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Prospect Capital Corporation (NASDAQ:PSEC)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

September 9, 2008 11:00 am ET

Executives

John Barry – Chairman and CEO

Bill Vastardis – CFO and Chief Compliance Officer

Grier Eliasek – President and COO

Analysts

Robert Dodd – Morgan, Keegan & Company

Jim Shanahan – Wachovia Securities

James Bellessa – D.A. Davidson & Co.

Henry Coffey – Sterne Agee

David Ratliff – Doucet Asset Management

John Ellis [ph]

Paul Norris [ph]

Mark Lindy [ph] – Wachovia Securities

Jasper Birch [ph] – Fox-Pitt, Kelton

Operator

Hello and welcome to the Prospect Capital Scheduled Fiscal Year Earnings Release and Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions) Please note this conference is being recorded. Now, I would like to turn the conference over to Mr. John Barry. Mr. Barry, you may begin.

John Barry

Thank you, Camille. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; Bill Vastardis, our Chief Financial Officer; and Brian Oswald, our Managing Director for Finance. Bill?

Bill Vastardis

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statement within the meaning of the Securities laws that are intended to be subject to Safe Harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and our 10-K filed previously.

Now, I will turn the call back over to John.

John Barry

Thanks, Bill. Out net investment income for the fiscal year ended June 30, 2008, was $45.1 million, or $1.91 per weighted average share for the year, an increase of 95% and 30% from the prior year on a dollars and per share basis, respectively.

Our net asset value per share on June 30 increased by $0.40 per share from March 31 to $14.55 per share.

Our net investment income for the fourth fiscal quarter was $13.7 million, or $0.50 per weighted average share for the quarter, an increase of 64% and 19% from the prior year-over-year quarter on a dollars and per share basis, respectively.

We estimate our net investment income for the current first fiscal quarter ended September 30 will be $0.45 to $0.53 per share. We expect to announce our first fiscal quarter dividend this month.

Now, Grier Eliasek will comment on our investment activity.

Grier Eliasek

Thanks John. On June 30, the fair value of our portfolio of 29 long-term investments was approximately $498 million. During the fiscal year, our portfolios generated a current yield of 15.5% across all our long-term debt and equity investments, including interest and dividends.

Last quarter, we completed two new investments, which consisted of Ajax and Peerless, totaling approximately $59.8 million, as well as follow-on investments in existing portfolio.

Additionally, we exited our investment in Cougar last quarter through the sale of our equity for $3.4 million, earning a 34% internal rate of return.

Deep Down fully repaid our $12 million loan last quarter. We received warrants in Deep Down, which we exercised and then sold in August for $1.65 million, resulting in an overall 54% internal rate of return for that investment.

On June 30, we consolidated our coal investments into Yatesville Coal under one management team, allowing for a more efficient utilization and oversight of our assets. We are pleased with the improvement of Yatesville, which we attribute to more efficient operations as a result of the consolidation of the multiple operating companies, as well as significant increases in coal prices in Central Appalachia.

In the current quarter, we have made three new investments in Castro Cheese, TriZetto Group, and Biotronic NeuroNetwork, aggregating $50.7 million. R-V Industries also repaid our $7.5 million of secured debt.

In early May, Gas Solutions purchased a series of propane puts at prices of $1.53 per gallon and $1.39 per gallon covering each of the next four 12-month periods, respectively. These hedges have been executed at close to the highest market propane prices that have been achieved on an historical basis. Such hedges preserve the upside of Gas Solutions to benefit from potential future increases in commodity prices. Gas Solutions is generating approximately $27.3 million of unadjusted plant operating income based on annualizing the performance of the six months ending June 30, 2008, which is an increase of 55% from the prior year. For calendar year 2008, Gas Solutions estimates, based on current commodity prices and annualized run rates, that it would achieve more than $30 million of unadjusted plant operating income.

As previously disclosed, we are in the process of monetizing Gas Solutions. This monetization process is ongoing, and extensive discussions are occurring now with an interested party related to a definitive purchase agreement. While we are optimistic, we can make no definitive assurances as to the likelihood or timing of such agreement.

Besides Gas Solutions, we are in active discussions concerning monetizing other controlled investments to maximize shareholder value.

