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Summary

  • I am projecting PSEC will report a modest decrease in net asset value (‘NAV’) during the fiscal fourth quarter of 2014 (NAV per share projection is stated within the article).
  • Part of the projected modest decrease in NAV during the fiscal fourth quarter of 2014 is due to the Chapter 7 Bankruptcy of New Century Transportation, Inc.
  • I am projecting PSEC will generate an economic return of 1.96% for the fiscal fourth quarter of 2014.
  • Beginning with the fiscal first quarter of 2015, PSEC will consolidate certain wholly-owned and substantially wholly-owned holding companies to be in compliance with an update to ASC 946 (ASU 2013-08).
  • My buy, sell, or hold recommendation for PSEC is stated in the “Conclusions Drawn” section of the article.

Focus of Article:

The focus of this article is to provide a detailed projection of Prospect Capital Corp.'s (NASDAQ:PSEC) net asset value ('NAV') per share as of 6/30/2014. Prior to results being provided to the public in late August 2014 (via the company's quarterly press release), I would like to analyze PSEC's NAV as of 6/30/2014 and provide readers a general direction on how I believe this recent quarter has panned out.

I will also include my quarterly "net investment income" ('NII') and "net increase (decrease) in net assets resulting from operations" (also known as "earnings per share" ('EPS')) projections in this article. My current BUY, SELL, or HOLD recommendation for PSEC will be in the "Conclusions Drawn" section of this article.

Side Note: Predicting certain accounting figures within the business development company ('BDC') sector is usually more difficult when compared to other sectors due to the fair market value ('FMV') adjustments that occur on a company's investment portfolio each quarter. Specifically, the following two PSEC accounts are typically more difficult to project in any given quarter: 1) unrealized appreciation (depreciation) on investments; and 2) realized gain (loss) on investments. As such, there are several assumptions used when performing such an analysis. PSEC's actual reported values may differ materially from my projected values within this article due to unforeseen circumstances. This could occur because management deviates from a company's prior business strategy and pursues a new strategy that was not previously disclosed or anticipated. This could also occur when the company has a "one-time" extraordinary event which was previously unforeseen. Readers should be aware as such. All projections within this article are my personal estimates and should not solely be used for any investor's buying or selling decisions. All actual reported figures that are above my ranges within this article will be deemed a positive sign in my judgment. All actual reported figures that are below my ranges within this article will be deemed a negative sign in my judgment.

Overview of PSEC's NAV as of 6/30/2014:

Due to the fact that several figures needed to project/calculate PSEC's NAV as of 6/30/2014 come directly from the company's consolidated statement of operations, I provide Table 1 below. Table 1 shows PSEC's consolidated statement of operations from a twelve-months ended timeframe. Using Table 1 below as a reference, one must add certain account figures from the fiscal first, second, third, and fourth quarters of 2014 for purposes of projecting a suitable NAV as of 6/30/2014.

Table 1 - PSEC Fiscal Twelve-Months Ended Consolidated Statement of Operations

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(click to enlarge)

(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database)

Having provided Table 1 above (in particular PSEC's "Fiscal Twelve-Months Ended (ESTIMATE)" column), we can now begin to calculate PSEC's projected NAV as of 6/30/2014. This projection will be calculated using Table 2 below.

Table 2 - PSEC Twelve-Months Ended NAV Projection (NAV as of 6/30/2014)

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 2 above as a reference, let us take a look at the calculation for PSEC's projected NAV as of 6/30/2014. Unless otherwise noted, all figures below are for the "twelve-months ended" timeframe. Let us look at the following figures (in corresponding order to the "Ref." column shown in Table 2 next to the June 30, 2014 column):

A) Operations

B) Stockholder Transactions

C) Capital Share Transactions

A) Operations:

- Net Increase (Decrease) in Net Assets From Operations Estimate of $318.2 Million; Range $278.2 - $358.2 Million

- Confidence Within Range = Moderate to High

- See Red Reference "A" in Table 2 Above Next to the June 30, 2014 Column

This "net increase (decrease) in net assets from operations" figure consists of the following three amounts that come directly from PSEC's consolidated statement of operations: 1) net investment income (see blue reference "A" in Tables 1 and 2 above); 2) net realized gain (loss) on investments (see blue reference "B" in Tables 1 and 2 above); and 3) net unrealized appreciation (depreciation) on investments (see blue reference "C" in Tables 1 and 2 above). Since I have refrained from writing a quarterly consolidated statement of operations projection article for PSEC (due to time constraints), I will summarize what I believe will occur within these three amounts during the fiscal fourth quarter of 2014. Let us first discuss PSEC's NII account.

