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Executives

John Barry – Chairman & CEO

Brian Oswald – CFO

Grier Eliasek – President & COO

Analysts

Robert Dodd – Raymond James

Greg Mason – Stifel Nicolaus

Jonathan Bock – Wells Fargo

Greg Mason – Stifel Nicolaus

Jerry Luther – Retail

Prospect Capital Corporation (PSEC) F1Q13 Earnings Call November 9, 2012 11:00 AM ET

Operator

Good morning and welcome to the Prospect Capital Corporation First Fiscal Quarter Year Earnings Release and Conference Call. All participants will be in a listen only mode. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

John Barry

Thank you Ashley. Joining me on the call today are Grier Eliasek, our President and COO; and Brian Oswald, our CFO. Brian?

Brian Oswald

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements 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-Qfiled previously. Now, I’ll turn the call back over to John.

John Barry

Before I dive into our record net investment income results for this quarter, I would like to take a moment to explain the thinking behind our successful equity raised last week. Starting months ago with the market expectation since confirmed of divided government heading into 2013 and increases in capital gains and other taxes and regulations. Counterparties have been approaching us to close transactions by year end. As a result, we have been seeing a surge in demand for our capital and our investment pipeline continues to build. We wanted to make sure we had enough dry powder to meet these demands and so last week issued equity on an accretive basis at a premium to net asset value.

Given the collapse in the markets following the election, a collapse we feared would occur, we believe we were fortunate to be able to thread the needle and clear our shelf filing with the SEC just in time to complete an offering before the election has now made such an offering difficult, if not impossible.

We now believe that we do have the dry powder necessary to meet all these escalating needs of capital and will be able to fill our nets while the salmon are running. On such a full sea, we are now afloat. We must take the current when it serves. We’ll lose our ventures.

In the September 2012 quarter, we achieved net record net investment income and record year-over-year great. We also delivered $0.47 and $0.05 of growth in net asset value per share for the year-over-year and sequential quarter periods. NAV stood at $10.88 on September 30th, 2012.

Net investment income for the quarter was $74 million up 166% from the prior year. on April share basis, net investment income for the quarter was $0.46 up 77% from the prior year. we've delivered strong net investment income growth while keeping leverage low. Net of cash and equivalents, our debt to equity ratio was less than 35% in September. We have substantial debt capacity and liquidity to drive future earnings. We estimate our net investment income per share in the December quarter will be $0.41 to $0.46.

We just announced more shareholder distributions through January, which will be our 54th shareholder distribution and 31st consecutive per share monthly increase. Our net investment income has exceeded distributions demonstrating substantial distribution coverage for the current fiscal year, the prior fiscal year, the last four quarters and for the cumulative history of the company. We've now paid out nearly $11 per share and almost $600 million in distributions over the life of the company.

I'll now turn the call over to Grier

Grier Eliasek

Thanks John. Our business continues to grow at a prudent pace. As of today we've now reached more than 3.5 billion of assets in undrawn credit. Our team is increased to more than 60 professionals representing one of the largest dedicated middle market credit groups in the industry. with our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that includes third party, private equity sponsor related lending, direct non-sponsor lending, prospect sponsored transactions and structured credit. Our team typically originates thousands of opportunities annually and invests in a disciplined manner in a single digit percentage of such opportunities.

Our non-bank structure gives us the flexibility to invest in multiples levels of the corporate capital stack with a preference for secured lending and senior loans. Our approach is the one that generates attractive risk adjusted yields and our debt investments were generating an annualized yield of 13.3% as of September 30. We also hold equity positions and mini-transactions that can act as yield enhancers of capital gains contributors as such positions generate distributions. Originations in the September 2012 quarter were 748 million, up 30% from the June quarter. We also experienced 158 million of repayments as the nice validation of our capital preservation objectives. As of September, we are up to 96 portfolio companies, a 13% increase from the June quarter and demonstrating both an increase in diversity as well as a migration toward the larger positions and larger portfolio companies. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration.

In the September quarter, we enjoyed exists for Pinnacle and US HealthWorks and generated realized IRRs of 15% for each plus exited other investments profitably. Our First Tower portfolio company is performing well with annualized cash yields in excess of 18% and our ramped CLOs are currently yielding more than 20% annualized. ESHI paid us 33 million in dividends in the September quarter as a significant income contributor. We don't know precisely what dividends ESHI will pay us in the future, but we hope to see solid dividends again in the current December quarter.

