Prospect Capital Announces Financial Results for Fiscal September 2024 Quarter

NEW YORK, Nov. 08, 2024 (GLOBE NEWSWIRE) -- Prospect Capital Corporation (NASDAQ:PSEC) ("Prospect", "our", or "we") today announced financial results for our fiscal quarter ended September 30, 2024.

"We are rightsizing our common shareholder distribution rate as we continue to execute our long-term income and total return strategy by rotating structured credit CLO equity and real estate investments into our core business of first lien senior secured middle market loans, including sometimes with selected equity co-investments," said John Barry, Chairman and Chief Executive Officer of Prospect.

"Our preferred shareholder cash distributions continue at the contractual rates of such distributions," said Mr. Barry.

"CLO equity and real estate investments have generated solid unlevered investment-level gross cash IRRs (12% for CLO equity and 24% for real estate property exited investments since inception of such strategies in 2011 and 2012, respectively), but with more variability compared to our core business," said Mr. Barry. "As we rotate into lower variability middle-market corporate investments, our recurring income as shown by interest income as a percent of total income has reached 94%, an increase of over 800 basis points for the year-over-year quarterly period."

"We still perceive CLO equity and real estate investments as attractive risk-adjusted strategies," said Mr. Barry. "We expect another fund managed by an affiliate of Prospect Capital Management L.P. to continue to focus on new CLO equity investments, with less targeted Prospect Capital Corporation balance sheet investment in this strategy going forward."

"CLO equity has decreased to 6% of our assets (versus 18% as of September 30, 2017) as we execute on our rotation strategy to emphasize first lien senior secured lending, with such mix growing significantly for us," said Mr. Barry. "CLO equity typically generates attractive cash-on-cash yields, but such yields tend to be higher in the initial years while lower in the later years, thereby resulting in variability that we seek to dampen by focusing more on our core business at Prospect Capital Corporation."

"Real estate investing is a total return strategy that has been a solid fit for Prospect Capital Corporation during periods of low short-term and medium-term interest rates," said Mr. Barry.

"We have exited dozens of our value-add properties in the past several years after achieving strong rent and net operating income performance," said Mr. Barry. "We have also generated substantial exit-related income from real estate property sales over the years, with such exit-related income decreasing recently. While we expect to monetize further real estate property investments with attractive returns, we are cautious about future exit-related income."

"Over the last seven weeks, the Fed has reversed 75 basis points of prior short term interest rate increases, with market expectations for more reductions going forward, which may lower future shareholder distribution rates across the BDC and related credit industries," said Mr. Barry. "We have already factored in the declining forward curve for short term interest rates for our common shareholder distribution declaration today."

"Over the past two decades, Prospect Capital Corporation has invested $11.4 billion in over 300 exited investments that have earned a 13% unlevered investment-level gross cash IRR to Prospect Capital Corporation," said Grier Eliasek, President and Chief Operating Officer of Prospect. "This two-decade time period includes the GFC and has been dominated in general by low reference interest rates. The majority of peer BDCs have not been battle tested by such general economic downturn and other headwinds."

"Our core business of directly-originated, non-syndicated first lien senior secured loans to U.S. middle-market companies, sometimes with selected equity co-investments, offers multiple compelling attributes," said Mr. Eliasek. "First lien loans as a percentage of total investments have now reached 65%, an increase of over 700 basis points for the year-over-year quarterly period."

"Such core business with proprietary opportunity flow offers higher spreads than lending to much larger companies, which loans are experiencing significant spread compression for other lenders focused on that more competitive and commoditized larger end of the market," said Mr. Eliasek.

"Middle-market loans, by comparison, offer higher interest rate floors (often 250 to 400 basis points) versus loans to larger companies (which often have only 0 to 100 basis point floors), thereby providing better protection for yield and income when short-term interest rates decline," said Mr. Eliasek. "Such higher floors benefited Prospect Capital Corporation greatly when the Fed last sharply reduced such rates during the GFC."

"First lien senior secured middle-market loans, different from CLO equity and real estate investments, also are eligible for favorable financing with our efficient-cost revolving credit facility, helping to further enhance our net investment income," said Mr. Eliasek.

"With such core business middle-market investments, we also sometimes have an opportunity to structure investments with equity upside, including through warrants, convertible debt, and 2x liquidation preferences, with an objective to maximize current yields and total returns in a prudent and risk-adjusted fashion," said Mr. Eliasek.

"Many such investments that we are currently underwriting have targeted unlevered double-digit current yields and unlevered total returns of 12-15%+, with such yields and total returns further enhanced by our credit facility to lift targeted levered returns to 18-20%+," said Mr. Eliasek.

"Recent investments like RK Logistics, Discovery Point, and Druid City illustrate such non-syndicated middle-market focus where we also capture equity upside," said Mr. Eliasek.

"Our middle-market portfolio companies also have the potential to drive substantial synergistic value creation with add-on acquisitions, with examples including Valley purchasing Comet and R-V Industries making multiple acquisitions," said Mr. Eliasek.

"With such middle-market investments, we have a greater ability to add value to management teams that benefit from our experienced Prospect team of over 130 professionals in areas like board supervision, operational assistance, strategic planning, executive recruiting, add-on acquisition sourcing, and other important areas," said Mr. Eliasek.