1) Net Investment Income:

- Estimate of $367.9 Million; Range $352.9 - $382.9 Million

- Confidence Within Range = Moderate to High

- See Blue Reference "A" in Tables 1 and 2 Above Next to the June 30, 2014 Column

PSEC reported NII of $82.3, $92.2 and $98.5 million for the fiscal first, second, and third quarters of 2014, respectively. I am projecting PSEC will report NII of $94.8 million for the fiscal fourth quarter of 2014. Using Tables 1 and 2 above as a reference, when combined this is a projected NII of $367.9 million (rounded) for the twelve-months ended 6/30/2014.

Per PSEC's quarterly Security and Exchange Commission ('SEC') filings, management disclosed the company had loan originations of $423.3 million during the first-half of the fiscal fourth quarter of 2014. Management also disclosed PSEC had portfolio sales/repayments of ($118) million during the first-half of the fiscal fourth quarter of 2014. Through the temporary stoppage of PSEC's at-the-market ('ATM') offering and "InterNotes©" programs, the company stopped providing SEC filings during the second-half of the fiscal fourth quarter of 2014. As such, I must project PSEC's loan originations and portfolio sales/repayments during the second-half of the fiscal fourth quarter of 2014. I am projecting PSEC slowed quarterly loan originations during the second-half of the fiscal fourth quarter of 2014 while still having a moderate amount of portfolio sales/repayments. This assumption should be deemed "cautious" in nature.

When combining the company's quarterly loan originations less portfolio sales/repayments, I am projecting PSEC's total investment portfolio increased (decreased) $400 million for the fiscal fourth quarter of 2014 (prior to all quarterly FMV fluctuations). For PSEC, this would be a material decrease when compared to the net investment portfolio increase of $1.09 billion for the fiscal third quarter of 2014.

The projected minor decrease in quarterly NII ($94.8 million for the fiscal fourth quarter of 2014 versus $98.5 million for the fiscal third quarter of 2014) is mainly attributed to a minor drop in the total income versus total expense ratio during the quarter. Specifically, I am projecting a material increase in PSEC's interest and credit facility expense. As of 3/31/2014, PSEC had borrowings under the company's credit facility of $729 million. Interest on borrowings under PSEC's credit facility is currently 1-month LIBOR plus 275 basis points. The credit facility also has a minor commitment fee which varies based on the amount of the unused portion of the revolver. During April 2014, PSEC quickly reduced the balance of the company's credit facility by issuing two material debt issuances. On 4/7/2014, PSEC issued $300.0 million of senior unsecured notes due 2019 with a stated annual interest rate of 5.00%. On 4/11/2014, PSEC issued $400 million of senior convertible notes that mature on 4/15/2020 with a stated annual interest rate of 4.75%. Both new debt issuances have a higher stated annual interest rate when compared to the credit facility. When compared to the prior quarter, I am projecting PSEC's interest expense will increase (decrease) approximately $9.0 million during the fiscal fourth quarter of 2014. Now let us discuss PSEC's net realized gain (loss) on investments account.

2) Net Realized Gain (Loss) on Investments:

- Estimate of ($6.0) Million; Range ($56.0) - $14.0 Million

- Confidence Within Range = Moderate

- See Blue Reference "B" in Tables 1 and 2 Above Next to the June 30, 2014 Column

PSEC reported a net realized gain (loss) on investments of $3.8, ($5.7), and ($1.6) million for the fiscal first, second, and third quarters of 2014, respectively. I am projecting PSEC will report a net realized gain (loss) on investments of ($2.5) million for the fiscal fourth quarter of 2014. Still using Tables 1 and 2 above as a reference, when combined this is a projected net realized gain (loss) on investments of ($6.0) million for the twelve-months ended 6/30/2014.

