Oxford Square Doubles Down on Secondary CLO Equity as Dividend Gap Persists
Oxford Square Capital Corp.'s second-quarter earnings call painted a picture of deliberate defensive repositioning: all new investment dollars flowed into secondary CLO equity promising low-20s cash-on-cash yields, even as the firm's dividend coverage gap persists and its share price sits near multi-year lows. The call revealed a portfolio manager more constructive on loan defaults, a single non-accrual resolved via restructuring, and an ATM funding machine that keeps churning out new shares. This is a story of a BDC using its permanent capital flexibility to chase yield in a recovering but still fragile credit market.
Q2 2026: A Tactical All-in on CLO Equity
In the quarter, Oxford Square deployed $19.9 million — every dollar into CLO equity, all purchased in the secondary market. Portfolio manager Kevin Yonon confirmed: “Sure. Erik, that was actually all CLO equity for this quarter. So the cash on cash was probably low 20s.” — Kevin P. Yonon, Managing Director and Portfolio Manager · 2026-07-31 CEO Jonathan Cohen framed it as a deliberate thesis: “And that's consistent, Erik, with our current thesis of CLO equity tranche investments representing what we believe is a fairly compelling cash-on-cash opportunity, particularly for purchases made in the secondary market.” — Jonathan Cohen, CEO · 2026-07-31
This marks a notable shift from the prior quarter, when the firm was buying first lien levered loans. Just a quarter earlier, Yonon described the purchases: “So broadly, the investments were focused on first lien loans, generally B2B loans.” — Kevin P. Yonon, Managing Director and Portfolio Manager · 2026-03-03 Moreover, as of November 2025, Cohen had said they were at the ceiling for CLO equity: “we have hit the maximum in terms of our ability to add additional CLO equity without rotating the portfolio.” — Jonathan Cohen, Host/Moderator · 2025-11-04 Now, with the ATM issuance of 11.3 million shares raising ~$17.8 million, they have fresh capital to redeploy into CLO equity via the secondary market — a counter-intuitive move given the asset class's volatility but one that locks in low-20s cash-on-cash yields.
The Loan Market is Healing — and So Is One Distressed Credit
The broader loan backdrop improved. The trailing twelve-month default rate fell to 0.97% from 1.44%, and the distress ratio dipped to 6.87%. Portfolio manager Kevin Yonon's prepared remarks captured the improvement:
More importantly for Oxford Square, one of its non-accrual positions was restructured. Kevin Yonon explained: “So that one position went through a restructuring transaction, which closed during the quarter. There's now a new manageable capital structure, which we hold the new first lien term loan as well as some common equity.” — Kevin P. Yonon, Managing Director and Portfolio Manager · 2026-07-31 The new first lien loan is back on accrual, removing a drag on earnings.During the quarter ended June 30, U.S. loan market performance improved versus the prior quarter. U.S. loan prices, as defined by the Morningstar LSTA U.S. Leveraged Loan Index, increased from 94.63% of par as of March 31 to 94.96% of par as of June 30.
The Dividend Gap Persists
Despite higher total investment income ($9.4 million vs. $8.9 million), NII per share of $0.05 still falls short of the $0.105 per share distributed. The firm is willing to fund the gap with equity issuance and portfolio repositioning. Cohen deflected guidance: “We don't, as you know, Erik, make forward projections or forward-looking performance estimates. But we are, I think, broadly optimistic about the capital that we're deploying presently...” — Jonathan Cohen, CEO · 2026-07-31 The market seems skeptical — the stock is down 28% from its May peak and trades at a discount that reflects ongoing coverage concerns. Net interest income has slipped from $9 million in 2023 to $5 million today, underscoring the pressure on distributable earnings. The ATM issuance adds shares but also dilutes existing holders if book value doesn't keep up.
The real question is whether the fresh CLO equity buys — with their attractive near-term cash yields — can restore full dividend coverage. The company is betting that the secondary market pricing, combined with a recovering loan cycle, will do the trick. But as one analyst probed, the gap between NII and the distribution remains the central tension. Oxford Square's answer is to lean into the cash-on-cash power of CLO equity, accepting the mark-to-market volatility in exchange for a higher yield — a wager that will play out over the remainder of 2026.