Prospect Capital Corp.'s Results For Fiscal Q2 2016 - My Assessment

| About: Prospect Capital (PSEC)

Summary

On 2/9/2016, Prospect Capital Corp. reported results for the fiscal second quarter of 2016.

It reported NII of $0.284 per share, earnings of ($0.268) per share, net ICTI of $0.281 per share, and NAV of $9.65 per share as of 12/31/2015.

In this assessment article, I will summarize my previous account projections versus actual results. This includes a detailed discussion regarding several of Prospect Capital's valuation accounts within the company’s income statement.

There were several notable events that occurred with the company's investment portfolio during the fiscal second quarter of 2016. This article discusses the impacts these events will have on future operations.

My overall thoughts on Prospect Capital's quarter, including my Buy, Sell, or Hold recommendation, are stated in the "Conclusions Drawn" section at the end of the article.

Introduction:

On 2/9/2016, Prospect Capital Corp. (NASDAQ:PSEC) reported net investment income ("NII") of $0.284 per share, net assets resulting from operations (also known as EPS) of ($0.268) per share, net investment company taxable income ("ICTI") of $0.281 per share, and a net asset value ("NAV") of $9.65 per share as of 12/31/2015. In my prior PSEC fiscal Q2 2016 NII and NAV projection article, I projected the company would report quarterly NII of $0.239 per share, EPS of ($0.021) per share, net ICTI of $0.253 per share, and NAV of $9.90 per share as of 12/31/2015.

As such, PSEC's NII and net ICTI were a minor-modest "outperformance" when compared to my projections, while the company's EPS and NAV figure were a notable "underperformance". With that being said, some market participants were expecting an even worse decrease to the company's EPS and NAV. When calculated, my NII, EPS, net ICTI, and NAV projections had a variance of ($0.045), $0.247, ($0.028), and $0.25 per share, respectively. While PSEC's NII and net ICTI per share figures were near the top end of my range, it should be noted the company's EPS and NAV per share figures were slightly outside my range (hence a "miss" per se). This was the first quarter since I have covered PSEC here at Seeking Alpha where my quarterly NAV per share figure was outside my projected range (see my profile page for a complete history).

I will now summarize my prior article's account projections and compare each account to PSEC's actual results. If a specific account had at least a modest variance between my projection versus the company's actual results, I will also provide an explanation on the variance. I will discuss PSEC's accounts in the same order as provided in my NII and NAV projection article (link provided above).

Projected Versus Actual Results (Overview):

To begin this discussion, Table 1 is provided below. The table shows my prior account projections, which were referenced in the linked article above, and compares these figures to the company's actual results for the fiscal second quarter of 2016.

Table 1 - PSEC NII and EPS for the Fiscal Second Quarter of 2016 (Projected Versus Actual Results)

Click to enlarge

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

Income and Expense Accounts:

In my prior PSEC NII and NAV projection article (link provided above), I projected the company's total investment portfolio would decrease ($25)-($75) million for the fiscal second quarter of 2016 (prior to all quarterly "fair market value" ("FMV") fluctuations and scheduled principle payments). It reported loan originations/add-on investments of $692 million, while having portfolio sales/repayments/restructurings of ($731) million. When calculated, PSEC had a total investment portfolio decrease of ($39) million for the fiscal second quarter of 2016, which was within my projected range. However, it should also be noted that the company's actual loan originations/add-on investments and sales/repayments/restructurings were both above the amount it previously disclosed within SEC filings prior to the quarterly earnings press release. As such, these "elevated" levels of increases (decreases) to PSEC's investment portfolio directly caused a noticeable increase to "non-recurring" income during the fiscal second quarter of 2016 (will be further discussed below).