We continue to execute on our balanced business model addressing the controlled buyout, direct lending, and sponsor finance segments. We also continue to diversify the portfolio across industry sectors in accordance with our strategy. The team is busy addressing an investment pipeline aggregating [ph] more than $400 million in potential transaction value. In the past few months, in the new financing marketplace, absolute yields have increased despite the drop in LIOBR, and leverage multiples have decreased both risk-reward dynamics working significantly in our favor. Now is an excellent time to be deploying capital into new transactions. We hope to reap the benefits of our past equity raises, anticipated monetizations, and current low leverage as our business continues to grow.

Thank you. I will now turn the call over to Bill.

Bill Vastardis

Thanks, Grier. In June, we closed a public equity offering of 3.25 million shares of common stock, raising $48.4 million in gross proceeds.

At June 30, borrowings under our current credit facility stood at approximately $91 million. Currently, the Company has approximately $130 million drawn under its $200 million credit facility. In addition to its corporate cash, the Company has non-recourse access to an additional approximately $30 million of cash at Gas Solutions.

We are currently seeking to increase our revolving credit facility from its current size of $200 million. Over the past few months we have worked with rating agencies to structure an expanded facility of up to $400 million in size, and we expect to initiate syndication of this facility during this calendar year. The closing of the facility is subject to lender syndication and other conditions customary for a transaction of this type.

Now, I will turn the call back over to John.

John Barry

Thank you, Bill. We can now answer any questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Robert Dodd from Morgan, Keegan.

Robert Dodd -- Morgan, Keegan & Company

Hi guys. A couple of housekeeping ones first and then (inaudible) one. On Gas Solutions, can you give us what was the dividend in the June quarter, was it $4 million?

Bill Vastardis

It was $4 million, Robert. Thank you.

Robert Dodd -- Morgan, Keegan & Company

Alright. Then when I look at the overhead cost, particularly the overhead allocation, which was up significantly year-over-year, obviously your asset base has grown a lot as well. Can you give us an idea what the – if I take out interest expense and the advisory fee, so I get $2.2 million in kind of operating costs for the June quarter. What’s the run rate that we should expect in that number going forward?

Bill Vastardis

It’s currently approximately $196,000 per month for the overhead allocation.

Robert Dodd -- Morgan, Keegan & Company

And what’s biggest source of that, give us some color on that number.

Bill Vastardis

Sure. As the fund has grown, there have been additional hires to work on the financial aspects of monitoring the credit facility and other – the monitoring of the portfolio companies and that additional cost is reflected in the administration cost, which is part of the overhead allocation.

Robert Dodd -- Morgan, Keegan & Company

And then last one, FAS 157, I mean you mentioned it in the K that you don’t expect it to have a significant impact. But I mean how would that play out particularly in – depending on timing here obviously in Gas Solutions or NRG or any of these other controlled investments you are looking to dispose off particularly if you have actually gotten to the point of discussing a price with someone. Because looking at Gas Solutions, it’s on the books of $51 million. I would hope that the price you are discussing is somewhat above that and how does that play into a fair value assessment?

Bill Vastardis

Robert, we appreciate the question. As I am sure you can imagine is we are in the middle of a negotiated process, we will not be discussing price for Gas Solutions or anything pertaining to that negotiation on this public call.

Robert Dodd -- Morgan, Keegan & Company

I understand. I just – in general terms, how does that play through in FAS 157?

Bill Vastardis

The methodology for how interested indications go into the evaluations process?

Robert Dodd -- Morgan, Keegan & Company

Yes.

Bill Vastardis

It’s one of the – as you know, we hire, Robert, Houlihan Lokey -- the board, to be specific, hires Houlihan Lokey to do valuation of all the companies in the portfolio and instruments thereof each quarter, including Gas Solutions. And it’s a balanced perspective that utilizes M&A and market trading multiples discounted cash flow analyses and some typically modest weights to non-binding indicative type of interest in the actual asset. Because until a definitive agreement is signed, it’s all talk, so to speak.

Robert Dodd -- Morgan, Keegan & Company

Okay. Got it. Thank you.

Bill Vastardis

Sure.

Operator

Our next question will come from Jim Shanahan from Wachovia. Please go ahead.