Regarding the fiscal first, second, and third quarters of 2014, the following material transactions occurred within this account: 1) realized gain (loss) of $3.3 million on NRG Manufacturing, Inc.; 2) realized gain (loss) of $1.2 million on Apidos CLO VIII, Ltd.; 3) realized gain (loss) of ($7.9) million on National Bankruptcy Services, LLC; 4) realized gain (loss) of ($1.6) million on ICON Health & Fitness, Inc. (partial loan sale); and 5) net realized gain (loss) of $1.5 million on all remaining investment portfolio companies who had realized activities.

Regarding the fiscal fourth quarter of 2014, I am projecting a net realized gain (loss) of ($2.5) million due to various minor gains (losses) in association with the investment portfolio's sales/repayments. This projection is formed from a detailed investment portfolio table that will be omitted from this article due to the sheer size of the spreadsheet. Now let us discuss PSEC's net unrealized appreciation (depreciation) on investments account.

Side Note: During the fiscal fourth quarter of 2014, one of PSEC's portfolio companies (New Century Transportation, Inc. [New Century]), abruptly filed for Chapter 7 Bankruptcy protection (liquidation). Since this event occurred in June 2014 / near the end of the quarter, I am still projecting PSEC reported the company's debt investment in New Century as "unrealized" (as opposed to "realized") as of 6/30/2014. This bankruptcy was still "on-going" as of 6/30/2014. As such, my projected FMV decrease associated with New Century is reported in PSEC's net unrealized appreciation (depreciation) on investments account. Since this is merely a potential "account classification" issue, my projection for both accounts, when combined, would remain unchanged if PSEC realized/"wrote-off" the company's debt investment in New Century (higher net realized loss and lower net unrealized depreciation) during the fiscal second quarter of 2014.

3) Net Unrealized Appreciation (Depreciation) on Investments:

- Estimate of ($43.7) Million; Range ($63.7) - $6.3 Million

- Confidence Within Range = Moderate

- See Blue Reference "C" in Tables 1 and 2 Above Next to the June 30, 2014 Column

PSEC reported a net unrealized appreciation (depreciation) on investments of ($6.2), ($1.2), and ($14.8) million for the fiscal first, second, and third quarters of 2014, respectively. I am projecting PSEC will report a net unrealized appreciation (depreciation) on investments of ($21.5) million for the fiscal fourth quarter of 2014. Once again using Tables 1 and 2 above as a reference, when combined this is a projected net unrealized appreciation (depreciation) on investments of ($43.7) million for the twelve-months ended 6/30/2014.

Regarding the fiscal first, second, and third quarters of 2014, various material valuation changes occurred within this account. I have covered these material valuation changes in past PSEC articles. As such, I refer readers to the following linked articles:

Prospect Capital's Dividend Sustainability Analysis (Post Fiscal Q1 2014 Earnings)

Prospect Capital's Dividend And Net Asset Value Sustainability Analysis (Post Fiscal Q2 2014 Earnings) - Part 2

Prospect Capital's Dividend And Net Asset Value Sustainability Analysis (Post Fiscal Q3 2014 Earnings) - Part 2

Specifically, please refer to Table 4, 8, and 7 within the first, second, and third linked articles above for a breakout of PSEC's material unrealized appreciation (depreciation) valuation changes, respectively.

Regarding the fiscal fourth quarter of 2014, I am projecting a net unrealized appreciation (depreciation) of ($21.5) million due to various minor to material gains (losses) in association with PSEC's investment portfolio. As stated in the above side note, a majority of this projected unrealized depreciation is in regards to the Chapter 7 Bankruptcy of New Century. However, I am also projecting PSEC's collateralized loan obligation ('CLO') investments had a minor to modest net appreciation thus offsetting some of the unrealized depreciation from New Century. This account's projection is formed from a detailed investment portfolio table that will be omitted from this article due to the sheer size of the spreadsheet.

Let us now combine the three amounts described above to come up with a proper net increase (decrease) in net assets from operations figure for the twelve-months ended 6/30/2014. When combining NII of $367.9 million, a net realized gain (loss) on investments of ($6.0) million, and a net unrealized appreciation (depreciation) on investments of ($43.7) million, and, I am projecting PSEC had an increase (decrease) in net assets from operations of $318.2 million for the twelve-months ended 6/30/2014 (see red reference "A" in Table 2 above).

