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Prospect Capital Corporation (PSEC) Q2 2024 Earnings Call Transcript

Prospect Capital Corporation (PSEC)

Q2 2024 Earnings Conference Call

November 09, 2024, 09:00 AM EST

Company Participants

John Barry - Chairman & Chief Executive Officer

Kristin Van Dask - Chief Financial Officer

Grier Eliasek - President & Chief Operating Officer

Conference Call Participants

Finian O'Shea - Wells Fargo

Robert J. Dodd - Raymond James.

Presentation

Operator

Good day, and welcome to the Prospect Capital Second Quarter Fiscal Year 2024 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] 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.

John Barry

Thank you, Betsie. 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

Thanks, John. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Future results are highly likely to vary materially. We do not undertake to update our forward-looking statements. For additional disclosure, see our earnings press release and 10-Q filed previously and available on our website prospectstreet.com.

Now, I'll turn the call back over to John.

John Barry

Thank you, Kristin. In the December quarter, our net investment income or NII was $96.9 million or $0.24 per common share. Our NAV stood at $3.68 billion or $8.92 per common share, down $0.33 from the prior quarter. Since inception in 2004 Prospect has invested $20.6 billion across 420 investments exiting 287 of those investments. In the December quarter our net debt equity ratio was 46.2% down 27.9 percentage points from March 2020 and own 0.3 percentage points from the September 2023 quarter as we continue to run an under leveraged balance sheet, which has been the case for us over multiple quarters years. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7 to 0.85 debt-to-equity and we are currently significantly below such range.

We are announcing monthly cash common shareholder distributions of $0.06 per share for each of February, March April. These 3 months represent the 78th, 79th and 80th consecutive 0.06 percent per share cash distribution. Consistent with past practice, we plan on announcing our next share of shareholder distribution in May. Since our IPO nearly 20 years ago through our April 2024 distribution at the current share count, we will have distributed $20.76 per common share to original shareholders, aggregating approximately $4.2 billion in cumulative distribution to all common shareholders. Thank you. I will now turn the call over to Grier.

Grier Eliasek

Thank you, John. Our scale platform with $8.9 billion of assets and undrawn credit at Prospect Capital Corporation continues to deliver solid performance in the current dynamic environment. Our experienced team consists of nearly 150 professionals, which represents one of the largest middle market investment groups in the industry. With our scale, longevity, experience in deep bench, we continue to focus on a diversified investment strategy that spans third-party private equity from sponsor related lending, direct non-sponsor lending, Prospect sponsored operating and financial buyouts, structured credit and real estate yield investing. Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged ones. Unlike many other groups, we have maintained and continue to maintain significant dry powder and balance sheet flexibility that we expect will enable us to capitalize on such attractive opportunities as they arise. This diversity of origination approaches 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.

Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single digit percentage of such opportunities. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. Consistent with our investment strategy, our secured lending and first-lien mix has continued to increase. As of December, our portfolio at fair value comprised 58.7% first-lien debt, up 1.4% from the prior quarter, 15.5% second-lien debt, down 0.4% from the prior quarter, 7.9% subordinated structured notes with underlying secured first-lien collateral, down 0.2% from the prior quarter and 17.8% unsecured debt and equity investments, down 0.8% from the prior quarter, resulting in 82.1% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral, that's up 0.8% from the prior quarter.

Prospect's approach is one that generates attractive risk adjusted yields and our performing interest-bearing investments were generating an annualized yield of 12.3% as of December 2023, a decrease of 0.4 percentage points from the prior quarter. Our interest income in the December quarter was 92.3% of total investment income, reflecting a strong recurring revenue profile to our business. We also hold equity positions in certain investments. They can act as yield enhancers or capital gains contributors as those positions generate distributions. We've continued to prioritize senior and secured debt with our originations to protect against downside risk, while achieving above market yields through credit selection discipline and a differentiated origination approach.

As of December, we held 126 portfolio companies, a decrease of two for the prior quarter, the fair value of $7.6 billion, a decrease of approximately $105 million. We also continue to invest in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 17.8%. As of December, our asset concentration in the energy industries stood at 1.4%. Hotel, restaurant, leisure sector 0.2% and retail industry 0.3%. Non accruals as a percentage of total assets stood at approximately 0.2% in December, no change from the prior quarter. Weighted average middle market portfolio net leverage was 5.4x EBITDA, substantially below our reporting peers and our weighted average EBITDA per portfolio company was $110 million. Originations in the December quarter aggregated $171 million. We also received $131 million of repayments, sales and exits as a validation of our capital preservation objective, resulting in net originations of over $40 million. As we continue to take a cautious approach towards new credit underwriting given macroeconomic conditions....

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