Using Table 1 above as a reference, I projected PSEC would report "total interest income" of $181.2 million for the fiscal second quarter of 2016. In comparison, it reported total interest income of $186.5 million, which was slightly above my projection, but within my stated range. One of the reasons for this slight outperformance was the fact that PSEC "bifurcated" several longer-sized debt investments during the quarter. The interest rate charged on the "term loan B" portion of these debt investments increased several hundred basis points (bps). I am anticipating the company may sell the "term loan A" portion of these debt investments in the future. In addition, its collateralized loan obligation ("CLO") portfolio recorded quarterly interest income slightly above my projection. Despite material investment depreciation within PSEC's CLO portfolio (mainly based on projected future discounted cash flows; discussed later in the article), the company continued to generate attractive annualized cash and "Generally Accepted Accounting Principles" ("GAAP") yields within these particular investments during the fiscal second quarter of 2016. In other words, current cash flows continued to remain strong.

Moving down Table 1, PSEC's combined dividend and structuring/fee income came in well above my projection. I projected the company would report dividend and structuring/fee income of $3.0 and $6.5 million, respectively. In comparison, it reported dividend and structuring/fee income of $13.5 and $9.1 million, respectively. PSEC recognized a fairly large "one-time" dividend payment of $11.0 million in regard to American Property REIT Corp. ("APRC"). This was in relation to the sale of one of APRC's properties, Vista Palma Sola. When PSEC originally disclosed this sale within SEC filings, the company did not state whether this sale occurred prior to or after 12/31/2015. I assumed the sale occurred after 12/31/2015, but it now appears it occurred prior to the end of the company's fiscal second quarter of 2016. Regarding PSEC's structuring/fee income, this minor outperformance was due to the fact that the company had additional loan originations/add-on investments and sales/repayments/restructurings that were both above what management previously disclosed within SEC filings (discussed earlier).

Still using Table 1 above as a reference, I projected PSEC would report total operating expenses of $106.7 million for the fiscal second quarter of 2016. In comparison, it reported total expenses of $108.3 million. When calculated, this comes out to be a variance of only $1.6 million. This was well within my stated range. When taking a look at all the accounts that make up this figure, since PSEC reported slightly higher interest and other income, along with noticeably higher dividend income when compared to my projections (see discussion above), the company also reported a slightly higher "income incentive fee" for the fiscal second quarter of 2016. In addition, its "allocation of overhead" expense was lower when compared to my projection. This variance was partially offset by PSEC's excise tax of $1.3 million for the fiscal second quarter of 2016. I projected no expense for this account due to my lower quarterly net ICTI projection.

Continuing to move down Table 1, I projected NII of $84.0 million for the fiscal second quarter of 2016, while PSEC reported NII of $100.9 million. When calculated, it reported NII that was $16.9 million above my projection. This was basically at the top end of my range. This modest NII outperformance was mainly due to the accounts already discussed above.

Valuation Accounts:

I believe PSEC's investment portfolio, as a whole, underperformed my expectations, which ultimately led to the company reporting EPS of ($0.268) per share when compared to my projected EPS of ($0.021) per share. As such, this directly led to the company reporting an NAV of $9.65 per share as of 12/31/2015 versus my projection of $9.90 per share. With that being said, I did correctly anticipate a projected decrease in NAV due to net depreciation within PSEC's CLO investments, increased credit risk regarding several portfolio companies, and continued stress on certain oil & gas investments. However, the level of net depreciation the company recorded within its investment portfolio for the fiscal second quarter of 2016 was more severe then I projected. As such, I wanted to understand why my projected valuations within PSEC's investment portfolio as of 12/31/2015 differed from the reported valuations.

