Prospect Capital Company (NASDAQ:) has disclosed its monetary outcomes for the second quarter of the fiscal yr 2024. The corporate reported internet funding revenue of $96.9 million, or $0.24 per widespread share, and a internet asset worth (NAV) of $3.68 billion, equating to $8.92 per widespread share. This NAV represents a lower of $0.33 per share from the earlier quarter. Prospect Capital additionally introduced month-to-month money distributions to shareholders at $0.06 per share for the upcoming months of February, March, and April.

Key Takeaways

• Prospect Capital’s internet funding revenue stood at $96.9 million for the December quarter.
• The online asset worth per widespread share decreased by $0.33 from the earlier quarter to $8.92.
• The corporate has maintained a internet debt fairness ratio of 46.2% and won’t improve its leverage past the goal vary of 0.7 to 0.85 debt-to-equity.
• Month-to-month money distributions of $0.06 per share have been introduced for the following three months.
• Prospect Capital has a diversified funding portfolio, with a good portion in first-lien and second-lien debt.
• The corporate’s funding technique contains non-public fairness, actual property, and structured credit score, with a long-term liabilities ladder.
• Over $1.7 billion has been raised by perpetual most well-liked inventory, and the agency holds investment-grade scores from a number of businesses.

Firm Outlook

• Prospect Capital has invested over $20.6 billion throughout 420 investments since its inception.
• The corporate has a diversified funding technique and a portfolio that features a mixture of debt and fairness investments.
• Prospect Capital’s subordinated structured credit score portfolio has generated important cumulative money distributions.

Bearish Highlights

• The online asset worth per widespread share has seen a lower within the latest quarter.
• Non-accruals, though minimal, are current within the portfolio.

Bullish Highlights

• Prospect Capital holds $4.7 billion of unencumbered belongings, representing about 60% of its whole portfolio.
• The corporate enjoys sturdy lender assist with $1.95 billion of commitments from 53 banks.
• Prospect Capital’s investment-grade scores and diversified funding method present monetary stability.

Misses

• There was an sudden spike within the allocation to Prospect administration through the quarter.

Q&A Highlights

• Administration mentioned methods for portfolio administration, together with refinancing choices and potential gross sales of positions.
• The corporate expects the spiked allocation to Prospect administration to return to round $5 million per quarter.
• Prospect Capital is contemplating the longer term composition of its portfolio, with an expectation of a lesser share of their general steadiness sheet over time.

Prospect Capital Company has proven resilience with its diversified funding method and secure monetary backing. The corporate’s dedication to sustaining a prudent debt-to-equity ratio and its skill to safe long-term liabilities level to a strategic give attention to sustainable development. The latest sale within the pupil housing portfolio and lively administration of its CLO e-book exhibit Prospect Capital’s proactive method to asset administration. With a strong base of investment-grade scores and a profitable observe report of elevating capital, the corporate is positioned to navigate the monetary markets and proceed its distribution to shareholders.

InvestingPro Insights

Prospect Capital Company (PSEC) has not too long ago revealed its monetary standings, with a highlight on its dividend-paying capabilities and the challenges it faces when it comes to liquidity and free money movement. Listed below are some key insights primarily based on real-time information and InvestingPro Suggestions:

InvestingPro Knowledge signifies a market capitalization of $2.22 billion, reflecting the corporate’s dimension and presence available in the market. Regardless of a difficult P/E ratio of -26.68, Prospect Capital has managed to attain a income development of 19.04% during the last twelve months as of Q1 2024. This development is additional demonstrated by a quarterly income improve of 16.56% in Q1 2024, showcasing the corporate’s skill to increase its monetary base.

A formidable dividend yield of 12.39% underscores the corporate’s dedication to return worth to shareholders, a reality bolstered by an InvestingPro Tip that highlights Prospect Capital’s observe report of sustaining dividend funds for 21 consecutive years. This consistency is a key issue for income-focused buyers.