B) Stockholder Transactions:

- Net Increase (Decrease) in Net Assets From Stockholder Transactions Estimate of ($403.2) Million; Range ($423.2) - ($383.2) Million

- Confidence Within Range = High

- See Red Reference "B" and Blue Reference "D" in Table 2 Above Next to the June 30, 2014 Column

- See Blue Reference "D" in Table 3 Below

Side Note: As shown in Table 2 above, PSEC's "net increase (decrease) in net assets from stockholder transactions" figure is the equivalent to the company's "distributions to stockholders from net investment company taxable income ('ICTI')" figure. Since this is the only amount within this specific classification, both figures will be the same.

This is a fairly simple calculation. This is PSEC's dividend distributions for the fiscal first, second, third, and fourth quarters of 2014.

Table 3 - PSEC Twelve-Months Ended Distributions to Common Stockholders Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Using Table 3 above as a reference, the number of outstanding shares of common stock as of 4/28/2014 is projected to be 341.3 million. As such, I am projecting 7.8 million shares of common stock were issued between 4/1/2014 and 4/27/2014. When broken out, this consists of 7.7 and 0.1 million shares of common stock being issued under PSEC's ATM offering program and dividend reinvestment plan, respectively. The monthly common stock dividend for the month of April 2014 was $0.110400 per share. When calculated, I am projecting an April 2014 dividend distribution of ($37.7) million.

Still using Table 3 as a reference, the number of outstanding shares of common stock as of 5/28/2014 is projected to be 342.5 million. As such, I am projecting 1.2 million shares of common stock were issued between 4/28/2014 and 5/27/2014. When broken out, this consists of 1.1 and 0.1 million shares of common stock being issued under PSEC's ATM offering program and dividend reinvestment plan, respectively. The monthly common stock dividend for the month of May 2014 was $0.110425 per share. When calculated, I am projecting a May 2014 dividend distribution of ($37.8) million.

Once again using Table 3 above as a reference, the number of outstanding shares of common stock as of 6/27/2014 is projected to be 342.6 million. As such, I am projecting 0.1 million shares of common stock were issued between 5/28/2014 and 6/26/2014. When broken out, this consists of 0.1 million shares of common stock being issued under PSEC's dividend reinvestment plan. The monthly common stock dividend declared and accrued for in the month of June 2014 was $0.110450 per share. When calculated, I am projecting a June 2014 dividend payable of ($37.8) million.

When these three monthly dividend distributions are combined with the nine-months ended dividend distributions of ($289.9) million, I am projecting PSEC had an increase (decrease) in net assets from stockholder transactions of ($403.2) million for the twelve-months ended 6/30/2014 (see red reference "B" in Table 2 above and blue reference "D" in Tables 2 and 3 above).

C) Capital Share Transactions:

- Net Increase (Decrease) in Net Assets From Capital Share Transactions Estimate of $1.046 Billion; Range $995.7 Million - $1.096 Billion

- Confidence Within Range = High

- See Red Reference "C" in Table 2 Above Next to the June 30, 2014 Column

This "net increase (decrease) in net assets from capital share transactions" figure consists of the following three amounts: 1) issuance of common stock, net of underwriting fees (see blue reference "E" in Table 2 above and Table 4 below); 2) offering costs on issuance of common stock (see blue reference "F" in Table 2 above and Table 4 below); and 3) issuance of common stock under dividend reinvestment plan (see blue reference "G" in Table 2 above and Table 5 below).

1) Issuance of Common Stock, Net of Underwriting Fees:

- Estimate of $1.032 Billion; Range $986.8 Million - $1.077 Billion

- Confidence Within Range = High

- See Blue Reference "E" in Table 2 Above Next to the June 30, 2014 Column

- See Blue Reference "E" in Table 4 Below

This is a more complex calculation. This is PSEC's issuance of common stock, net of underwriting fees for the fiscal first, second, third and fourth quarters of 2014.

Table 4 - PSEC Twelve-Months Ended Issuance of Common Stock, Net of Underwriting Fees Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Originally discussed within PSEC's distributions to stockholders from net ICTI figure, I projected 7.7 million shares of common stock were issued under PSEC's ATM offering program for the month of April 2014 (through 4/27/2014). Using Table 4 above as a reference, when calculated this is projected gross proceeds of $84.1 million for the month of April 2014.