"Our pipeline continues to build with additional non-syndicated first lien senior secured middle-market loans with selected equity co-investments, which we expect to deliver substantial benefits to Prospect Capital Corporation and its shareholders going forward," said Mr. Eliasek.

FINANCIAL RESULTS

All amounts in $000's except per share amounts (on weighted average basis for period numbers)

Quarter Ended

Quarter Ended

Quarter Ended

September 30, 2024

June 30, 2024

September 30, 2023

 

 

 

 

Net Investment Income ("NII")

$89,877

$102,922

$125,612

NII per Common Share

$0.21

$0.25

$0.31

Interest as % of Total Investment Income

94.0%

89.2%

85.7%

 

 

 

 

Net Income (Loss) Applicable to Common Shareholders

$(165,069)

$(9,050)

$94,011

Net Income (Loss) per Common Share

$(0.38)

$(0.02)

$0.23

 

 

 

 

Distributions to Common Shareholders

$77,358

$75,640

$73,252

Distributions per Common Share

$0.18

$0.18

$0.18

Cumulative Paid and Declared Distributions to Common Shareholders(1)

$4,384,924

$4,325,055

$4,088,041

Cumulative Paid and Declared Distributions per Common Share(1)

$21.25

$21.12

$20.58

Multiple of Net Asset Value ("NAV") per Common Share

2.6x

2.4x

2.2x

 

 

 

 

Total Assets

$7,592,705

$7,857,092

$7,853,828

Total Liabilities

$2,469,590

$2,559,171

$2,602,715

Preferred Stock

$1,612,302

$1,586,188

$1,470,247

Net Asset Value ("NAV") to Common Shareholders

$3,510,813

$3,711,733

$3,780,866

NAV per Common Share

$8.10

$8.74

$9.25

 

 

 

 

Balance Sheet Cash + Undrawn Revolving Credit Facility Commitments

$1,631,291

$1,357,577

$1,108,386

 

 

 

 

Net of Cash Debt to Total Assets

29.7%

30.5%

31.4%

Net of Cash Debt to Equity Ratio(2)

43.7%

44.7%

46.5%

Net of Cash Asset Coverage of Debt Ratio(2)

329%

323%

314%

 

 

 

 

Unsecured Debt + Preferred Equity as % of Total Debt + Preferred Equity

86.0%

80.3%

77.0%

Unsecured and Non-Recourse Debt as % of Total Debt

100.0%

100.0%

100.0%

(1) Declared dividends are through the January 2025 distribution. November through January 2025 distributions are estimated based on shares outstanding as of 10/29/2024.(2) Including our preferred stock as equity.

CASH COMMON SHAREHOLDER DISTRIBUTION DECLARATION

Prospect is declaring distributions to common shareholders as follows:

Monthly Cash Common Shareholder Distribution

Record Date

Payment Date

Amount ($ per share)

November 2024

11/26/2024

12/19/2024

$0.0450

December 2024

12/27/2024

1/22/2025

$0.0450

January 2025

1/29/2025

2/19/2025

$0.0450

Prospect expects to declare February 2025, March 2025, and April 2025 distributions to common shareholders in February 2025.

Taking into account past distributions and our current share count for declared distributions, since inception through our January 2025 declared distribution, Prospect will have distributed $21.25 per share to original common shareholders, representing 2.6 times September 2024 common NAV per share and 4.1 times the closing stock price on November 6, 2024, aggregating approximately $4.4 billion in cumulative distributions to all common shareholders.

Since Prospect's initial public offering in July 2004 through September 30, 2024, Prospect has invested over $21 billion across over 400 investments, exiting over 300 of these investments.

Drivers focused on growing NII and NAV include (1) our $2.25 billion targeted Floating Rate perpetual preferred stock offering, (2) greater utilization of our cost efficient revolving floating rate credit facility, (3) elevated short-term SOFR rates which boost asset yields, (4) optimization of portfolio company performance, and (5) increased primary and secondary originations of senior secured debt and selected equity investments targeting attractive risk-adjusted yields and total returns as we deploy dry powder from our underleveraged balance sheet.

Our senior management team and employees own over 27% of all common shares outstanding or $0.9 billion of our common equity as measured at NAV.

PORTFOLIO UPDATE AND INVESTMENT ACTIVITY

All amounts in $000's except per unit amounts

As of

As of

As of

September 30, 2024

June 30, 2024

September 30, 2023

 

 

 

 

Total Investments (at fair value)

$7,476,641

$7,718,243

$7,736,817

Number of Portfolio Companies

117

117

128

 

 

 

 

First Lien Debt

64.9%

60.3%

57.3%

Second Lien Debt

11.1%

13.6%

15.9%

Subordinated Structured Notes

6.2%

6.9%

8.1%

Unsecured Debt

0.1%

0.1%

0.1%

Equity Investments

17.7%

19.1%

18.6%

Mix of Investments with Underlying Collateral Security

82.2%

80.8%

81.3%

 

 

 

 

Annualized Current Yield, All Investments

9.7%

9.8%

10.3%

Annualized Current Yield, Performing Interest Bearing Investments

11.8%

12.1%

12.7%

 

 

 

 

Top Industry Concentration(1)

19.0%

19.1%

18.2%

Retail Industry Concentration(1)

0.1%

0.3%

0.3%

Energy Industry Concentration(1)

1.5%

1.6%

1.6%

Hotels, Restaurants & Leisure Concentration(1)

0.3%

0.3%

0.3%