Nevertheless, there are areas of concern as effectively. The corporate’s short-term obligations exceed its liquid belongings, which might pose a threat in sustaining operational fluidity and assembly rapid monetary obligations. Furthermore, the valuation implies a poor free money movement yield, suggesting that the corporate will not be producing sufficient money after capital expenditures to fulfill debt and dividends, which might impression its long-term sustainability.

Prospect Capital’s skill to remain worthwhile during the last twelve months, as famous in one other InvestingPro Tip, is a testomony to its monetary administration and strategic funding selections.

For readers concerned about a deeper evaluation, there are further InvestingPro Suggestions accessible on the corporate, which may be accessed at https://www.investing.com/professional/PSEC. To reinforce your analysis expertise, use the coupon code PRONEWS24 to get an extra 10% off a yearly or biyearly Professional and Professional+ subscription. This provide not solely offers monetary insights but in addition features a whole of 5 insightful suggestions associated to Prospect Capital Company, aiding buyers in making extra knowledgeable selections.

Full transcript – Prospect Capital (PSEC) Q2 2024:

Operator: Good day, and welcome to the Prospect Capital Second Quarter Fiscal Yr 2024 Earnings Launch and Convention Name. All individuals might be in listen-only mode. [Operator Instructions] Please observe this occasion is being recorded. I’d now like to show the convention over to John Barry, Chairman and CEO. Please go forward.

John Barry: Thanks, Betsie. Becoming a member of me on the decision right now are Grier Eliasek, our President and Chief Working Officer; and Kristin Van Dask, our Chief Monetary Officer. Kristin?

Kristin Van Dask: Thanks, John. This name accommodates forward-looking statements which can be supposed to be topic to secure harbor safety. Future outcomes are extremely more likely to fluctuate materially. We don’t undertake to replace our forward-looking statements. For added disclosure, see our earnings press launch and 10-Q filed beforehand and accessible on our web site prospectstreet.com. Now, I am going to flip the decision again over to John.

John Barry: Thanks, Kristin. Within the December quarter, our internet funding revenue or NII was $96.9 million or $0.24 per widespread share. Our NAV stood at $3.68 billion or $8.92 per widespread share, down $0.33 from the prior quarter. Since inception in 2004 Prospect has invested $20.6 billion throughout 420 investments exiting 287 of these investments. Within the December quarter our internet debt fairness ratio was 46.2% down 27.9 share factors from March 2020 and personal 0.3 share factors from the September 2023 quarter as we proceed to run an beneath leveraged steadiness sheet, which has been the case for us over a number of quarters years. We’ve no plans to extend our precise drawn debt leverage past our historic goal of 0.7 to 0.85 debt-to-equity and we’re at present considerably beneath such vary. We’re saying month-to-month money widespread shareholder distributions of $0.06 per share for every of February, March April. These 3 months characterize the 78th, 79th and eightieth consecutive 0.06 p.c per share money distribution. In step with previous follow, we plan on saying our subsequent share of shareholder distribution in Could. Since our IPO almost 20 years in the past by our April 2024 distribution on the present share depend, we could have distributed $20.76 per widespread share to unique shareholders, aggregating roughly $4.2 billion in cumulative distribution to all widespread shareholders. Thanks. I’ll now flip the decision over to Grier.

