Oxford Square Capital (OXSQ) risk factors, FY2024 10-K

RISKS RELATING TO OUR BUSINESS AND STRUCTURE

1. 01Any failure on our part to maintain our status as a BDC would reduce our operating flexibility, including our ability to borrow money
2. 02Our financial condition and results of operations will depend on our ability to manage our existing portfolio and future growth effectively
3. 03We operate in a highly competitive market for investment opportunities
4. 04There will be uncertainty as to the value of our portfolio investments, which may impact our net asset value
5. 05Market conditions affect debt and equity capital markets in the U.S. and abroad and may in the future have a negative impact on our business and operations
6. 06Further downgrades of the U.S. credit rating, impending automatic spending cuts or another government shutdown could negatively impact our liquidity, financial condition and earnings
7. 07Our business is subject to increasingly complex corporate governance, public disclosure and accounting requirements that could adversely affect our business and financial results
8. 08A disruption in the capital markets and the credit markets could negatively affect our business
9. 09Even in the event the value of your investment declines, the Base Fee and, in certain circumstances, the Net Investment Income Incentive Fee will still be payable
10. 10PIK interest/dividend payments we receive will increase our assets under management and, as a result, will increase the amount of Base Fee and incentive fees payable by us to our investment adviser
11. 11Our investment adviser is not obligated to reimburse us for any part of the incentive fee it receives that is based on accrued income that we never receive
12. 12Our investment adviser can resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our financial condition, business and results of operations
13. 13We are permitted to borrow money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us
14. 14If we are unable to comply with the covenants or restrictions in our borrowings, our business could be materially adversely affected
15. 15The terms of our future borrowings may contractually limit our ability to incur additional indebtedness
16. 16We may need to raise additional capital to grow because we must distribute most of our income
17. 17Regulations governing our operation as a BDC affect our ability to, and the way in which we raise additional capital, which may expose us to risks, including the typical risks associated with leverage
18. 18Senior Securities and Other Indebtedness
19. 19Our Board of Directors is authorized to reclassify any unissued shares of common stock into one or more classes of preferred stock, which could convey special rights and privileges to its owners
20. 20A change in interest rates may adversely affect our profitability and we may expose ourselves to risks if we engage in hedging transactions to mitigate changes in interest rates
21. 21Our ability to enter into transactions involving derivatives and financial commitment transactions may be limited
22. 22There are significant potential conflicts of interest between the Company and its management team
23. 23until we are satisfied that doing so will not raise concerns under the 1940 Act or, if such concerns exist, we have taken appropriate actions to seek board review and approval or exemptive relief for such transaction. Our Board of Directors reviews these procedures on an annual basis
24. 24Changes in laws or regulations governing our operations may adversely affect our business
25. 25As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of such acquisition, at least 70% of our total assets are qualifying assets
26. 26Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock
27. 27the exemption from the Control Share Acquisition Act (in accordance with any applicable law, rules or regulations), the Control Share Acquisition Act also may make it more difficult for a third party to obtain control of us and increases the difficulty of consummating such a transaction
28. 28Our Board of Directors may change our investment objective, operating policies and strategies without prior notice or stockholder approval
29. 29Our business and operation could be negatively affected if we become subject to any securities litigation or stockholder activism, which could cause us to incur significant expense, hinder execution of our investment strategy and impact our stock price

RISKS RELATED TO U.S. FEDERAL INCOME TAX

1. 30Our investments in CLOs may be subject to special anti-deferral provisions that could result in us incurring tax or recognizing income prior to receiving cash distributions related to such income
2. 31If we do not receive timely distributions from our CLO investments, we may fail to qualify as a RIC
3. 32The CLOs in which we invest may be subject to withholding tax if they fail to comply with certain reporting requirements
4. 33We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income

