Common stock, par value $0.01 per share; 100,000,000 shares authorized, 49,885,954 and 66,519,677 shares issued and outstanding, respectively | 498,859 | 665,197 |
| Capital in excess of par value | 434,871,321 | 480,378,058 |
| Total distributable earnings/(accumulated losses) | (295,531,032) | (295,531,032) |
| Total net assets | $ 139,839,148 | 185,512,223 |
| Total liabilities and net assets | $ 335,216,919 | $ 335,216,919 |
Oxford Square Capital – Prospectus Filed 5/24/2023
VIEWS
Deep End
Frankly, the BDC Reporter has only had to contend with capital-raising techniques like this one a few times in our history of writing about the sector.
Our background is not on Wall Street, but in lending and private equity so we’re a little out of our depth here.
Must Do
We can say, though, that this gambit seems absolutely essential if OXSQ wants to remain in anything like its existing form in the future.
With no Revolver to draw on and a de minimis amount of cash (see the table above) OXSQ’s liquidity is very tight.
With $64mn of unsecured notes coming due in 9 months, the clock is ticking.
Alternatives
If OXSQ chose to repay that debt by selling off assets – if that’s even possible – that would reduce the BDC’s portfolio by (20%), with a similar shrinkage necessary in 2026.
Too Small?
Is an OXSQ with a portfolio of $260mn or $200mn (we’re rounding down) even a viable operation for both the managers and the shareholders ?
Track Record
The other question we’re asking ourselves – as must be existing OXSQ shareholders facing a very significant d dilution should they step up to exercise their rights – is whether this is a classic “good money after bad” situation ?
A quick glance at the BDC NAV Change Table in your Subscriber Tools section shows that since the end of 2017, the BDC’s Net Asset Value Per Share (NAVPS) has dropped by (63%) – the second worst amongst the 42 BDCs we track.
Same Old
There has been no change in management’s approach in recent years that promises any change in that constant NAVPS erosion.
Moreover, we’ve expressed concern in recent months about the deterioration in the credit quality of OXSQ’s loan portfolio.
(We don’t know to properly evaluate the BDC’s CLO investments).
Stable
Admittedly, the BDC has managed to maintain the same $0.0350 monthly distribution since July 2020.
We have to question if that can continue with an influx of new shares or if assets have to be sold off to pay down debt.
Even Worse
Most of all, we’re worried for both the shareholders and bondholders of the BDC should this new capital not be raised.
The future of the BDC rests on a knife’s edge.