Jim Shanahan -- Wachovia Securities

Thank you. I have a couple of questions. First of all, since June 30, by our estimates, coal names are down 36%, natural gas 45%, oil names down 25%. NLP names are also down and (inaudible) this would likely impact valuations in the September quarter. How – any thoughts on that or what all this weakness might spelt out in terms of impact to NAV and have these declines in just commodity prices generally impacted the performance at the portfolio company level in any significant way for your companies particularly Yatesville given the prior performance of the separate coal companies say in the March of December quarters.

Grier Eliasek

Jim, this is Grier. We appreciate the question. There are several components in answering that. First, we do not, as a general rule, project what future net asset values might be. However, we can comment on the general performance of our largest controlled investment. These companies, which include Gas Solutions, Ajax, R-V Industries, Yatesville Coal, are right now experiencing record operating and financial performance on a trailing and recent basis.

Regarding commodity exposure, we seek to hedge those exposures wherever possible if that’s available to us. For example, as I discussed in our script at the beginning, we’ve hedged for the next two years our propane exposure for Gas Solutions. We also continue to diversify the portfolio. You saw three transactions that were closed in the last month in diversified verticals, including food and beverage, Information Technology, and healthcare. We also – where we have more significant investments – where we hold primarily debt, there is third-party equity underneath us that would bear any first exposure to changes in commodity prices that aren’t already hedged out. For example, Stryker Energy, an oil and gas company where we hold primarily a debt instrument and a – for modest equity kicker. But that company has hedged its gas prices for years into the future. We are also in the process of monetizing our investment in Gas Solutions, as previously disclosed and we are working on the same for NRG Manufacturing.

And we’ll potentially look at others to maximize shareholder value at the appropriate point in time. Specifically – and some of those deals we mentioned, Gas Solutions, I talked about the hedging of that. Ajax is a significant manufacture for components of wind turbines. That business is booming significantly. It also services the global mining and construction industry that feeds a lot of the growth going on in India and China, developing countries. And we are seeing record profits and not a slowdown there. R-V services diversified verticals including power generation, food and beverage, paper industry, so we like the diversity there.

Yatesville Coal, which you asked about specifically, we have actually benefited because Yatesville in the earlier part of the year was selling coal at previously hedged prices in the $80 per ton range. Now, coals prices are above $100 per ton and we are able to sell at those prices and we are looking to hedge that for as long as possible and there is a very active permitting activity going on to increase and ramp production to capture that. So, that’s a long answer, I know, but I wanted to give you a comprehensive one to that very good question about recent energy industry dynamics.

Jim Shanahan -- Wachovia Securities

Thank you very much, Grier. And a followup on the Yatesville, if you don’t mind. There were some performance issues associated with these coal investments that I think were related to the resignation or termination of a couple of your investment professionals. Given kind of everything sounds like going the right way for your coals investments and the fact that some or all of these had either been underperforming or been on non-accrual at some point since their inception, is it a good time to just think about monetizing these particular investments and continuing the diversification away from energy or perhaps accelerating that diversification?

John Barry

Jim, this is John. In fact, it is a good time. And we look at monetizing any one of the number of our investments at appropriate times. You are quite correct to note that now is a good time in the coal sector. So we have been actively looking at that.

Jim Shanahan -- Wachovia Securities

Okay. And then just one final easy one. With regards to the expansion of the credit facility, would you – are you able to or would you care to update the community here on what your outlook is or your expectation is for the financing cost either on an incremental basis, in other word, the incremental $200 million or perhaps the entire $400 million where you might see that borrowing cost shaking out for the entire $400 million facility?

Bill Vastardis

Sure, Jim. We have – on the credit facility, spent the last several months putting together a very tight structure. We already have a tight structure for our credit facility, but specifically we have been working with Moody’s and S&P on a dual-rated facility, which will add extra lender bells and whistles. We feel in the current environment as one goes upsides any facility you want to have maximum attractive paper for folks to be looking at and we think having a dual-rated revolving facility would significantly differentiate us. Also, the low leverage embedded in our business development company model as it pertains others in the leveraged loan market. By moving to a dual-rate -- and we don’t yet if it would be -- what with this precise rating but potentially double A is what we had hoped to get. Our objective is to stay very close to existing pricing. We right now are pricing (inaudible) plus 175. We don’t know for sure if it will be precisely that. We might come in a little greater than that. It’s a little bit premature and speculative to know, Jim, because we are just now finishing the hard work on the rating agency structuring and we will be going into the market. (inaudible) markets obviously are experiencing a lot of dynamics and changes in pricing in real time, but the higher the rating of course the tighter the spread and pricing we expect to come out and the harder it will be for folks to argue about pricing by having definitive ratings in place.