The current December quarter is off to a strong start. With 143 million of originations and a rapidly building pipeline. This quarter we've already enjoyed exists for Northwestern, Blue Coat, Hi-Tech, Wilson, Mood Media and Shearer’s. and generated realized IRRs of 23, 23, 16, 13 and 19% respectively.

Our credit quality continues to be robust. None of our loans originated in approximately five years has gone on nonaccrual status. Nonaccruals as a percentage of total assets stood at only 1.5% in September down from 1.9% in June 2012 and 3.5% in Jun 2011. Our advanced investment pipeline aggregates more than 800 million, potential opportunities, building well for the coming months. Thank you. I'll now turn the call over to Brian.

Brian Oswald

Thanks Grier. As John discussed, we've grown our business with low leverage. Net of cash and investments, our debt to equity ratios stood at less than 35% in September. We believe our low leverage in the first supplied excess to funding demonstrate both balance sheet strength as well as substantial liquidity to capitalize on the attractive opportunities. We’re a leader in innovator in our marketplace. We were the first company in our industry to issue a convertible bond, conduct an ATM program, develop a retail notes program and acquire a competitor as we did with Patriot Capital. Shareholders and unsecured creditors alike should appreciate the thoughtful approach, differentiated in our industry which we have taken to the construction of the right hand side of our balance sheet.

As of September, we held approximately 2.2 billion of our nearly 2.9 billion in total assets as unencumbered assets. the remaining assets are pledged to Prospect Capital funding LLC which has a AA rated $517.5 million revolver with 16 banks and with a $650 million total size accordion feature at our auction. The revolver is priced at Libor plus 275 basis points and revolves for three years followed by two years of amortization with interest distributions allowed. We started the June quarter with a $410 million revolver in 10 banks so we've seen significant lender interest as we've grown the revolver. Outside of our revolver and benefiting from our unencumbered assets, we've issued a Prospect Capital Corporation; multiple types of BBB rated unsecured debt including convertible bonds, our baby bond and retail program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions and no cross defaults with our revolver.

We've now tapped the five year, seven year, 10 year and greater unsecured term debt market to extend our liability duration. We have no debt maturities until December 2015, with debt maturities extending through 2022. With so many banks and debt investors across so many debt tranches, we substantially reduced our counterparty risk over the years. as of today, we have issued four tranches of convertible bonds with staggered maturities, that aggregate $647.5 million, at interest rates ranging from 5.38 to 6.25% and have conversion prices ranging from $11.35 to $12.76 per share.

We have also issued a $100 million, 6.95% baby bond due in 2022 and traded on the New York Stock Exchange with the Ticker PRY. We have issued 95.7 million of retail program notes with staggered maturities between 2019 and 2022 at an weighted average interest rate of 6.2%. from March 31st to today, in addition to our revolver expansion, retail program notes issuance and two convertible bond issuances, one in April and one recently in August, we have issued equity four times, each at a premium to net asset value. In two ATM programs, we raised $153.8 million and in an underwriting offering in July, we raised $269.3 million and in our recent underwritten offering in November, we raised $383.6 million.

We currently have $10 million in borrowings under our revolver. Assuming sufficient assets are pledged to the revolver and that we are in compliance with all our revolver terms and taking into account our cash balances on hand, we have approximately 800 million of new investment capacity.

Now I'll the call back over to John.

John Barry

We can now answer any questions.

Question-and-Answer Session

Operator

We will now begin the question and answer session. (Operator Instructions). and our first question is from Robert Dodd of Raymond James. Please go ahead.

Robert Dodd – Raymond James

In the press release disclosure, since the end of the quarter you put in another 20 million in equity in to First Tower. The question is why equity? The structure of the deal that I see there is a $400 million revolver of which 246 roughly is drawn. If the first I had the need for some seasonal capital or why didn’t they just draw the revolver and repay that after the seasonal demand returns to more normal levels. I mean what was the motivation for putting equity rather than temporary finance in that place.

