Prospect Capital Corporation
Q3 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Good day and welcome to the Prospect Capital Third Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead, sir.

[John Barry:]

Thank you, Chad. Good morning, everyone. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

[Kristin Van Dask:]

Thank you, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecasts, due to the impact of many factors.

[John Barry:]

Thank you, Kristin. We at Prospect have managed investors savings for 32 years. 16 years ago, we brought public Prospect Capital Corporation. Over the decades, we’ve weathered multiple business challenges, stock market crashes, credit market dislocations, hurricanes, liquidity crunches, epidemics, pandemics. Learning something from each challenge readies us for the next one. We have learned to batten down the hatches when we see storm clouds and to unfurl our sails for maximum speed as the rising sun brings a new morning and new opportunities. During the last recession that sank other boats, we went on offence to purchase Patriot Capital, the first acquisition of any BDC. Purchasing Patriot at 50% of NAV enhanced dividends for years to come. Can we do that again? We’ll see. We are reviewing new investment opportunities emerging each day. As part of that process, we are seeking shareholder approval for a one-year option to sell shares below NAV, subject to board approval and other conditions. We may not have been able to purchase Patriot without that approval. For the March 2020 quarter, our net investment income or NII was $68.5 million or $0.19 per share, up a $0.01 from the prior quarter. Our ratio of NII to distributions was 103%. Over the past 10 quarters, our ratio of NII to distributions has averaged 113%, with NII exceeding distributions by $85.7 million during that period. In the March 2020 quarter, our net debt to equity ratio was 74.1%. Over the past 10 quarters, our ending quarter, net of cash, debt to equity ratio has ranged from 60.2% to 75.1%, averaging 69%. Over the last two years, other listed of BDCs have increased the leverage, with a typical list of BDC in March 2020 at roughly 114% debt to equity, 40 percentage points higher than us. We have not increased our target leverage, instead electing lower risk. We recently reduced our minimum, 1940 Act, regulatory asset coverage to 150%. We also elected exemptive relief to provide additional regulatory cushion through December 31st, 2020. We have no plans to increase leverage beyond our historical target of 0.7 to 0.85 debt to equity or 218% to 243% asset coverage. Prospect’s balance sheet is highly differentiated from peers with 100% of Prospect’s funding coming from unsecured and non-recourse debt, which has been the case the last 12 years. Unsecured debt was 92.5% of Prospect’s total debt in March 2020, compared to roughly 40% for the typical listed BDC for December 2019, or again 50 percentage points less than us.

[Michael Eliasek:]

Thank you, John. Our scale platform with over $6 billion of assets and undrawn credit continues to deliver solid performance in the current challenging environment. Our experienced team consists of approximately 100 professionals, representing one of the largest middle market credit groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor related and direct non-sponsor lending, Prospect-sponsored operating and financial buyouts, structured credit, real estate yield investing and online lending. Consistent with past cycles, we expect to see an increase in secondary opportunities, coupled with wider spread primary opportunities, with a pullback from other investment groups, particularly highly leveraged one. As of March 2020, our controlled investments at fair value stood at 43% of our portfolio, down 2.8% from the prior quarter. This diversity of strategies allows us to source a broad range and high volume of opportunities, then select in a disciplined bottoms-up manner the opportunities we deem to be the most attractive on a risk-adjusted basis.

[Kristin Van Dask:]

Thanks, Grier. We believe our prudent leverage, diversified access to matched-book funding, substantial majority of unencumbered assets waiting toward unsecured fixed-rate debt, avoidance of unfunded asset commitments and lack of near-term maturities demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 23 years into the future. Today, we have zero debt maturing until 2022 or over two years from now. Our total unfunded eligible commitments to non-controlled portfolio companies totaled approximately $15 million or less than 0.3% of our assets. Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $785 million. We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop notes program, issue under a bond ATM, acquire another BDC and many other lists of firsts. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of March 2020, we held approximately $3.56 billion of our assets as unencumbered assets, representing approximately 68% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, where in September, we completed an extension of our revolver to a refreshed five-year maturity. We currently have $1.0775 billion of commitments from 30 banks with a $1.5 billion total size accordion feature at our option. The facility revolves until September 2023, followed by a year of amortization with interest distributions continuing to be allowed to us. Of our floating rate assets, 90.1% of LIBOR floors with a weighted average floor of 1.55%.

[Operator:]

Mr. Barry, perhaps your line is muted.

[Michael Eliasek:]

Thank you. We can now answer any question.

[John Barry:]

Oh, yes, it is. Yes. Thank you, Kristin. We’re all remote, so I apologize to everyone. My line was muted. Thank you everyone and we can take questions now.

[Operator:]

Okay, thank you. At this time we’ll begin our question-and-answer session.

[Q -:]

[John Barry:]

Okay. Thank you, everyone. Have a wonderful morning, wonderful afternoon. Thanks all. Bye.

[Operator:]

Thank you, sir. The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.