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This article provides an analysis of Prospect Capital's (NASDAQ:PSEC) underlying portfolio companies. PSEC is a business development company that lends to and invests in private and micro-cap public businesses. A large majority of its holdings are in industries related to the Energy Sector.

A high-level summary of the portfolio health is provided in the quarterly earnings report; however, a company-by-company breakdown is needed to identify which companies are in financial trouble (based on the fair value of their debt versus cost). Results from this analysis can give insights into book value changes and future cash flow impairments. Getting back to the question posed in the title, results from this exercise demonstrate that PSEC has constructed a healthy portfolio. However, a small sub-set of companies is identified that may have an adverse impact on PSEC's results going forward.

Overall Portfolio Health

PSEC's portfolio has a total cost of $2.880B and a current fair value of $2.846B, so the overall portfolio is valued at 0.988 cents on the dollar. This is a great number for a business development company. To put this number in perspective, one of PSEC's competitors Gladestone Capital (NASDAQ:GLAD) trades at about 76 cents on the dollar (discussed here).

Financially Impaired Companies

I filtered across PSEC's portfolio to return loans, which were valued at less than 80 cents on the dollar. I also included only companies that are not on non-accrual status. This was done to identify companies currently generating cash for PSEC, but may not continue do so in the quarters ahead. Only two companies were returned from this filter, as seen in the table below.

CompanyValue (Mill USD)Valuation (cents on the dollar)
Borga0.620.67
New Meatco4.70.38

On a combined basis, these two companies represent 0.2% of total portfolio. Were these companies to be written down to zero, the net asset value of PSEC would decrease by just $0.03 per share assuming 173M shares outstanding at quarter end.

Companies On Non-Accrual

In this part of the analysis all portfolio companies on non-accrual status were identified. Of these companies, only those that have not been completely written to zero were retained. These companies (below) have not been generating cash for PSEC, but may cause future decreases in book value.

CompanyValue (Thousand USD)Valuation (cents on the dollar)
Borga6210.20
H&M Oil & Gas353120.55
Wind River Resources15390.10

The company to watch is H&M Oil & Gas. It has been on non-accrual status for a few years, but is valued on PSEC's balance sheet at 55 cents on the dollar. Were the company to be completely written off, it would result in a $0.20 drop in book value. This is the single most important portfolio company to keep an eye on going forward.

Portfolio-driving Companies

The 8 companies below represent 51.4% of PSEC's net assets. These companies should be followed closely going forward as they will drive PSEC's quarterly results. So goes PSEC as goes these 8 companies (below). All of these companies are valued at 100 cents on the dollar, which is what you would want to see in the main companies in their portfolio.

CompanyCostValue% of net assets
First Tower287,953,000287,953,00015.3
Progrexion135,000,000135,000,0007.2
Interdent115,906,000115,906,0006.2
United Sporting Companies100,000,000100,000,0005.3
Energy solutions63,245,00095,195,0005.0
SG Acquisition83,242,00083,242,0004.5
Capstone Logistics75,418,00075,418,0004.0
CRT Midco73,125,00073,125,0003.9

Conclusion

Outside of a few minor portfolio holdings, PSEC's portfolio is very healthy. All of its major holdings (51.4% of net assets) are valued at 100 cents on the dollar. Given its current portfolio coupled with the fact that PSEC is trading below book value makes PSEC a stock worth owning.

Source: Are The Companies In Prospect Capital's Portfolio Healthy?