Grier Eliasek

Tower, really the Tower investment, part of the premise was to benefit from opportunities for growth in the business. So there’s really two things going on with Tower, it created a rationale for a capital, additional incremental capital investment buys in the last few weeks. One is the seasonality aspect; more business gets done in the end of the year, holiday shopping all of that. But the second aspect is, Tower is in the midst of expanding into multiple other states, beyond its existing footprint all of which are opportunity driven for us and we would hope and expect to have similar returns on net capital that we enjoy off our existing investment that's yielding close to 20%.

Robert Dodd – Raymond James

And second one, just kind of a broader question, when you look at Tower, like you say, 18 or 20% returns that the CLOs, north of 20%. Combined those now represent pretty large piece on your bad assets are now, BBC classification, not to say that's bad per se, is now 25% of total assets which means you don't really have a lot of room to expand within the mix the CLOs or First Tower from this level. so how are you going, if those are essentially to a degree within the mix, maxed out, what's the strategy for other high yield assets going forward? I mean what other areas can you add to maintain portfolio yields given your highest yielding assets are nearing (inaudible).

Grier Eliasek

We do have a little bit more capacity than the numbers you were quoting as we've grown the book with our offering recently. But you’re right, both CLOs as well as finance businesses follow to the so called 30% basket and they were cast there and we monitor and manage those quite carefully. We also think we use those baskets wisely and strategically because there are limitations there, we want to be smart about how we want to use them on a risk mitigation basis and also try to achieve high returns in those strategies.

In terms of the so called (inaudible) I think it was your question, what are you doing for yields there? I think we've enjoyed some of the highest (inaudible) of any of our peers for years our investments. And really the key aspect to that is driving on originations and having the vast book for business being agent to model, more than 80 plus percent of our business, really agent. We’re putting terms on the term and then you tend to get paid more for doing so than in the syndicated market, predictably in the last couple of months, we've seen frothiness in the participation syndicated type market. that's a small portion of our business that we see opportunities here or there. We haven't seen that many opportunities in that margin in the last few months. And because we have such a large footprint of people, 60 plus, because I think one of them, not the most diversified business models of any of our peers, we can play in different markets as they become relatively more attracted. And our advice is always towards being as hype in the capital structure as we can with senior secured debt. We have intended to have as much unsecured paper as assets on our balance sheet. We do have some so called unsecured net (ph). We’d like to have a security interest and we’d like to get paid as much as possible for it and you’ve seen the history of our company. We've been in the 13 to 15% yield range for quite some time.

Operator

And our next question is from Greg Mason of Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

Could you just discuss the capital deployment over the last two quarters has been about 600 million a quarter and previously you’re averaging 200 to 250 million per quarter. Can you give us some comfort. I know you talked about the pipeline is extremely robust but just some comfort on what you’re seeing that you will continue to see as good credit quality in this basket of assets that you’ve had in the past? What are you seeing on leveraging and underwriting characteristics on the new investments that you’ve been making?

Grier Eliasek

Sure, this is a general question across all opportunities Greg?

Greg Mason – Stifel Nicolaus

Sure, yes.

Grier Eliasek

Okay, well in general what we've seen is, define middle market. people define middle market in different ways. So it’s helpful to start the definition. We would define it as about $5 to $100 million EBITDA size companies that's composed of the lower middle market, sub 10 traditional middle market of 10 to say 40 million of EBITDA and then the upper middle market, they can equate that syndicated situations, 40 to 100. Those are clean designations but work reasonably well.

We've seen in the upper range of that, the syndicated market little bit more frostiness in the last couple of months and a little bit of yield compression but much more so, some leverage popping up and covering it light entering that market. both of it should make us very uncomfortable as credit people and its very, very hard to get a deal done around here, that maybe hard for folks to appreciate when you see three quarters of a billion of originations but when you realize that we worked on many multiples of that, that we declined to invest in or went in another direction, then you can appreciate more that discipline.

In the traditional middle market and the lower middle market, we've seen much greater stability of returns and call it first lean, the unit tranche type of lending and the 10 to 11% coupon range and higher IRRs through points and prepayment premium, second leans without subordination of call it, 11 to 12% with subordination 12 to 13%, 12 to 14% and unsecured paper north of that. Those are the returns we've seen in the Asian to lending business. Of course we look at pricing and our selection as well as risk and as we've talked about earlier in the other businesses like our structured credit business, in our (inaudible) closer to 20% return.