On 5/5/2014, PSEC also issued 1.1 million shares of common stock in relation to the recapitalization of Arctic Energy Services, LLC. As such, these shares also need to be added. When calculated, this is projected gross proceeds of an additional $11.9 million for the month of May 2014.

When adding projected gross proceeds of $84.1 and $11.9 million for the months of April and May 2014, I am projecting total gross proceeds of $96.0 million for the fiscal fourth quarter of 2014. When excluding ($0.5) million of quarterly underwriting fees, I am projecting PSEC will report an issuance of common stock, net figure of $95.5 million for the fiscal fourth quarter of 2014.

Therefore, when this figure is combined with the nine-months ended figure of $936.2 million, I am projecting PSEC will report an issuance of common stock, net of underwriting fees figure of $1.032 billion for the twelve-months ended 6/30/2014 (see blue reference "E" in Tables 2 and 4 above).

2) Offering Costs on Issuance of Common Stock:

- Estimate of ($1.3) Million; Range ($1.8) - ($0.8) Million

- Confidence Within Range = High

- See Blue Reference "F" in Table 2 Above Next to the June 30, 2014 Column

- See Blue Reference "F" in Table 4 Above

This figure consists of the offering costs associated with the issuance of common stock. This figure was originally projected within the issuance of common stock, net of underwriting fees figure above. However, I reclassified ($0.1) million of offering costs originally projected within the ($0.6) million of underwriting fees and offering costs for the fiscal fourth quarter of 2014.

Once again using Table 4 above a reference, when this figure is combined with the nine-months ended figure of ($1.2) million, I am projecting PSEC will report an offering costs on issuance of common stock figure of ($1.3) million for the twelve-months ended 6/30/2014 (see blue reference "F" in Tables 2 and 4 above).

3) Issuance of Common Stock Under Dividend Reinvestment Plan:

- Estimate of $15.3 Million; Range $13.2 - $17.4 Million

- Confidence Within Range = High

- See Blue Reference "G" in Table 2 Above Next to the June 30, 2014 Column

- See Blue Reference "G" in Table 5 Below

This is a simple calculation. This is PSEC's issuance of common stock under the company's dividend reinvestment plan for the fiscal first, second, third, and fourth quarters of 2014.

Table 5 - PSEC Twelve-Months Ended Issuance of Common Stock Under Dividend Reinvestment Plan Projection

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(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database [link provided below Table 1])

Originally discussed within PSEC's distributions to stockholders from net ICTI figure, I projected 0.1 million shares of common stock were issued under PSEC's dividend reinvestment plan for the months of April, May, and June 2014. Using Table 5 above as a reference, when calculated this is projected proceeds of $0.9, $1.0, and $1.0 million for the months of April, May, and June 2014, respectively. When combined, I am projecting PSEC will report an issuance of common stock under the company's dividend reinvestment plan figure of $2.9 million for the fiscal fourth quarter of 2014.

Therefore, when this figure is combined with the nine-months ended figure of $12.3 million, I am projecting PSEC will report an issuance of common stock under the company's dividend reinvestment plan figure of $15.3 million (rounded) for the twelve-months ended 6/30/2014 (see blue reference "G" in Tables 2 and 5 above).

When combining equity raised in common stock issuances, net of underwriting fees of $1.032 billion, offering costs associated with the issuance of common stock of ($1.3) million, and equity raised in relation to the company's dividend reinvestment plan of $15.3 million, I am projecting PSEC had an increase (decrease) in net assets from capital share transactions of $1.046 billion for the twelve-months ended 6/30/2014 (see red reference "C" in Table 2 above).

Remainder of NAV Calculation:

After combining the three referenced figures discussed earlier (see red references "A, B, C" in Table 2 above), I am projecting PSEC had a "total increase (decrease) in net assets" of $960.7 million for the twelve-months ended 6/30/2014 (see red reference "(A + B + C) = D" in Table 2 above).