Grier Eliasek: Thanks, John. Our scale platform with $8.9 billion of belongings and undrawn credit score at Prospect Capital Company continues to ship strong efficiency within the present dynamic atmosphere. Our skilled staff consists of almost 150 professionals, which represents one of many largest center market funding teams within the business. With our scale, longevity, expertise in deep bench, we proceed to give attention to a diversified funding technique that spans third-party non-public fairness from sponsor associated lending, direct non-sponsor lending, Prospect sponsored working and monetary buyouts, structured credit score and actual property yield investing. In step with previous cycles, we anticipate through the subsequent downturn to see a rise in secondary alternatives coupled with wider unfold major alternatives with a pullback from different funding teams, notably extremely leveraged ones. In contrast to many different teams, now we have maintained and proceed to keep up important dry powder and steadiness sheet flexibility that we anticipate will allow us to capitalize on such enticing alternatives as they come up. This range of origination approaches permits us to supply a broad vary and excessive quantity of alternatives, then choose in a disciplined bottoms up method the alternatives we deem to be probably the most enticing on a threat adjusted foundation. Our staff usually evaluates hundreds of alternatives yearly and invests in a disciplined method in a low single digit share of such alternatives. Our non-bank construction offers us the pliability to spend money on a number of ranges of the company capital stack with a desire for secured lending and senior loans. In step with our funding technique, our secured lending and first-lien combine has continued to extend. As of December, our portfolio at honest worth comprised 58.7% first-lien debt, up 1.4% from the prior quarter, 15.5% second-lien debt, down 0.4% from the prior quarter, 7.9% subordinated structured notes with underlying secured first-lien collateral, down 0.2% from the prior quarter and 17.8% unsecured debt and fairness investments, down 0.8% from the prior quarter, leading to 82.1% of our investments being belongings with underlying secured debt benefiting from borrower pledge collateral, that is up 0.8% from the prior quarter. Prospect’s method is one which generates enticing threat adjusted yields and our performing interest-bearing investments had been producing an annualized yield of 12.3% as of December 2023, a lower of 0.4 share factors from the prior quarter. Our curiosity revenue within the December quarter was 92.3% of whole funding revenue, reflecting a robust recurring income profile to our enterprise. We additionally maintain fairness positions in sure investments. They’ll act as yield enhancers or capital beneficial properties contributors as these positions generate distributions. We have continued to prioritize senior and secured debt with our originations to guard in opposition to draw back threat, whereas attaining above market yields by credit score choice self-discipline and a differentiated origination method. As of December, we held 126 portfolio firms, a lower of two for the prior quarter, the honest worth of $7.6 billion, a lower of roughly $105 million. We additionally proceed to spend money on a diversified vogue throughout many various portfolio firm industries with a desire for avoiding cyclicality and with no important business focus. The biggest is 17.8%. As of December, our asset focus within the power industries stood at 1.4%. Resort, restaurant, leisure sector 0.2% and retail business 0.3%. Non accruals as a share of whole belongings stood at roughly 0.2% in December, no change from the prior quarter. Weighted common center market portfolio internet leverage was 5.4x EBITDA, considerably beneath our reporting friends and our weighted common EBITDA per portfolio firm was $110 million. Originations within the December quarter aggregated $171 million. We additionally acquired $131 million of repayments, gross sales and exits as a validation of our capital preservation goal, leading to internet originations of over $40 million. As we proceed to take a cautious method in direction of new credit score underwriting given macroeconomic situations. Throughout the December quarter, our originations comprised 53.8% middle-market lending, 30.2% actual property, 10.5% middle-market lending and buyouts and 5.5% subordinated structured notes investments. So far, we deployed important capital in the actual property area by our non-public REIT technique, largely centered on multifamily workforce, stabilized yield acquisitions with enticing in place in largely mounted fee multiyear financing. So far, on a cumulative foundation, we have invested in $3.8 billion in 108 properties together with 3 triple internet lease, 81 multifamily, 8 pupil housing 12, self-storage and 4 senior dwelling. Within the present larger financing price atmosphere, which has not too long ago began to abate a bit. Our new funding focus contains most well-liked fairness buildings with important third-party capital assist beneath our funding attachment factors. NPRC, our non-public REIT has actual property properties which have benefited during the last a number of years from rising rents, exhibiting the inflation hedge nature of this enterprise phase, strong occupancies, excessive collections, make money working from home tailwinds, excessive returning worth added renovation packages and enticing financing recapitalizations, leading to a rise over time in money yields as a validation of this revenue development enterprise alongside our company credit score companies. NPRC as of December and never together with partially exited offers the place we have acquired again greater than our capital invested from distributions and recapitalization has exited utterly 46 properties at a median internet realized IRR to NPRC of 25.2%, Common realized internet multiples invested capital of two.5 occasions and an goal to redeploy capital into new property acquisitions, together with with repeat property supervisor relationships. Our structured credit score enterprise has delivered enticing money yields, Demonstrating the advantages of pursuing majority stakes, working with world class administration groups, offering sturdy collateral underwriting by major issuance and specializing in favorable threat adjusted alternatives. As of December, we held $601 million throughout 33 non-recourse subordinated structured notes investments. We’ve centered on amortizing our subordinated structured notes portfolio, whereas electing to develop our different funding methods. In consequence, the structured notes portfolio now contains lower than 8% of our funding portfolio and is predicted to lower over time. These underlying structured credit score portfolios comprised almost 1600 loans. Within the December 2023 quarter, this portfolio generated a GAAP yield of 5.8%, down 4.9% from the prior quarter and a money yield of 20%, up 2.5% from the prior quarter. The distinction represents amortization of our price foundation that returns capital to prospect that we intend on using for different funding methods and company functions. As of December, our present subordinated structured credit score portfolio has generated $1.45 billion in cumulative money distributions to us, representing over 118% of our unique funding. By December, we have additionally exited 15 investments with a median realized IRR of 12% and money on money a number of of 1.3 occasions. Thus far within the present March quarter, throughout our general enterprise, we have booked $63 million in originations and skilled $22 million of repayments for roughly $41 million of internet originations. Originations have consisted of 62.3% middle-market lending and 37.7% actual property. Thanks. I am going to now flip the decision over to Kristin. Kristin?