Jim Shanahan -- Wachovia Securities

Okay. Well thank you, gentlemen, and congratulations on the performance this quarter.

John Barry

Thank you very much, Jim.

Operator

Our next question will come from James Bellessa from D.A. Davidson and Company. Please go ahead.

James Bellessa -- D.A. Davidson & Co.

Good morning. In your Form 10-K, in the legal section, it talks about an arbitration activity that you are involved in. Did that hit the June quarter? Will that hit the first quarter or ’09 or one – I think at one time you reserved for this arbitration and now it looks like you are going to be on the winning side. Will you be adding this back to you earnings at some point?

Grier Eliasek

Well, Jim, first we did win that. The party who made whoever was nine different claims, every single one was dismissed. And now that party (inaudible) the judgment against that party for millions of dollars, which we intend to collect. So, when did you collect that, I believe is that if we do collect it. We all know about people (inaudible) hide their assets. So we are – maybe some people don’t even have any assets. But we will make an effort to collect that. And if we are successful, that will be returned to income. But it won't be – we might like to recognize it today, but we recognize it correcting on some of these things is less than (inaudible) or even highly probable exercise.

James Bellessa -- D.A. Davidson & Co.

In your income statement it looks like you reclassified a line item and you’ve added this item called ‘Allocation of overhead from Prospect Administration.’ Is that a correction? Is that correct that you’ve – that’s a new line item--?

Bill Vastardis

Jim, this is Bill. That’s always been a cost. However it was in previous periods listed under other general and administrative. And given that it has increased over the last year, we have decided to break that out separately. And as I mentioned earlier in response to another question, it reflects the increase in staff at Prospect to handle many of the functions that the typical BDC staff would handle such as the credit facility portfolio, monitoring activities, et cetera.

James Bellessa -- D.A. Davidson & Co.

Understand. Now, will the historical pattern be released or will we just have to have a combo – discombobulated earnings model until – of the quarters in the future reported?

Bill Vastardis

If I understand your question correctly, the – that line item has been reflected in the previous years.

James Bellessa -- D.A. Davidson & Co.

Right. I understand about the previous years, but by quarter is there any way you can give the data out historically or we just have to be patient, wait?

Bill Vastardis

The current run rate is about $196,000 per month for that line item. Is that (inaudible).

James Bellessa -- D.A. Davidson & Co.

That helps a little, yes.

Bill Vastardis

Okay.

James Bellessa -- D.A. Davidson & Co.

And in terms of these prepayments and from time to time you have them, what’s the – a rough rule of sum how much the prepayment penalty might be on this, example R-V Industries?

Bill Vastardis

Sometimes we have prepayment premium, sometimes they are more modest (inaudible) on specific deals, Jim, but they can vary between zero to say 1% all the way to more significant 10% and 20% type of premium and up. So it’s hard to have a precise number but maybe an average of say 5% for modeling purposed on overall portfolio might not be a bad high level estimate one could make for a portfolio like ours.

James Bellessa -- D.A. Davidson & Co.

Thank you very much.

Bill Vastardis

Thank you, Jim.

John Barry

Thank you, Jim.

Operator

Our next question will come from Henry Coffey from Sterne Agee. Please go ahead, sir.

Henry Coffey -- Sterne Agee

Hi, good morning, everyone.

John Barry

Good morning, Henry.

Henry Coffey -- Sterne Agee

How are you, John?

John Barry

Fine.

Henry Coffey -- Sterne Agee

With the new debt facility hopefully in place sometime this year and if not sooner than that, how does your attitude towards – how is your attitude towards leverage changing? I know, John, historically you have always built up some leverage, paid it down with equity, built up leverage, paid it down with equity, but now that you have got a bigger and more diversified business are we going to see more – a more aggressive attitude towards leverage? And if so can you give us a sense of what your targeted leverage ratios could look like in the future?