Continuing to move down Table 1, I projected PSEC would report a "gain (loss) on the extinguishment of debt" of ($500,000) for the fiscal second quarter of 2016, while it reported a loss of ($480,000). Most would agree this was basically an exact match. Next, I projected the company would report a "net realized gain (loss) on investments" of ($25.0) million during the fiscal second quarter of 2016. As stated within my prior PSEC NII and NAV projection article (link provided above), a large portion of this projected loss revolved around the notion that the company had finalized its pending sale of CP Energy Services, Inc. (CP Energy). At the time, I stated this was "speculation" on my part, and it turned out to be an incorrect assumption. I projected a realized loss of ($20.0) million on the CP Energy sale, which was basically the difference between by projected net realized loss of ($25.0) million and PSEC's reported net realized loss of only ($5.3) million. Excluding my incorrectly assumed CP Energy sale, my projection would have been very close to PSEC's actual reported net realized loss.

This leads us to one last projection with PSEC's income statement, the company's "unrealized appreciation (depreciation) on investments" account. I projected PSEC would report net unrealized depreciation of ($65.0) million in regard to its entire investment portfolio for the fiscal second quarter of 2016. Since we now know the CP Energy sale did not occur, my projected unrealized depreciation on investments figure would theoretically increase to ($85.0) million. In comparison, the company reported net unrealized depreciation of ($190.6) million for the fiscal second quarter of 2016. Simply put, this was a notable underperformance when compared to my projection. However, I would once again point out that this was actually an outperformance when compared to some market participants who basically already had priced in a "worst-case" scenario. Again, where the variance occurred, on my end, was from the "severity" of PSEC's investment depreciation.

During the company's fiscal second quarter of 2016, U.S. and global debt markets continued to experience heightened volatility. In part, the markets anticipated the FOMC would finally increase the Federal ("Fed") Funds rate for the first time in roughly a decade, which directly impacted most short-term funding rates, including the London Interbank Offered Rate (LIBOR). As I correctly anticipated, along with fears of a global recession, this heightened volatility caused varying levels of underperformance within residential/commercial mortgages, corporate bonds, and the high yield debt market. As such, spreads materially widened during PSEC's fiscal second quarter of 2016. The entire "business development company" ("BDC") sector (to varying degrees) was impacted by the "panic" which occurred during the calendar fourth quarter of 2015.

As I began to research the cause of my variance (by calculating PSEC's quarterly unrealized appreciation (depreciation) fluctuations within each portfolio company), I discovered several notable events that occurred during the quarter, which I believe should be mentioned. A discussion of these events will also help explain several differences between my projected valuation changes in regard to PSEC's investment portfolio from what the company reported.

First, PSEC restructured its investment in CP Energy and "Freedom Marine Solutions, LLC" (Freedom). On 10/30/2015, the company performed a "debt-to-equity" exchange in regard to the investments within these portfolio companies. Since CP Energy and Freedom are classified as "oil & gas" portfolio companies, these restructurings were not that surprising due to the continued negative trends that occurred within this sector. In addition, CP Energy's existing debt investments were put on "non-accrual" status as of 9/30/2015, so the restructuring had no material impacts to interest income during PSEC's fiscal second quarter of 2016 (already were not accruing income on the debt investments).

Upon these restructurings, PSEC did "write down" the newly created convertible preferred stock/membership interest by a minor amount. I personally believe CP Energy's valuation should be deemed more of an "aggressive/optimistic" valuation as of 12/31/2015. CP Energy has had several consecutive quarters of deteriorating operating performance. This began to occur even when oil prices were materially higher versus recent valuations. As such, I believe this would be a portfolio company which should have heightened monitoring in future quarters regarding possible equity write-downs if oil prices remain suppressed (amongst several other sector factors). We will also have to wait and see if the pending sale of CP Energy finally "materializes" or the recent events within the oil & gas sector have caused the sale to dissipate/fall through. On a side note, I was surprised the question of CP Energy's pending sale was not brought up by analysts on PSEC's earnings conference call. Regarding Freedom's valuation, this particular portfolio company was already materially written down prior to the fiscal second quarter of 2016. In addition, management has stated there are "attractive" assets held by the company, with little existing liabilities. As such, it would currently appear Freedom's equity position basically is the value of the assets (first lien on the ships).