Kristin Van Dask: Thanks Grier. We imagine our prudent leverage, diversified entry to matched e-book funding, substantial majority of unencumbered belongings, weighting towards unsecured mounted fee debt, avoidance of unfunded asset commitments and lack of near-term maturities exhibit each steadiness sheet power in addition to substantial liquidity to capitalize on enticing alternatives. Our firm has locked in a ladder of liabilities extending 28 years into the longer term. Our whole unfunded eligible commitments to portfolio firms totals roughly $28 million representing roughly 0.4% of our belongings. Our mixed steadiness sheet money and undrawn revolving credit score facility commitments at present stand at roughly $1.02 billion. We’re a pacesetter and innovator in our market. We had been the primary firm in our business to difficulty a convertible bond, develop a notes program, difficulty beneath a bond and fairness ATM, purchase one other BDC, difficulty a listed perpetual most well-liked, undertake a most well-liked program and lots of different lists of firsts. Shareholders and unsecured collectors alike ought to admire the considerate method differentiated in our business, which now we have taken towards building of the right-hand facet of our steadiness sheet. As of December 2023, we held roughly $4.7 billion of our belongings as unencumbered belongings representing roughly 60% of our portfolio. The remaining belongings are pledged to Prospect Capital Funding, a non-recourse SPV. We at present have $1.95 billion of commitments from 53 banks, demonstrating sturdy assist of our firm from the lender group with the variety unmatched by every other firm in our business. Shortly after the well-publicized financial institution failures in March 2023, we added two new banks and upsized an present financial institution inside our credit score facility. The power revolves till September 2026 adopted by a yr of amortization with curiosity distributions persevering with to be allowed to us. Our drawn pricing is now SOFR plus 2.05%. Exterior of our revolver and benefiting from our unencumbered belongings we have issued at Prospect Capital Company, together with up to now few years, a number of kinds of funding grade unsecured debt, together with convertible bonds, institutional bonds, child bonds and program notes. All of most of these unsecured debt don’t have any monetary no covenants, no asset restrictions and no cross defaults with our revolver. We get pleasure from an investment-grade BBB- ranking from S&P, an investment-grade Baa3 ranking from Moody’s (NYSE:), an investment-grade BBB- ranking from Kroll, an investment-grade BBB ranking from Egan-Jones and an investment-grade BBB Low ranking from DBRS. We at present have 5 funding grade scores Greater than every other firm in our business, all of those scores have secure outlooks. We have now tapped the unsecured time period debt market on a number of events to ladder our maturities and to increase our legal responsibility length out 28 years. Our debt maturities lengthen by 2052 with so many banks and debt buyers throughout so many unsecured and non-recourse debt tranches, we considerably lowered our counterparty threat over time. Within the December 2023 quarter, now we have continued using our revolving credit score and have continued with our weekly programmatic Web issuance on an environment friendly funding. To-date, now we have raised over $1.7 billion in combination issuance of our perpetual most well-liked inventory throughout our most well-liked packages and listed most well-liked, together with $66.5 million within the December 2023 quarter and $11.7 million so far within the March 2024 quarter. Throughout the December 2023 quarter, we commenced a young provide to buy for money any and all of 5,882,351 shares of excellent 5.35% perpetual most well-liked inventory, leading to 631,194 shares validly tendered at a value of $15.88 plus accrued and unpaid dividends for a complete consideration of $16 per share. We’ve 4 separate unsecured debt issuances aggregating $1.2 billion not together with our program notes with maturities extending by October 2028. As of December 2023, we had $391 million of program notes excellent with staggered maturities by March 2052. At December 31, 2023, our weighted common price of unsecured debt financing was 4.15%, a rise of 0.07% from September 30, 2023 and a lower of 0.18% from December 31, 2022. Now, I am going to flip the decision again over to John.