Having this figure established, let us now calculate PSEC's projected NAV per share as of 6/30/2014 (see red references "D, E, F, G" in Table 2 above):

Total Increase (Decrease) in Net Assets: $960.7 million

(+) Net Assets at Beginning of Period: $2.656 billion

(=) Net Assets at End of Period: $3.617 billion

(/) Outstanding Shares of Common Stock as of 6/30/2014: 342.6 million

(=) NAV Per Share as of 6/30/2014: $10.56 per share

Conclusions Drawn:

To sum up all the information discussed above, I am projecting PSEC will report the following NAV per share as of 6/30/2014:

PSEC's Projected NAV as of 6/30/2014 = $10.56 Per Share

PSEC's Projected NAV Range as of 6/30/2014 = $10.46 - $10.66 Per Share

This projection is an increase (decrease) of ($0.12) per share from PSEC's NAV as of 3/31/2014. This modest decrease in NAV can be attributed to the following quarterly per share changes:

Table 6 - PSEC Quarterly NAV Per Share Changes

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(Source: Table created entirely by myself, including all calculated figures and projected valuations)

Using Table 6 above as a reference, I am projecting PSEC's net increase (decrease) in net assets resulting from operations (also known as EPS) will be $0.21 per share for the fiscal fourth quarter of 2014 (rounded to the nearest cent). In comparison, I am projecting PSEC had dividend distributions of ($0.33) per share for the fiscal fourth quarter of 2014 (also rounded to the nearest cent). I am also projecting PSEC had no NAV accretion (dilution) in relation to the company's equity raises for the fiscal fourth quarter of 2014 (once again rounded to the nearest cent). After adding these three amounts together, an increase (decrease) of ($0.12) per share for the fiscal fourth quarter of 2014 is obtained.

My BUY, SELL, or HOLD Recommendation:

I continue to believe there are several positive and negative aspects to PSEC right now. Let us first discuss a few positive factors for PSEC. First, PSEC's current annual dividend yield continues to be over 12%. This is one reason why investors are attracted to this stock and to the BDC sector in general. More investors are looking for a steady stream of dividend income in this continued low interest rate environment. I believe PSEC could be an enticing proposition for some investors looking for a steady stream of income while having a somewhat lower risk tolerance when compared to other high-yielding sectors. I also believe PSEC's dividend should continue to be stable (fractionally higher) through the foreseeable future (supported through evidence from past articles). Even though there has been a minor to modest overpayment of NII when compared to dividend distributions over the past few quarters, PSEC continues to have a material cumulative NII surplus. More important, PSEC's net ICTI has been basically in-line with dividend distributions for the past few quarters. This should be seen as a positive sign. As I have always stated (see past articles for support), net ICTI trumps NII regarding a BDC's dividend sustainability.

Second, even though I am projecting PSEC will report an increase (decrease) in NAV of (1.14%), I am also projecting the company will generate an "economic return" (dividends paid and net change in NAV) of 1.96% for the fiscal fourth quarter of 2014. This positive economic return for the quarter is even after the projected depreciation associated with the Chapter 7 Bankruptcy of New Century. While New Century's bankruptcy filing was rather abrupt, in a past PSEC article (linked provided earlier) I also classified this debt investment as performing materially below expectations as of 3/31/2014. As such, this bankruptcy was not a "total" surprise in my opinion and PSEC's economic return for the quarter should be seen as a positive sign.

Third, I like the diversification of PSEC's business operations. The following are seven origination strategies management currently implements regarding PSEC's investment portfolio: 1) lending in private equity sponsored transactions; 2) lending directly to companies not owned by private equity firms; 3) control investments in corporate operating companies; 4) control investments in financial companies; 5) investments in structured credit; 6) real estate investments; and 7) investments in syndicated debt. Furthermore, PSEC has the flexibility and expertise to add additional types of origination strategies when deemed appropriate/lucrative. This should also be seen as a positive sign.

Now let us discuss a few "cautionary" / negative factors. First, as stated in PSEC's 10-Q for the fiscal third quarter of 2014, the company disclosed that the SEC staff had determined certain "wholly-owned holding companies" within PSEC's control investment portfolio are deemed "wholly-owned subsidiaries" per "Generally Accepted Account Principles" ('GAAP'). As such, the SEC staff believed these entities are also considered investment companies per GAAP and should be consolidated at the parent level. This determination was based on the SEC staff's interpretation of "Accounting Standards Codification 946 - Investment Companies ('ASC 946')". Specifically, the SEC staff's interpretation was based on "Accounting Standards Update 2013-08: Amendment to the Scope, Measurement, and Disclosure Requirements ('ASU 2013-08')".

