Oxford Square’s 21% Yield Masks a Crumbling Portfolio

Oxford Square Capital (NASDAQ:OXSQ) advertises a headline yield north of 21%, and the math checks out at the surface. With shares trading around $2 and a monthly distribution of $0.035 per share, the payout looks like a gift. The company behind it is in worse shape than the yield suggests.

How Oxford Square Generates Its Income

Oxford Square is a business development company. It raises capital from shareholders and lends to private middle-market businesses, then passes the interest income through as monthly distributions. Its income comes from two buckets: senior secured debt investments yielding a weighted 14.5% at cost and CLO equity tranches, the riskiest, first-loss slice of collateralized loan obligations.

In the fourth quarter of 2025, debt investments produced $5.3 million and CLO equity contributed $4.3 million. CLO equity is the engine of the high yield, and also the source of the trouble.

The Numbers That Don’t Add Up

The single most important figure for a BDC investor is whether net investment income (NII) covers the distribution. It does not. Q4 NII per share came in at $0.07, which annualizes to roughly $0.28. The annualized distribution is $0.42. Shareholders are receiving about 50% more in cash than the portfolio is actually earning, with the gap effectively a return of capital.

That capital is visibly eroding. NAV per share has fallen every quarter of 2025:

That is a 27% decline in book value over four quarters. Q4 alone shaved off 13%, driven by unrealized depreciation and realized losses. Full-year 2025 realized losses totaled around $17 million.

Portfolio and Balance Sheet Stress

The CLO equity book is feeling the squeeze. The effective yield on those positions compressed from roughly 10% in Q3 to 9% in Q4, a single-quarter drop. With the 10-year/2-year spread barely positive and the fed funds rate near 4%, leveraged loan defaults are the swing factor for that yield, and Oxford Square already carries one portfolio company on non-accrual at a $5.0 million fair value.

Funding is getting more expensive. The company issued 7.75% Unsecured Notes for net proceeds of about $72.1 million, pushing total liabilities up while shareholders’ equity fell 10%. Management has also leaned heavily on at-the-market share sales, issuing roughly 15.9 million new shares across 2025, much of it below NAV. That dilutes per-share NII at exactly the moment per-share NII needs to recover.

The Yield Is Real. The Total Return Isn’t.

Oxford Square already cut its monthly distribution from $0.04 to $0.035 in early 2025, a reduction during 2025. The full-year total return on NAV was -8%, and the market-value total return was -12%. Even after a 11% bounce over the past month, the stock has lagged. Collecting a 21% yield while watching principal compound lower is a losing trade.

Verdict

The distribution is at meaningful risk. With NII covering only two-thirds of the payout, NAV down sharply, realized losses mounting, CLO yields compressing, and a non-accrual already on the books, another cut is more likely than not if portfolio stress continues into 2026. Oxford Square may suit speculators willing to bet on a credit cycle turn and wider CLO spreads. Income investors focused on a sustainable monthly check have reason to be skeptical of this payout.