Second, I was disappointed in the valuation adjustments within several of PSEC's controlled portfolio companies. In particular, let us discuss two of them, "First Tower Holdings of Delaware, LLC" (First Tower) and "Harbortouch Payments, LLC" (Harbortouch). These two portfolio companies are classified as being within the "consumer finance" and "business services" sector, respectively. Generally speaking, these sectors have remained relatively strong within the U.S. economy as several other sectors, including the oil/gas, metal/mining, and certain manufacturing sectors, have faltered. The U.S. consumer has actually benefited from falling gas prices by having added "money in one's pocket". As such, when PSEC recorded quarterly net unrealized depreciation of over ($10) million within both First Tower and Harbortouch, this was a disappointment, in my opinion. I actually anticipated either a de minims valuation adjustment or minor unrealized appreciation within both investments during the fiscal second quarter of 2016.

Third, and the point which currently seems to be the most popular/controversial topic of discussion, is the valuation changes within PSEC's CLO portfolio. Within prior BDC sector and PSEC articles, at the time I stated that I believed the company's CLO portfolio was "overvalued" by a minor-modest extent (proportionately speaking) at the end of the fiscal first quarter of 2016. When asked, I stated this overvaluation was in a general range of $50-75 million as of 9/30/2015. Other contributors/analysts have also weighed in on this topic recently, and some have provided a more "severe" overvaluation. I stated, at the time, that these more severe overvaluations were using variables based on a more "bearish" stance regarding future events within CLO markets and credit markets in general. Now, let us consider what occurred during the fiscal second quarter of 2016 (quarter ending 12/31/2015).

As pointed out in my NII and NAV projection article (link provided above), due to the sharp reversal/steepening of the forward LIBOR curve during PSEC's fiscal second quarter of 2016 and its impact on projected future discounted cash flows, I believed the company's CLO portfolio would likely experience modest-material net investment depreciation during the fiscal second quarter of 2016. I also anticipated a minor "spike" in the percentage of underperforming/non-performing investments held within PSEC's CLO positions. Overall pricing of a majority of CLO investments, especially newer vintages, decreased during the company's fiscal second quarter of 2016.

However, I also stated it would be interesting to see how PSEC valued its CLO portfolio as of 12/31/2015 knowing that the forward LIBOR curve rapidly "reversed course" once again and began to materially flatten beginning in early January 2016. A flattening of the forward LIBOR curve typically benefits projected future discounted cash flows, even when pricing remains "under pressure". Since I anticipated PSEC would seriously consider what has occurred during January 2016 regarding the material reversal of the forward LIBOR curve (which has now continued to flatten through the first half of February 2016), I anticipated the company would still record material net unrealized depreciation - however, not as severe as what other contributors were projecting (or even what PSEC wound up reporting). Since most of its CLO investments have leveraged "floating rate" liabilities, a deferment/drop to the forward LIBOR curve positively impacts projected future discounted cash flows under most scenarios. Simply put, an increase to the CLO's "cost of funds" rate is delayed. Also, in some cases, refinancing can occur, which leads to more attractive term sheets. In actuality, PSEC recorded net investment depreciation basically "in between" my projected quarterly net unrealized depreciation of ($75) million and what some other contributors/analysts projected (losses by at least $220 million; some even more severe).

Specifically in regard to my CLO unrealized depreciation projection for the fiscal second quarter of 2016, I did not anticipate PSEC would "fully" write down its CLO portfolio by the amount of my 9/30/2015 overvaluation in "one fell swoop". With that being said, I'm glad the company did, because in my professional opinion, it was necessary. PSEC basically wrote down every CLO investment this quarter. While this is not necessarily a positive for investors, it more aligns valuations with expectations. This was in noticeable contrast to what occurred within Apollo Investment Corp. (NASDAQ:AINV) during the quarter ending 12/31/2015. AINV maintained most CLO valuations during the calendar fourth quarter of 2015, which appeared to be in contrast to most (if not all) peers with these types of investments (excludes the notion of AINV's "credit-linked notes" [CLN], if any readers are wondering).

