Business Context and Reporting Period
Company: Prospect Capital Corporation (Prospect Capital)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: Prospect Capital is a closed-end investment company organized as a Business Development Company (BDC) under the Investment Company Act of 1940. It invests primarily in senior and subordinated debt and equity of middle-market, privately-held companies, with a historical concentration in energy and industrial sectors. The company is a non-diversified company.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2009 | Nine Months Ended Mar 31, 2009 | Net Assets (Mar 31, 2009) |
|---|---|---|---|
| Total Investment Income | $20,669 | $78,681 | $444,024 |
| Net Investment Income | $11,720 | $47,182 | |
| Net Increase in Net Assets from Operations | $15,331 | $35,853 | |
| Net Asset Value (NAV) Per Share | $14.19 | $14.19 | |
| Dividends Declared Per Share | $0.41 | $1.21 | $137,567 |
| Credit Facility Outstanding | $137,567 | $137,567 | |
| Debt-to-Equity Ratio | 0.31 to 1 | 0.31 to 1 | $449 |
| Cash and Cash Equivalents | $449 | $449 |
Note: All figures in thousands except per share data.
Material Changes vs. Prior Period
- Operating Results: Net increase in net assets from operations for the three months ended March 31, 2009, was $15.3 million, a significant improvement from a net decrease of $1.3 million in the same period in 2008. For the nine-month period, the increase was $35.9 million compared to $3.6 million in the prior year.
- Investment Income: Total investment income decreased slightly for the quarter ($20.7M vs $22.0M) due to a sharp decline in "Other Income" (primarily overriding royalty interests). However, for the nine-month period, total investment income increased to $78.7M from $56.0M, driven by higher interest and dividend income.
- Unrealized Gains/Losses: The company recorded a net unrealized appreciation of $3.6 million for the quarter, reversing the $14.4 million unrealized depreciation seen in the prior year's quarter. This was driven by write-ups in Gas Solutions Holdings, Inc. (GSHI), H&M Oil & Gas, and NRG Manufacturing, partially offset by write-downs in other portfolio companies.
- Non-Accrual Status: Four loan investments were on non-accrual status as of March 31, 2009 (Appalachian Energy Holdings, Integrated Contract Services, Wind River Resources, and Change Clean Energy/Biomass), totaling $69.5 million in principal. This represents an increase from the prior period, resulting in $3.9 million of foregone interest for the quarter.
- Capitalization: Borrowings under the credit facility increased from $91.2 million (June 30, 2008) to $137.6 million (March 31, 2009) to fund new investments. The company also raised $12.3 million in equity during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Market Conditions: Management notes that global capital markets remain turbulent with weaker liquidity and credit quality. However, the company believes it is well-positioned due to its conservative debt-to-equity ratio (0.31:1) compared to the 1:1 regulatory limit.
- Portfolio Valuation: Valuations are determined by the Board using a multi-step process involving independent valuation firms. Significant write-downs occurred in distressed assets (e.g., Integrated Contract Services, Change Clean Energy, Yatesville Coal) based on liquidation or asset-based valuations. Conversely, GSHI was written up based on discounted cash flow and public comparables.
- Unusual Items:
- Net Profit Interest Settlement: The company settled net profit interests in IEC Systems LP and Advanced Rig Services LLC for $12.6 million during the nine-month period, which was immediately reinvested as senior secured debt.
- Foreclosures: The company completed foreclosures on Integrated Contract Services and Change Clean Energy assets, taking ownership of underlying properties and equity.
- Risks: Key risks include the credit quality of portfolio companies (many of which are non-investment grade), the impact of general economic conditions on the energy and industrial sectors, and the ability to extend the revolving credit facility maturing in June 2009.
- Subsequent Events: On April 27, 2009, the company completed an underwritten equity offering of 3.68 million shares at $7.75 per share, raising $28.5 million in gross proceeds.
Investor Verification Checklist
- Credit Facility Extension: Verify the status of negotiations to extend the $200 million Rabobank facility, which matures on June 6, 2009.
- Non-Accrual Recovery: Monitor the recovery prospects and valuation adjustments for the four loans on non-accrual status, which represent approximately 15.7% of net assets.
- Equity Issuance Dilution: Assess the impact of recent equity offerings (March and April 2009) issued below NAV on shareholder value.
- Portfolio Concentration: Review the continued concentration in energy and energy-related industries despite the name change and strategy shift.
- Legal Proceedings: Confirm the final resolution of the Dallas Gas Partners (DGP) litigation and the status of the counterclaim for damages.