John Barry: Thanks, Kristin. We will now reply any questions.

Operator: [Operator Instructions]. The primary query right now comes from Finian O’Shea with Wells Fargo. Please go forward.

Finian O’Shea: Hello, good morning, everyone. Thanks for having me on. First query on the popular inventory, you’ve been shopping for down the Collection A. Ought to we anticipate you exercising the issuer optionally available conversion characteristic when these Collection A preferreds are in the end out of the way in which?

Grier Eliasek: Hello, Finian. Thanks on your query. I am undecided what you imply by shopping for down the Collection A. I do not suppose we have been doing that. However now we have no plans to train such possibility and we truly can train such possibility for an additional 2.5 years due to an enterprise associated to our listed most well-liked, however now we have no plans to take action. Anyway, and truly transferring the opter path, we simply launched a brand new collection that is not convertible in any respect into widespread inventory, so we’re truly are transferring within the different path.

Finian O’Shea: Okay, admire that. And only a follow-up on the REIT, it appears such as you offered a property there this quarter. I hope I did not get this one incorrect as effectively. However curious given the market atmosphere, the headlines all of us learn, like how that exit shook out. Any coloration you may give on the IRR you skilled? What you offered versus your mark? what the cap fee you offered that was? would actually admire coloration there and that is all for me. Thanks.

Grier Eliasek: Positive, thanks. The asset we offered was an asset within the pupil lending sorry, pupil housing portfolio, pupil housing e-book is definitely performing fairly effectively and there may be important purchaser curiosity in that phase of the actual property market. So, we’re blissful to have diversification in our actual property portfolio. I do know we offered it near our mark. I haven’t got the IRR at our fingertips, however I do know it was effectively into the double digits. General, inside actual property, our e-book is doing fairly effectively. Recall, we give attention to workforce housing multifamily. We do not spend money on workplace. We do not spend money on retail. These are the areas which were most deeply impacted, after all, inside actual property, kind of on the incorrect facet of the digital divide, if you’ll. We’re on the fitting facet of the digital divide. Of us want a spot to reside. Multifamily has benefited considerably from Issues and affordability points within the single-family housing market, holding individuals of their residences, you truly see much less turnover and folk need to and want to remain of their residences for lots longer. We even have a Larger combine publicity into markets just like the Midwest, for instance, and chosen mid Atlantic Northeast markets which have had much less provide additions in comparison with the Western states and sure markets within the Southeast, locations like Nashville and Austin, for instance, have had large surges of provide and we have declined to buy any properties in these areas due to provide considerations. Even in these markets with further provide, if you have a look at the ahead pipeline previous 2024, it kind of falls off a cliff. So, most folk within the business anticipate absorption to happen and over the long run for important constructive hire development to proceed from there. So, we’re very blissful to have our actual property e-book and it is performing effectively.