PSEC marked down basically all the CLO investments by the overvaluation I calculated as of 9/30/2015, and then another ($40) million for the December quarter. Now, with that being said, knowing what has occurred during the first half of the March quarter, I believe PSEC likely still had a minor (some could argue modest) overvaluation within its CLO portfolio as of 12/31/2015 (which I calculate with my private resources/models, discussed further below). This is solely my professional opinion, as I try to remain as "non-biased" as possible, even if I currently own a particular stock that is being analyzed.

Culminating this data with trends that have occurred during the first half of PSEC's fiscal third quarter of 2016 (through the week ending 2/12/2016), the probability of continued modest-material investment depreciation in the company's CLO portfolio remains heightened. This is important for readers to understand. Simply put, the positive impacts of the sharp reversal of the forward LIBOR curve are more than offset against the continued pressured on discount rates/margins and continued pricing pressure (just to name two factors/variables at play).

However, with that being said, I'm still not as "bearish" as some market participants' valuations. I believe projected valuations need to take multiple models into consideration to come up with a "blended"/weighted average mean. Right now, I believe some valuations that have been calculated by market participants are more towards the "worst-case" scenario. While that type of specific scenario can certainly come to pass, I believe a more normalized valuation is typically appropriate. Of course, this is an analysis that constantly needs to be "tweaked". As is the case with all my mortgage real estate investment trust (mREIT) models, I constantly evaluate all applicable factors/variables that go in a modeled projection. In this instance, it includes a non-simulated future discounted cash flow projection and various modeled forecasts through a privately accessed intranet valuation software (willing to disclose in private correspondence; includes "Monte Carlo" modeling), and comparable research tools/models from outside resources (including Intex).

With that being said, I continue to stress to readers that this is not an "exact science". This is dealing with various imputed factors/variables and providing certain "judgments". That is why these types of investments are classified as "level 3" assets per Accounting Standards Codification 820 (ASC 820), which I have continued to reiterate since I began covering PSEC several years ago. In the end, if a company were to engage 3 independent valuation firms, I believe each firm will likely derive 3 different valuation ranges for a particular portfolio. Currently, that's just the "grim reality" that investors/market participants have to deal with regarding more illiquid types of investments.

With that being said, I would point out that, as a whole, PSEC's CLO portfolio continues to experience a default rate under the structured credit/CLO market average (a positive). The following quote by its president and chief operating officer ("COO"), M. Grier Eliasek, during the company's earnings conference call for the fiscal second quarter of 2016 supports this notion:

"... As of December 31, our structured credit portfolio experienced a trailing 12-month default rate of 60 basis points or 94 basis points less than the broadly syndicated market default rate of 154 basis points…"

With that being said, PSEC did, in fact, witness another slight "uptick" in defaults during the fiscal second quarter of 2016 (a negative), which needs to be carefully monitored. This was one of the reasons why projected future discounted cash flows were noticeably "trued down" (plays a part in which discount rate/margin to use; can cause an increase in this particular factor/variable). This factor, in addition to an overall weakness for such securitized products during the quarter (which caused prices to decrease within this specified sector), caused the company to record material net unrealized depreciation within its CLO portfolio during the fiscal second quarter of 2016.

As of 6/30/2015, PSEC's "residual interest" (equity) CLO portfolio was valued at an "FMV versus cost" ratio of 1.0376. As of 9/30/2015, this portfolio had an FMV versus cost ratio of 1.0236, which I believed, at the time, was a minor-modest overvaluation (as stated above). When calculated, this was a quarterly percentage decrease of only (1.40%). However, as of 12/31/2015, this portfolio had an FMV versus cost ratio of only 0.9303. When calculated, this was nearly a (10%) decrease in valuation. As stated earlier, I am currently anticipating this ratio to further decline during PSEC's fiscal third quarter of 2016. However, as stated earlier, I'm still not as bearish as some other market participants. While the company's CLO portfolio had a slight increase in quarterly accrued interest income (current cash flows per se; shown within the income statement), the actual valuation of the portfolio itself net decreased (projected future discounted cash flows per se; shown within the balance sheet) during the fiscal second quarter of 2016.