Grier Eliasek

Thanks, Henry. You are right that we have in the last 18 months, couple of years or so (inaudible) over equitized our capital base allowing us really to build minimum scale and diversity. You need to get the asset base as we do – and as one does work with the agencies that becomes increasingly clear any sort of $400 million, $500 million, $600 million (inaudible) to make leveraging that makes sense to get the ratings that one desires. And so, going forward, particularly at today’s interest rates, we want to maximize our credit, maximize our leverage. From a modeling standpoint, as you know Henry, while we are limited to one-to-one, that wouldn’t be our average leverage outstanding because of the nature of building up the facility and the paying it down through future equity monetizations and/or share issuances. But somewhere around 0.5 to 0.7 is where we’d like to be long term.

Henry Coffey -- Sterne Agee

Thank you.

John Barry

Henry, I guess I would add. Everything changes but nothing changes, right. So our access to credit, we are fortunate to have access to credit. We recognize that leveraging the portfolio drives the dividend. As we have a more diversified slice and dice portfolio across multiple industries the amount that we can draw on the facility goes up, but we will be mindful especially in credit markets like this to not overestimate the amount of credit that will be available at any given time. So as Grier said, people who want to go up to 0.99 or 0.95, which I think (inaudible) we think we will be seeing less of that. On the other hand, there will be also less (inaudible) time periods when we have now leverage.

Henry Coffey -- Sterne Agee

We are just trying to figure out looking forward you had a very predictable formula that you outlined for us a couple of years ago, John, and just kind of on a going-forward basis, as we do modeling, it helps to sort of guess at what point additional equity is needed or growth gets capped out and (inaudible) 0.5 to 0.7 is probably good enough for --

John Barry

But bear in mind also we take advantage of market opportunities. So as interest rates move, as the equity markets move, we do respond to what we view as advantageous situations.

Henry Coffey -- Sterne Agee

And do you have any insight yet into the type of term debt facility you are – the type (inaudible) the type of debt facility you are likely to be entertaining? Will it be a term debt? Will you take down a lot of money or drawn line against assets or--?

Grier Eliasek

Henry, this is Grier. The – we are prioritizing increasing a revolving facility that gives us flexibility to draw and pay down in an as needed basis. We haven’t been in a term debt discussions recently, but we are always evaluating and constant talks about different options that are available in the marketplace. One of the benefits of getting a rated facility and working with the agencies on that is it allows us to evolve towards potentially getting a corporate credit rating. And by doing so that would enable potentially access to lower cost term debt in the future.

Henry Coffey -- Sterne Agee

Just going back to one of the earlier questions, there has always been kind of a debate about how to value Gas Solutions. The operating figure you are giving out, I am assuming that approximates EBITDA and doesn’t include any interest expense or does it?

Bill Vastardis

That’s a pretty capital structure for EBITDA type figure.

Henry Coffey -- Sterne Agee

Close enough to EBITDA for – I think for modeling purposed. And the disconnect between market multiples and the way you are evaluating firm puts a number on that company’s particularly large is – once this process is completed, are you going to be revisiting how you value companies and 157 force more transparency on that front? Or is just going to--?

John Barry

Henry, since Grier answered this once, let’s say my answer is going to be consistent. Of course I was in the room, should be. We are required to value our portfolio quarterly using a consistent valuation methodology and in our case the consistent methodology is information about each of the companies we send directly to Houlihan who performs their valuation exercise without any material input from us. We want to make sure that they have the correct numbers. Their evaluation results are provided to the Board of Directors and to the management and these are discussed by the audit committee without the management present and also by the full Board and the full Board assesses the valuation and generally accepts the valuations provided by the audit committee, which generally is within the ranges provided by Houlihan. So, the question does come up if people like Henry Coffey believe that an asset is worth way more than Houlihan, we would be very happy to take a bid, if you are interested. Otherwise, we are going to wait to see what happens because we are not in a position to be attempting to influence Houlihan or to second guess their method of valuing these companies. As Grier said, they do a GCF, they do market multiples, they look at a number asset liquidation, they view, they do have all bid information we have. And so it’s a rigorous, disciplined methodology. Doesn’t mean that it is a prediction of exactly where something really will not be sold. So we won't be changing that.