PSEC disagreed with the SEC staff's interpretation of ASC 946 and appealed to the SEC's Office of the Chief Accountant ('OCA'). PSEC stated the SEC staff's interpretation to consolidate these particular holding companies was not supported by any written guidance within existing GAAP. PSEC strongly believed these wholly-owned holding companies did not meet the definition of an investment company under GAAP. Furthermore, management believed GAAP permitted, but did not require, investment companies to consolidate other investment companies. In my opinion, PSEC did not consider ASU 2013-08 to be "written guidance within EXISTING GAAP" (since it was an update).

On 6/10/2014, PSEC announced the company would not be required to restate its prior period financials. However, under the guidance of the newly amended ASC 946 (through ASU 2013-08), PSEC will need to consolidate the company's wholly-owned or "substantially wholly-owned" holding companies (deemed wholly-owned or substantially wholly-owned subsidiaries) starting with the company's fiscal year 2015. As such, I believe a "middle-of-the-road" scenario occurred. I believe a "worst-case" scenario would have been if PSEC needed to restate the company's prior period financials. I believe a "best-case" scenario would have been if PSEC did not need to consolidate the company's wholly-owned or substantially wholly-owned holding companies. In the agreement between PSEC and the SEC, the company needs to incorporate the newly amended ASC 946 (through ASU 2013-08) beginning in the fiscal first quarter of 2015. (quarter ending 9/30/2014).

Readers should understand this change in accounting will most likely cause some "uncertainty" regarding the "new look" of PSEC's financial statements beginning in the fiscal first quarter of 2015. This uncertainty could cause some volatility in PSEC's stock price. When PSEC's annual report for fiscal 2014 (10-K) is released, I would like management to disclose specific details in regards to PSEC's upcoming prospective consolidation of the company's wholly-owned or substantially wholly-owned holding companies. This may alleviate some of the upcoming uncertainty. I believe this entire situation should be seen as a cautionary factor.

Second, due to the recent situation that unfolded between PSEC and the SEC, management has temporary stopped using the company's ATM equity offering and InterNotes© programs. Management stated PSEC wanted to avoid using such programs while the situation with the SEC was unresolved. As a result, PSEC's investment portfolio growth was partially "suppressed" during the fiscal fourth quarter of 2014. This reduced level of investment portfolio growth hindered structuring and fee income during the fiscal fourth quarter of 2014 and will continue to do so until PSEC "re-activates" these debt/equity programs. It has been nearly two months since PSEC's press release was issued stating the SEC situation was resolved. However, PSEC has yet to re-activate the company's Internotes© or equity issuance programs. My speculation is PSEC will continue to refrain from re-activating these programs until at least the company's 10-K for fiscal year 2014 is issued. Under a more pessimistic scenario, these programs will not be re-activated until PSEC incorporates the newly amended ASC 946 (through ASU 2013-08) beginning in the fiscal first quarter of 2015. Since this would inherently limit investment portfolio growth, I believe this should be seen as a negative factor.

PSEC recently closed at $10.65 per share as of 8/6/2014. This was a $0.09 per share premium (discount) to my projected NAV of $10.56 per share as of 6/30/2014. This calculates to a price to NAV ratio of 1.009 or a premium (discount) of 0.9%. From all the factors listed above, I currently rate PSEC as a HOLD when the stock trades up to a modest premium to NAV (up to a 5% premium), a BUY when the stock trades at or slightly below NAV, and a STRONG BUY when the stock trades at a modest discount to NAV (over 5% discount).

Full Disclosure of "Long" Position in Regards to PSEC: I initiated a position in PSEC in October 2013 at prices ranging from $10.80 - $10.85 per share. Prior to these acquisitions, I did not own PSEC as an investment. I have taken both cash and reinvested stock dividends depending on the stock price of PSEC when the monthly dividends were distributed. On 7/28/2014, I sold 50% of my position in PSEC at a price of $11.00 per share. This decision was based on the following: 1) valuation at the time of sale (modest premium to projected NAV as of 6/30/2014 achieved); 2) the upcoming "worse-than-expected" projected earnings for the fiscal fourth quarter of 2014; and 3) upcoming uncertainty of the pending accounting change regarding PSEC's wholly-owned or substantially-owned holding companies.

Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation may not fit each investor's current investing strategy.

Disclosure: The author is long PSEC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Prospect Capital Corp.'s Upcoming Fiscal Q4 2014 Net Asset Value Projection