Business Context and Reporting Period
Company: Prospect Capital Corporation (Prospect)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2012
Business Overview: Prospect is a closed-end investment company and Business Development Company (BDC) that invests primarily in senior and subordinated debt and equity of middle-market, privately-held companies. The company also invests in Collateralized Loan Obligations (CLOs).
Key Financial Metrics
| Metric | Six Months Ended Dec 31, 2012 | Six Months Ended Dec 31, 2011 |
|---|---|---|
| Total Investment Income | $289,671 | $122,605 |
| Net Investment Income | $173,243 | $64,385 |
| Net Realized Gain/(Loss) | ($6,348) | ($1,109) |
| Net Unrealized Appreciation/(Depreciation) | ($73,157) | $41,116 |
| Net Increase in Net Assets from Operations | $93,738 | $104,392 |
| Net Assets (End of Period) | $2,326,635 | $1,172,484 |
| Net Asset Value (NAV) Per Share | $10.81 | $10.69 |
| Dividends Declared Per Share | $0.61 | $0.61 |
Balance Sheet Highlights (Dec 31, 2012)
- Total Investments at Fair Value: $3,038,808 (Control: $649,380; Non-control/Non-affiliate: $2,341,162)
- Cash and Money Market Funds: $433,164
- Total Liabilities: $1,203,086
- Debt Obligations:
- Senior Convertible Notes: $847,500
- Senior Unsecured Notes: $100,000
- Prospect Capital InterNotes: $164,993
- Revolving Credit Facility: $0 (Fully repaid)
Material Changes vs. Prior Period
- Portfolio Growth: Net assets increased by 53.9% ($814.7 million) compared to June 30, 2012, driven primarily by equity issuances ($828.0 million net proceeds) and operating income.
- Revenue Surge: Total investment income increased 136% year-over-year (six-month comparison), driven by a larger portfolio, increased CLO investments, and significant dividend income from Energy Solutions and R-V Industries.
- Valuation Decline: Despite revenue growth, net assets from operations decreased due to a $73.2 million net unrealized depreciation. This was primarily caused by fair value reductions in Ajax Rolled Ring, Energy Solutions, H&M Oil & Gas, and R-V Industries.
- Debt Structure: The company fully repaid its $96 million revolving credit facility balance by period-end. Conversely, it significantly increased long-term debt, issuing $400 million in Senior Convertible Notes and $144.4 million in InterNotes during the period.
- Impairments: Recorded a realized loss of $12.2 million on Integrated Contract Services (ICS) due to other-than-temporary impairment.
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared monthly dividends of $0.110000 for December 2012 and $0.110025 for January 2013. Subsequent events indicate a slight increase to $0.110050 for February 2013.
- Capital Deployment: Management continues to focus on secured lending (first and second lien) and CLO investments. The annualized current yield on performing interest-bearing investments increased to 14.7% from 13.9% in the prior period.
- Key Risks:
- Valuation Volatility: A significant portion of the portfolio (Level 3 assets) relies on unobservable inputs. Fair values are subject to significant fluctuations based on operating results of portfolio companies (e.g., Ajax, Energy Solutions).
- Credit Risk: Nine loan investments were on non-accrual status as of December 31, 2012, with a fair value of $39.0 million (1.7% of net assets).
- Liquidity: While the credit facility is currently undrawn, the company relies on the ability to issue debt and equity to fund operations and dividends.
- Unusual Items: The company accrued $4.5 million in excise tax to retain a portion of taxable income. Significant one-time income included a $14.1 million make-whole fee from Energy Solutions and $24.3 million in structuring fees.
Investor Verification Checklist
- Verify Non-Accrual Exposure: Confirm the status and recovery prospects of the nine loans on non-accrual status (e.g., Borga, Manx, Wind River) totaling $162 million in principal.
- Assess Control Investment Valuations: Review the specific valuation methodologies and operating performance of major control investments (Ajax, First Tower, Energy Solutions) that drove the $73 million unrealized loss.
- Monitor Debt Maturities: Analyze the maturity profile of the $1.1 billion in debt obligations, noting that $150 million in convertible notes matures within 1-3 years.
- Check Equity Issuance Dilution: Evaluate the impact of the 75 million shares issued during the period on future per-share earnings and NAV.
- Review CLO Performance: Assess the performance of the $408 million CLO residual interest portfolio, which is sensitive to default rates and interest rate spreads.