Henry Coffey -- Sterne Agee

Hopefully they pay a lot more for it than what you are carrying it for, John, we will all make money.

John Barry

Well, that’s you know we obviously we hope that for all of our assets, right.

Henry Coffey -- Sterne Agee

Well, thank you.

Grier Eliasek

Thank you, Henry.

Operator

Our next question comes from Chris Doucet from Doucet Asset Management. Please go ahead.

David Ratliff -- Doucet Asset Management

Good morning gentlemen.

Grier Eliasek

Hi, Chris.

David Ratliff -- Doucet Asset Management

This is actually David Ratliff. I am one of Chris’ analysts here at the firm, but Chris is here on the call as well. We want to congratulate you on an excellent year-over-year performance in you operating business and look forward to hearing more about some of these monetizations. You have answered most of our question, but had one straightforward – pretty straightforward question about Gas Solutions. In the past you have provided some EBITDA guidance – or EBITDA run rates for Gas Solutions. In this quarter you provided operating income. I assume that includes depreciation element. Do you have a run rate for Gas Solutions’ current EBITDA?

Bill Vastardis

The number we are quoting of plant operating income is – prior to depreciation I believe – we will check on that and get that later in the call. But 30 – more than $30 million of unadjusted plant operating income, you can use that for modeling purposes to be EBITDA.

David Ratliff -- Doucet Asset Management

Okay. Excellent. That’s my only question. Thanks for taking my question.

Bill Vastardis

Thank you.

Operator

Our next question will come from John Ellis [ph], a private investor. Please go ahead.

John Ellis

Good morning. I haven’t had time to read your 10-K in detail, so if the answer to my question is in there just refer me to the page. Do you list your investments in risk conscious – for instance, what percentage of your assets are non-performing, what are performing above expectations, and percentages in between?

Bill Vastardis

We currently only list in the 10-K the investments in non-accrual status in terms of percentages and that’s I think less than 1%. In terms of the performance of the assets, there are discussions about individual companies in there but there isn’t a rating system that we have applied to any of the companies --

John Ellis

Yes, I have seen that, but for an amateur shareholder like most of us I suppose, it would be helpful if we have something – some of the BDCs do that and it just gives one a handy point of reference.

Bill Vastardis

John, we will take that under advice and thank you.

John Ellis

Yes, thanks. It would help. Thanks very much and very nice performance. Thanks.

Bill Vastardis

Thank you, John.

Operator

Our next question comes from Paul Norris [ph], a private investor. Please go ahead.

Paul Norris

Good morning. I would like to ask how many number of shares outstanding and when will the next dividend be announced?

Grier Eliasek

Related to the – I will answer – this is Grier – the second question, Paul. The dividend will be announced later this month, in the next three weeks you should expect an announcement. Related to the number of shares, Bill?

Bill Vastardis

We currently have 29,520,379 shares outstanding.

Paul Norris

Thank you very much and congratulations on the job that you are doing for the shareholders.

Grier Eliasek

Thank you, Paul. Much appreciated.

Bill Vastardis

Thank you, Paul.

Paul Norris

You are welcome.

Operator

(Operator instructions) Our next question comes from Mark Lindy [ph] from Wachovia Securities. Please go ahead.

Mark Lindy -- Wachovia Securities

I have a question on a disclosure that’s in the 10-K regarding Gas Solutions. It says that the interested parties have expressed interest in acquiring the assets of Gas Solutions and then further says that the sale of the assets rather than the stock might (inaudible) in a significant Gas Solutions level. Could you clarify that for me? Does it look like – playing towards a sale of assets as opposed to sell Gas Solutions in its entirety. What’s the difference between stock sales and an asset sale of Gas Solutions?

Grier Eliasek

Mark, we put in that language cautionary note because we do not have a definitive deal pertaining to selling Gas Solutions. And if we were to do an asset sale there may be a tax liability involved with that. It would be premature for us to comment on the precise size of it. If there were to occur an asset sale then there are some potential activities we could take to reduce potentially reduce that tax liability. But it’s a bit premature – it’s more of a cautionary note and it’s a bit premature to get into all these specific potential dynamics there. There are (inaudible) different possibilities and potential (inaudible) as well.