RISKS RELATING TO OUR INVESTMENTS

1. 34Our investment portfolio may be concentrated in a limited number of portfolio companies, which will subject us to a risk of significant loss if any of these companies defaults on its obligations under any of its debt securities that we hold or if the sectors in which we invest experience a market downturn
2. 35The lack of liquidity in our investments may adversely affect our business
3. 36If we cannot obtain additional capital because of either regulatory or market price constraints, we could be forced to curtail or cease our new lending and investment activities, our net asset value could decrease and our level of distributions and liquidity could be affected adversely
4. 37General interest rate fluctuations may have a substantial negative impact on our investments and our investment returns and, accordingly, may have a material adverse effect on our investment objective and our net investment income
5. 38Subordinated liens on collateral securing debt investments that we will make to our portfolio companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and us
6. 39Most of our debt investments will not fully amortize during their lifetime, which may subject us to the risk of loss of our principal in the event a portfolio company is unable to repay us prior to maturity
7. 40Our portfolio companies may prepay loans, which may reduce our yields if capital returned cannot be invested in transactions with equal or greater expected yields
8. 41The application of the risk retention rules to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for the Company
9. 42We may be subject to risks associated with our investments in covenant-lite loans
10. 43Our investments in the companies that we target may be extremely risky and we could lose all or part of our investments
11. 44Inflation may adversely affect our and our portfolio companies’ business, results of operations and financial condition
12. 45our investment originations, limit our ability to grow and negatively impact our operating results. Further, inflation could make it difficult to extend the maturity of, or refinance existing indebtedness or obtain new indebtedness on favorable terms
13. 46Our failure to make follow-on investments in our portfolio companies could impair the value of our investment portfolio
14. 47Our incentive fee may induce Oxford Square Management to use leverage and to make speculative investments
15. 48Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in such companies
16. 49We may not realize gains from our equity investments
17. 50Because we generally do not hold controlling equity interests in our portfolio companies, we may not be in a position to exercise control over our portfolio companies or to prevent decisions by the managements of our portfolio companies that could decrease the value of our investments
18. 51Our investments in CLO vehicles are riskier and less transparent to us and our stockholders than direct investments in the underlying senior loans
19. 52Failure by a CLO vehicle in which we are invested to satisfy certain tests will harm our operating results
20. 53Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment obligations or fails to perform as we expect or if the market price fluctuates significantly in such illiquid investments
21. 54Investments in foreign securities formed under the laws of the Cayman Islands may involve significant risks in addition to the risks inherent in U.S. investments
22. 55We will have no influence on management of underlying investments managed by non-affiliated third party CLO collateral managers

RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES

1. 56Our common stock price may be volatile
2. 57Our shares of common stock have traded at a discount from net asset value and may do so in the future
3. 58There is a risk that investors in our equity securities will not receive distributions or that our distributions will not grow over time and a portion of our distributions could be a return of capital
4. 59Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering
5. 60If we issue preferred stock, the net asset value and market value of our common stock will likely become more volatile
6. 61Holders of any preferred stock we might issue would have the right to elect members of our Board of Directors and class voting rights on certain matters
7. 62The net asset value per share of our common stock may be diluted if we sell shares of our common stock in one or more offerings at prices below the then current net asset value per share of our common stock

GENERAL RISKS

1. 63We are operating in a period of capital markets volatility and economic uncertainty. The conditions have materially and adversely affected debt and equity capital markets in the United States, and any future volatility or instability in capital markets may have a negative impact on our business and operations
2. 64Political, social and economic uncertainty creates and exacerbates risks
3. 65Global economic, regulatory and market conditions may adversely affect our business, results of operations and financial condition, including our revenue growth and profitability
4. 66Increased geopolitical unrest, terrorist attacks, or acts of war may affect any market for our common stock, impact the businesses in which we invest, and harm our business, operating results, and financial conditions
5. 67Changes in laws or regulations governing our operations may adversely affect our business or cause us to alter our business strategy
6. 68The effect of global climate change may impact the operations of our portfolio companies
7. 69Changes to United States tariff and import/export regulations may have a negative effect on our portfolio companies and, in turn, harm us
8. 70Internal and external cyber threats, as well as other disasters, could impair our ability to conduct business effectively
9. 71We are highly dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay distributions
10. 72These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay distributions to our stockholders
11. 73We are subject to risks associated with artificial intelligence and machine learning technology
12. 74We are subject to risks related to corporate social responsibility
13. 75We maintain our cash at financial institutions, often in balances that exceed federally insured limits