Finian O’Shea: Superior. Thanks, Grier. And I used to be simply considering if I can sneak in a 3rd. A subject we have touched on over time, after all, which has been kind of operating off the CLO e-book. Simply questioning with the kind of resurgence and resets and refis beginning to construct up, is there any – are you compelled to pursue that type of technique, type of rebuild the CLO e-book, lengthen these out or ought to we nonetheless view them as runoff or such? And that’s all for me. Thanks.

Grier Eliasek: Positive. So, what we do with our CLO e-book is basically no completely different than what we do with any of our positions on an ongoing foundation, together with actual property, together with middle-market lending, together with middle-market buyouts. Once we study a spread of choices for an funding, we’re wanting at all times on the NPV, the online current worth, of every potential possibility, and we’re needing, after all, to pick the best NPV possibility. With CLOs, the vary of choices for an present funding and it’s an actively managed e-book, contains calling in investments and we get the good thing about having name premium optionality as majority holder in our e-book right here, that is no 1. Quantity 2, refinancing a number of tranches of the legal responsibility stack, we’re pursuing that in certainly one of our offers, for instance. Quantity 3 can be, as you referenced, extending or resetting a deal. We’re – quantity 4 can be you are promoting a place on a secondary foundation. So, we’re continually all 4 of these choices. Our want isn’t a one dimension matches all kind of tops down, however quite bottoms up. It’s a diversified portfolio of over 30 positions and so, what’s applicable for one deal will not be applicable for an additional deal. However usually, anticipate for that e-book to be a lesser share of our portfolio extra time as different methods grown and general steadiness sheet grows, we have got a really beneath leveraged steadiness sheet with numerous dry powder. After which on a greenback foundation, I’d anticipate for it to say no over time as effectively. We have got important amortization occurring. It’s true within the final couple of years, due to the place legal responsibility spreads have been, exercise for refinancings and extensions have been considerably muted. Within the present atmosphere, as you identified, legal responsibility spreads are beginning to tighten up, so there may be some extra optionality there. And it would not be out of the query to do a refinancing and nonetheless proceed to amortize at the next NPV or do an extension and nonetheless promote. So, these aren’t mutually unique exits for us. However over time, I imply, this e-book at one level was nearly 20% of our portfolio and now it is within the 7%. It is declined considerably, and I’d anticipate for that to proceed.

Operator: The subsequent query comes from Robert J. Dodd with Raymond James. Please go forward.

Robert J. Dodd: Good morning. You simply answered a lot of the opposite query. So, the one different one I had was on the allocation to Prospect administration, it spiked up this quarter. Is {that a} new regular or was there any one-time expense embedded in that, I imply, possibly associated to the popular tender or no matter. Are you able to give us any coloration on that? I imply, it was about $10 million sequentially.

Grier Eliasek: Positive. Thanks on your query. It isn’t the brand new regular. We must always anticipate a lesser quantity, in all probability extra within the 5% vary per quarter going ahead, Robert, what you noticed there was a few issues. One, comping it to the previous. Every now and then, we could have a contra expense that can fortunately scale back that quantity. We had a big litigation settlement in our favor up to now, which lowered that quantity related to aiding certainly one of our portfolio firms. After which there’s some kind of catch-up allocation on prime of that. However the reply is not any, that is not the brand new regular and we must always anticipate extra within the vary of $5 million per quarter.

Robert J. Dodd: Obtained it. I admire it. Thanks.

Operator: This concludes our question-and-answer session. I wish to flip the convention again over to John Barry for any closing remarks.

John Barry: Properly, thanks everybody. Have a beautiful day and we’ll see you in 90 days. Thanks all. Bye.

Operator: Thanks. [Operator Closing Remarks].

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