Prospect Capital (PSEC) is a company that I have reviewed in the past, and this post can be viewed as a look at the year for the firm. PSEC recently announced 2012 was a record year in loan origination of $2.25 billion and December alone was responsible for $750 million. Forbes also put out a press release that PSEC crossed over its 200-day moving average on Friday 1/4/2013 (but if you are 50/200 person, PSEC is still in bear territory). This article will briefly discuss reasons for and against buying the stock.
Reasons to buy:
- Prospect has been expanding its portfolio, and book value has slowly climbed back up to $10.88 as of the end of Q3. If it has been able to continue working its portfolio and investing the proceeds from its equity and debt raises into performing companies, the company should be able to increase its book value even more. Also, each one of its equity raises in Q4 was at an amount that was greater than the stated NAV of $10.88. This should also increase the NAV.
- In December, the company revised its dividend up from $0.107 to $0.11 and set the January dividend (payable in February) at $0.110025, which is an increase of about 2.8% and was a nice way to pay an "extra" dividend like another BDC Ares Capital Corp (ARCC) did.
- The company has a significant insider ownership (almost 10% of all shares outstanding), and officers continued to purchase the stock in Q4.
Reasons to wait:
- The first reason is that I believe PSEC will be launching a secondary offering soon. The stock is finally trading above the current NAV after being below that mark for most of Q4 2012. PSEC has an established history of going to the equity markets when it is available (scroll to page 74 in the latest 10-Q to see the list start or read my article linked above). In December 2012, the firm issued over $200 million in new debt notes and avoided the equity market. This may be due to the uncertainty of the Fiscal Cliff, but now that the majority of the issues have been pushed at least 2 months further down the road, the equity markets have jumped. Year-to-date, PSEC is up 3% and this additional upswing may be enough of a draw. The last equity raise in November 2012 was for 35 million shares and took off about 9% of the stock's price.
- The company issued convertible notes in December 2010 that mature in 2015. These notes have a conversion price of approximately $11.35 per share and are due to be readjusted since the notes had a provision: "The conversion rate for the 2015 Notes will be increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101125 per share, subject to adjustment." Given the adjustment, it is possible these notes will be equity sensitive and you will need to start adjusting the company's balance sheet and numbers as if they were converted.
Prospect Capital has survived the Great Recession intact and the management continues to grow the firm. However, given some upcoming new share concerns, it may make sense to hold off on any purchases until after the company releases its Q4 numbers (and possibly announce another secondary).