Business Context and Reporting Period
Company: Prospect Capital Corp (PSEC)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended March 31, 2021
Business Overview: Prospect Capital is a closed-end, externally managed Business Development Company (BDC) and Regulated Investment Company (RIC). It primarily lends to and invests in middle-market privately-held companies through four strategies: lending to companies, purchasing controlling equity positions, investing in real estate companies (via National Property REIT Corp), and investing in structured credit (CLOs).
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2021 | Nine Months Ended Mar 31, 2020 |
|---|---|---|---|
| Total Investment Income | $159,456 | $474,628 | $478,301 |
| Net Investment Income | $73,402 | $212,508 | $207,421 |
| Net Realized & Unrealized Gains (Losses) | $185,841 | $526,028 | ($383,611) |
| Net Increase in Net Assets from Operations | $246,408 | $720,121 | ($178,837) |
| Earnings Per Share (Diluted) | $0.63 | $1.88 | ($0.49) |
| Net Asset Value (NAV) per Share | $9.38 | $9.38 | $7.98 |
| Total Assets | $6,005,488 | $6,005,488 | $5,300,163 |
| Total Investments (Fair Value) | $5,883,328 | $5,883,328 | $5,232,328 |
| Cash and Cash Equivalents | $100,989 | $100,989 | $44,561 |
| Total Liabilities | $2,303,648 | $2,303,648 | $2,244,302 |
| Net Assets | $3,701,840 | $3,701,840 | $3,055,861 |
Debt and Liquidity
- Revolving Credit Facility: $343,537 outstanding (as of March 31, 2021) with $424,167 available.
- Public Notes: $892,342 net carrying value.
- Prospect Capital InterNotes: $660,973 net carrying value.
- Convertible Notes: $262,755 net carrying value.
- Asset Coverage Ratio: 269.0% based on outstanding senior securities representing indebtedness.
- Portfolio Turnover Rate: 12.17% (annualized for nine months ended March 31, 2021).
Material Changes vs. Prior Period
- Profitability Reversal: The Company reported a net increase in net assets of $720.1 million for the nine months ended March 31, 2021, compared to a net decrease of $178.8 million in the same period in 2020. This turnaround was driven primarily by a significant net change in unrealized gains of $518.6 million in the current period versus unrealized losses of $383.3 million in the prior period.
- Investment Portfolio Growth: Total investments at fair value increased by approximately $651 million (12.4%) from June 30, 2020, to March 31, 2021, reaching $5.88 billion.
- NAV Appreciation: Net Asset Value per common share increased from $8.18 at June 30, 2020, to $9.38 at March 31, 2021.
- Debt Management: The Company issued $400 million in new 2026 Notes and redeemed $233.8 million of 2024 Notes during the period. It also actively tendered and repurchased portions of its 2022 and 2025 Convertible Notes.
- Operating Expenses: Total operating expenses for the nine months ended March 31, 2021, were $262.1 million, a decrease of $8.8 million compared to $270.9 million in the prior year period, largely due to lower interest and credit facility expenses.
Guidance, Outlook, and Risks
- Forward-Looking Statements: Management cautions that actual results may differ materially from expectations due to risks including the impact of the global health pandemic (COVID-19), economic instability, interest rate volatility, and the ability of portfolio companies to achieve objectives.
- LIBOR Transition: The Company notes the impact of the cessation of LIBOR settings and is evaluating the impact of reference rate reform on its contracts.
- Portfolio Risks: Significant risks include credit risk, liquidity risk, and the valuation of Level 3 assets (which comprise the vast majority of the portfolio). The Company highlights that valuations are based on unobservable inputs and may fluctuate.
- Equity Offerings: The Company is seeking stockholder approval to sell common stock below NAV in future offerings. It also continues to issue Preferred Stock (Series A1 and M1) and InterNotes to fund operations and investments.
- Unusual Items: The Company recorded a net loss of $18.4 million on the extinguishment of debt during the nine months ended March 31, 2021, primarily due to tender offers and redemptions of convertible and public notes.
Key Facts for Investor Verification
- Valuation Methodology: Verify the assumptions used for Level 3 fair value measurements, particularly the discount rates and EBITDA multiples applied to the $5.8 billion portfolio, as these significantly impact reported earnings.
- Debt Extinguishment Costs: Review the specific losses recorded on debt repurchases ($18.4 million for the nine-month period) to understand the impact on cash flow and future interest expense.
- Non-Accrual Assets: Confirm the status of loans on non-accrual, which represented approximately 0.7% of total assets at fair value as of March 31, 2021.
- Preferred Stock Conversion: Monitor the conversion of Preferred Stock to Common Stock, which occurred during the period, and its dilutive effect on common shareholders.
- Revolving Credit Facility Extension: Note the subsequent event regarding the extension of the Revolving Credit Facility in April 2021, which reduced the interest rate spread and extended the maturity.