Prospect Capital: Meet NMMB Holdings

Mar. 6.14 | About: Prospect Capital (PSEC)

Summary

We provide additional examples of senior and subordinated debt restructuring to impaired equity.

Such examples are timely, dating from December 2013 on Prospect investments initiated in 2011.

We believe our analysis to be sound and our examples representative.

Yesterday, an analyst stated that Prospect Capital (NASDAQ:PSEC) responded to my prior article on their accounting and underwriting practice, asserting my data was stale and involved, alternatively, a discontinued project-finance business or investments made prior to 2007. My use of a 5-year review period was characterized as not representative. [1]

I appreciate Mr. Aloisi's effort, and rely on his published representations of the conversation to be true and accurate. As my response to him is based entirely upon them, I sincerely apologize to Prospect Management if miscommunication has occurred.

My Response to Mr. Aloisi Follows.

We document, without amendment or revision, actions disclosed by Company in the most recent SEC Form 10-Q filing (the stale December, 2013 quarter) regarding Investments, including two 5-year loans, initiated in 2011.

Per Company filings, the investment was in a media advertising brokerage based in New York. I have no ability to determine whether such an investment meets the predicate of "project finance". If it does, I again apologize to Prospect Management and will, immediately and publicly admit error. Same offer holds regarding initial year of Investment and term of loan.

Moving The Goalposts, Episode III: NMMB Holdings. [2]

NMMB Holdings ("NMMB") is a media company engaged in advertising brokerage located in New York.

On May 6, 2011, Prospect initiated an investment in NMMB, consisting of a $24mm Senior Secured Term Loan ("Seniors" 14% due 2016), a $2.8mm Senior Subordinated Loan ("Subordinated" or "Subs" 15% due 2016), and $4.4mm of Preferred Shares ("Preferreds"). The commitment represented 2.8% of Prospect's Net Assets. [3]

By the close of the quarter ending March 31, 2013, changes had occurred. Fully a third of the Seniors had been repaid, reducing par to $16mm. Fair Value on the seniors was marked (below par) at $14mm. Both the Subs and the Preferreds were marked at zero Fair Value. [4]

By the close of the quarter ending Sep 30, 2013, the Seniors were further marked down to $10.7mm (67% of par value of $16mm). Fair Value of the Subs and Preferreds remained zero. [5]

On December 13, 2013, Prospect provided $8.1mm in new funding, upon which NMMB

  • Partially repaid the Senior (using $5.3mm, leaving $10.7mm face outstanding),
  • Repaid the entire $2.8mm Subordinated, and
  • Issued an additional $8.1mm of Preferred.

The Preferreds were immediately (again, intra quarter) written down to $0.04 on the dollar. [6]

What to Do Now?

I hope Nicholas (NASDAQ:NICK) shareholders continue to review my analysis, and spend some time thinking about the pending vote, and perhaps, the amount of due diligence that went into our Board's decision.

Prospect Management, shareholders, and analysts: I sincerely bear no ill will towards you, and hold no continuing interest in you or your exhibit. But I do not want this proposed deal to be consummated.

Choose another merger target and get on with your program, please.

COMPANIES MENTIONED

Prospect Capital Corporation

Nicholas Financial, Inc.

FOOTNOTES

[1] Analyst Aloisi writes:

"Greetings readers: In response to my inquiry regarding Mr. Galler's article that ran the same day as this interview, Prospect's IR sent me the following, which I have copied in verbatim:

'The article Prospect's Growth Hides Bad Underwriting that you referenced is based on data that is dated and not germane to the current business of Prospect. The use of data that is 5+ years old is not representative of Prospect's current business as the average life of a Prospect loan is approximately three years.

The losses that the author cites are primarily related to the project finance business that was conducted during our early existence and a business that was discontinued in 2007 (7 years ago). While this business was profitable overall, the variability in the business, with both gains and losses, created too much noise and was discontinued to originate business that was more stable in terms of income streams. Nearly every loans[sic] that the author listed in his chart are loans that were originated prior to 2007 and were project finance loans, a business we are no longer in today.' "

(See: Everything You Wanted to Know About Prospect Capital I Was Able To Ask, author: Adam Aloisi, Seeking Alpha, dated 3 Mar, 2014, in comment by author dated 5 Mar, 2013 4:30PM. [Quotation marks reformatted for re-publication.])

[2] For additional Prospect Capital debt restructurings into marked-down equity, review Moving the Goalposts I and II, in Prospect's Growth Hides Bad Underwriting.

[3] For initiation of investment: Form 10-K, 2011, pp. 62, 71. For itemized securities, Consolidated Schedule of Investments, p. 103.

[4] Form 10Q, 2013 Q3 [Mar-2013], p. 8. For amplification: repayments and changes in marks occurred over the entire interval between investment start and the referenced balance sheet date. I am not describing a single event.

[5] Form 10-Q, 2014 Q1 [Sep-2013], p. 9.

[6] For narrative of restructuring, Form 10-Q, Q2 2014 [Dec-2013], p. 80. For final marks, see p. 9. Also see: Note (42) to Consolidated Schedules of Investments on p. 39.

Disclosure: I am long NICK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.