This specific "separation of characteristics" was not clearly disclosed within PSEC's prepared remarks or specifically brought up on the earnings conference call. It even appears some analysts have had troubling understanding this concept. Last quarter, one particular analyst on the earnings call was having trouble understanding how the company's CLO portfolio was not "marked down" during the quarter by making the point that "current yields" increased, so he assumed its CLO valuation net increased as well. However, with factual evidence as support, PSEC's equity CLO portfolio was written down during the quarter by a minor percentage. This same general trend occurred during the fiscal second quarter of 2016. Annualized cash and GAAP yields slightly increased during the fiscal second quarter of 2016 (current cash flows impacting the income statement), yet PSEC's CLO valuations materially decreased (projected future discounted cash flows impacting the balance sheet). I believe this is an important notion for readers/analysts to understand.

In addition, it should be noted that the company's CLO residual interests are in the "lowest tranche/bottom basket" when it comes to income distributions. If, in the future, there is a noticeable uptick in underperforming/non-performing loans (defaults), the residual interest (equity) tranche of a CLO bears first risk loss of this income. This methodology is also known as a CLO's "waterfall" calculation, which I have discussed at length in prior PSEC/BDC articles. This is why this particular tranche of the CLO can have highly attractive yields under certain positive environments (say, north of 25%), yet also have very poor yields under certain negative environments (say, single-digit or even negative yields). This all gets back to an investment's "risk versus reward" metric. Within a CLO's residual interest/equity tranche, there's heightened risk for investment depreciation, but also a heightened reward if the security is performing above expectations.

Finally, I was also disappointed on several other portfolio companies regarding valuation fluctuations during the fiscal second quarter of 2016 (non-control, non-CLO investments). A full discussion/"breakout" of these companies will be provided in a future PSEC dividend and NAV sustainability article.

Therefore, when analyzing PSEC's entire investment portfolio, I had the following overvaluations (undervaluations) when compared to the company's reported FMV fluctuations during the fiscal second quarter of 2016: 1) Undervaluation of CP Energy by approximately ($10) million; 2) Combined overvaluation of First Tower and Harbortouch by approximately $30 million; 3) Net overvaluation of CLO portfolio by approximately $40 million; and 4) Net overvaluation of the remainder of the company's investment portfolio by approximately $45 million.

Readers have continued to request that I provide these types of "update"/"follow-up" articles showing how my quarterly projections "stacked up" to PSEC's actual results. I believe the analysis above accomplishes this request. Since a company's operating performance (quarterly earnings) is one of the key drivers to stock price valuations, I believe these types of projection/assessment articles are appreciated by most readers. In addition, this article provides my overall thoughts on the quarter, which I believe most readers see as beneficial when assessing their investing strategies.

Conclusions Drawn:

I believe PSEC's results for the fiscal second quarter of 2016 had two components. First, the company's reported NII and net ICTI were slightly-modestly above my expectations, which is a positive trend. However, PSEC's reported EPS and NAV were materially below my expectations, which is a negative trend. As discussed above, this was due to more severe investment depreciation within its investment portfolio when compared to my projections. As I began to research the cause of this variance (by calculating PSEC's quarterly unrealized appreciation (depreciation) fluctuations within each portfolio company), I discovered several notable events that occurred during the quarter. These events were discussed (in detail) above.