Mark Lindy -- Wachovia Securities

Okay. I guess what I want to get a sense of is was it a cautionary note of was it playing towards an asset sale and I guess it’s not --

John Barry

Well, Mark, it’s really – this is John Barry – what is intended to point is an asset sale is likely to result in a higher tax bill than a sale of the corporation--

Mark Lindy -- Wachovia Securities

Right.

John Barry

So, you would think all things being equal, we would rather sell the corporation than the asset and you would be correct in believing that. Whether we will be able to achieve that goal is still in the future.

Mark Lindy -- Wachovia Securities

I understand and I appreciate the clarification.

Grier Eliasek

Thank you, Mark.

Mark Lindy -- Wachovia Securities

Thank you.

Operator

Our next question will come from Jasper Birch [ph] from Fox-Pitt, Kelton. Please go ahead.

Jasper Birch -- Fox-Pitt, Kelton

Hey guys, just a quick question on Worcester Energy. In your 10-K you have a sentence that says that it’s now earning revenues, sufficient coverage, that service requirements, and the wording seems like that’s because of a top line in terms of a energy production agreement. Should we – is that the driver for it now making a – for it now having sufficient revenue or is there also improvement in the bottom line in term of inputs such as (inaudible)

Grier Eliasek

Jasper, it pertains to a agreement on the production side of things as well as higher availability (inaudible) than in prior years.

Jasper Birch -- Fox-Pitt, Kelton

Okay. Alright. Thank you.

Grier Eliasek

Thank you.

Operator

Our next question will come from Henry Coffey from Sterne Agee. Please go ahead.

Henry Coffey -- Sterne Agee

Yes, I guess I better start by – I forgot to sort of congratulate you on a great quarter. You will obviously blow the bottle and park your – but I am looking at the guidance numbers for September. Shall we just sort of assume that everything falls in at the – into the range and can you give us any sense of – in terms of expected payouts where your dividend policy is going to fall? Are you going to try to pay out a higher percentage of your earnings in the future or is it going to have about 90% of it, which is what you seem to be doing now or where do you think that’s heading and shall we get really optimistic and kind of go to the upper end of the numbers that you put out for us?

John Barry

Well, hold on, Henry, let’s not get carried away.

Henry Coffey -- Sterne Agee

Why not?

John Barry

Yes. And that’s not a good idea.

Grier Eliasek

Right. Henry, look, we try to be thoughtful about guidance and we put a range of numbers for a reason because we don’t want to be too precise there and disappoint people if something falls below a precise number. As it pertains to the dividend end of things and net invested income, your question there, we are actually on an August tax year and we have, as you probably know, Henry, a one-year spill back mechanism pertaining to giving the 90% distribution requirement. But on top of that, on a calendar year basis, we intend to distribute at least 98% to avoid any excise tax. And then you bid into whether or not that distribution is part of a quarterly normalized dividend or a special dividend that is a balancing act determination for us. On the one hand we want to have as much in the recurring normalized category as possible because we think people prefer that as opposed to one-time type of distribution. On the other hand, we like being very conservative in having a dividend that we can seek to pay out and if that increase over we hope as an objective long periods of time, and we have observed other businesses out there make distributions partially or sometimes significantly in excess of net investment income and candidly we have stretched our head on that, Henry, and wondered about that. And we have thought that a better recurring number is to live within the normalized net investment income range if you will. So as a result we may be one of the only in our peer group that is in fact under distributed relative to net investment income on a quarterly basis today and more recently but we do – we are trying to get that closer to 100% to minimize taxation.

John Barry

You know, Henry, we don’t mind being the most conservative person in the room and we find that that’s generally works pretty well.

Henry Coffey -- Sterne Agee

Well, obviously, John, it was a great quarter, so thank you.

Grier Eliasek

Thanks, Henry.

Operator

We show no further questions at this time. I would like to turn the conference back over to Mr. Barry for any closing remarks.

John Barry

Well, we appreciate all those really interesting questions and we thank people for coming on our call. Good bye now.

Grier Eliasek

Thank you all.

Operator

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Source: Prospect Capital Corporation F4Q08 (Qtr End 06/30/08) Earnings Call Transcript
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