This is notable for two reasons. First, Prospect Capital is continuing to increase its investment asset balance from individual transactions after digesting the bulk acquisition of Patriot Capital-another BDC which got into trouble and needed rescuing-back in December 2009. Prospect needs more income to pay for its sky high quarterly dividend of $0.41. The company’s latest Net Investment Income Per Share was just $0.29 a share, so there’s a significant gap to be made up. (Even some of the $0.29 was a one time gain associated with the Patriot acquisition). Prospect needs to deploy assets and fast, or risk either continuing to drain cash from the balance sheet by paying the excess dividend out of existing capital or facing the ire of shareholders and cutting the dividend down to fit its continuing earnings.
Today’s acquisition should be a modest step forward. The incremental amount of new assets will be $17mn as Shearer’s is an existing portfolio company, with an $18mn second lien Term Loan outstanding. PSEC did not announce pricing but we’d expect the yield is probably between 13-15% per annum. The current loan is at 15%. Assuming PSEC uses its Revolver to fund the increased exposure to Shearer’s (which is priced at a relatively expensive LIBOR + 4%) , and given PSEC’s fee structure (which includes both a base fee and an incentive fee) and assuming incremental operating expenses, the net margin should be around 5%, or $850,000 in additional Net Investment Income. That would add 1.3 cents a year, to the $1.16 annualized Net Investment Income.
The second notable lesson from today’s announcement is that leveraged buy-outs (LBO) are happening again after a two year near-freeze. Apparently Shearer’s, which is controlled by a private equity firm, is acquiring another snack manufacturer to broaden its offerings. Just a few hundred more of deals like these and we’ll be able to say the LBO market is back. (The Wall Street Journal has been saying it for weeks but we’ve not been seeing much new LBO activity in the BDC space.) The BDC industry has money to spend, and the financing of LBOs remains their bread and butter business. If activity resumes as before (or even at two-thirds the pre-recession pace) we will see many BDCs increasing their investment portfolios after two years of de-leveraging or treading water.
Disclosure: Author holds a long position in PSEC