Even though I believe PSEC had a "mixed" quarter (positive NII and net ICTI per share figures offset by negative EPS and NAV per share figures), it appeared the market priced in a "worst-case" scenario for the stock. In my prior NII and NAV projection article (link provided above), I stated that most of the risk associated with PSEC's investment portfolio was likely already priced into the stock. From the "snapback" rally witnessed in the company post earnings, I believe this prediction played out accordingly.

In my opinion, the following positive trends should be highlighted for existing and potential PSEC shareholders: 1) possible growth of online lending and real estate investments through spin-offs; 2) recent quarterly net ICTI figures continue to be in excess of quarterly dividend distributions; 3) continued strong cumulative performance regarding several control investments; 4) continued attractive weighted average annualized yield on its debt investments without a material increase in "new" risk; 5) continued high percentage of floating rate debt investments; 6) continued relatively minor percentage of debt and equity investments within the oil & gas sector (including certain investments in the energy sector which had "oil & gas" characteristics); and 7) recent material insider purchases by executive management (a sign of confidence in the company and/or undervaluation of the company by the market).

However, the following cautionary/negative trends should cause heightened awareness for existing and potential PSEC shareholders: 1) recent quarterly economic loss was generated; 2) continued modest-material depreciation on several control/non-control investments (including most oil & gas portfolio companies); 3) Prospect Capital Management L.P.'s stance regarding not amending its Investment Advisory Agreement with the company regarding the "2%/20%" fee structure; 4) recent material net unrealized depreciation within the company's CLO portfolio (has to be monitored going forward with heightened importance); 5) continued delay to the company's three proposed spin-offs (no definitive dates have yet been announced); 6) continued fairly high weighted average cash LIBOR floor when compared to the sector peers; and 7) no share buybacks occurred during the fiscal second quarter of 2016, when the stock was trading at an excessively material discount to NAV as of 12/31/2015 (management also indicated a low probability of material buybacks during the fiscal third quarter of 2016 as well).

My BUY, SELL, or HOLD Recommendation:

PSEC recently closed at $6.17 per share as of 2/12/2016. This was a ($3.48) per share discount to the company's NAV of $9.65 per share as of 12/31/2015. This calculates to a price-to-NAV ratio of 0.6391, or a discount of (36.09%).

When combining the analysis above with various other factors/analytical metrics not discussed within this specific article, I currently rate PSEC as a SELL when the stock price is trading at less than a (20%) discount to my projected CURRENT NAV (NAV as of 2/12/2016), a HOLD when trading at or greater than a (20%) but less than a (30%) discount to my projected CURRENT NAV, and a BUY when trading at or greater than a (30%) discount to my projected CURRENT NAV.

As such, I currently rate PSEC as a BUY (however, close to my "HOLD" range). My current price target is $7.60 per share. This price target is a ($0.30) per share decrease when compared to my last PSEC article. Still, I believe most of the risk associated with PSEC's investment portfolio is already priced into the company's current stock valuation.

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy. I first initiated a position in PSEC in October 2013 at prices ranging from $10.80 to $10.85 per share. I took both cash and reinvested stock dividends depending on the stock price when the company's monthly dividends were distributed. On 7/28/2014, I sold 50% of my position in PSEC at a price of $11.00 per share. On 8/26/2014, I sold my remaining position in the stock at a price of $10.69 per share (initial goal was to obtain a price of at least $10.75 per share) due to the disappointing results reported by the company after markets closed on 8/25/2014. At the time, this disclosure was provided to readers within subsequent PSEC articles over the next several months. On 8/27/2015, I once again initiated a position in PSEC at a weighted average purchase price of $7.325 per share. I made a subsequent purchase in PSEC on 2/8/2016 at a weighted average price of $5.445 per share. My second purchase was approximately double the monetary amount of my initial purchase. When calculated, the weighted average purchase price on my PSEC position is $6.072 per share. This weighted average per share price excludes all dividends received/reinvested.

Disclosure: I am/we are long PSEC.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in AINV.