So we think the higher alpha opportunities, the barriers to entry of those businesses and how we approach those markets. (inaudible) for example, you need a lot more bodies and relationships and expertise to manage that type of business than a purely long and strong sponsor finance business and most of our peers I think, 100% of the business is just long and strong sponsor finance in some cases just a participation side. That's a good business for us, but it’s not our only business and it allows us to be very disciplined. As John likes to say, when you’re working on 10 different things, and you feel like you’re not comfortable with them right in front of you, no problem. Say no to that and move on to the other nine. It’s the folks who don't have much deal flow and as many people. That they are closing the mediocre deals.

Greg Mason – Stifel Nicolaus

And can you talk about, you put quite a bit in CLO equity, can you talk about what you’re seeing in that market and why you’ve really decided to build out that part of your balance sheet on the asset side?

Grier Eliasek

Yes, I don't know, it’s quite a bit, it’s about 10 to 13% of our asset base and again, we’re using our 30% baskets strategically as others do with the Unitron’s funds and doing middle market CLOs with others that also get their applause meters out there. We continue to have a very differentiated strategy there, that's analogous to our control equity business in which we take controlling interest in deals, all primary issuance in which we co-underwrite credits in conjunction with the third party collateral manager and we get special terms on such deals as well. And there are only a few collateral managers that pass mustard.

I think we have eight or nine or so platforms that we've approved and now done in many cases, repeat business with. There’s probably three to four times that that don't pass mustard with and we've really stood clear a lot of the secondary market there and more subject to pricing frothiness and volatility than on the primary issuance side. That book now has about 500 discrete loans in it. Extremely well diversified. We have about 12-13 or so different deal structures. So that compares well if you compare to say, appear might have 100% wrapped up in a $1 billion vehicle, we’re very well diversified from that standpoint. And most importantly, zero defaults, not a single default which I think speaks well as to the credit quality of how we’re underwriting on the front end and our collateral manager partners. Does that help Greg?

Brian Oswald

One thing Grier left out because we ran out of time is that the team that we have, that manage this CLO business for us has become well known in the industry and as a result they are well liked viewed as people who get it and are easy to work and as a result, we discovered that we have the pick of really the best managers to work within this strategy. We've turned down some very well-known managers. Hopefully we’ll be able to work with them as they improve their track records. But meanwhile, we are able to limit the people we work with to a fairly small group which I think you can identify by looking at our financials.

Operator

And our next question comes from Jonathan Bock of Wells Fargo. You may go ahead.

Jonathan Bock – Wells Fargo

Just trying to focus on the comment I think you made on focusing on senior, maybe secured lending in this environment, as one of the many businesses you’re looking at that I do understand. But as I look at your schedule of investments and particularly the new ones made this quarter, I noticed the $80 million sub debt investment in Artic Glacier, which I think was a formerly bankrupt ice maker. Could you tell us what the overall leverage is through your sub debt security?

Grier Eliasek

I can’t disclose that for confidentially reasons but I can tell you that we’re very excited about the Artic investment, working with the sponsor we've done multiple deals with and yes, there was a part bankruptcy of the company that obviously created a clean situation going forward in our attachment point through our capital is way lower than historical averages. The company’s performing quite well, we’re very pleased of the performance. I can also tell you that we got calls from no fewer than half a dozen of our peers wanting in on the deal and wanting a piece of it and our philosophy that if sometimes it makes sense, sometime hey, we did the underwriting, we originated it, we've got the very attractive pricing we think on that particular investment as you see in our queue and we’ll stick with the paper.

John Barry

One of the things I would point out beyond that is if that is a Blue Chip sponsor, I guess we’re not allowed to give names, advertising, but it’s a Blue Chip sponsor, you can look it up in our papers that has given us a significant amount of their business in large part because of the attention of Jason Wilson on our staff to that company. As a result, we get the first call. very important to get the first call. not just from that sponsor but from others.

Jonathan Bock – Wells Fargo

And again jut as I was looking around, I do think there maybe 225 million of debt ahead of you. I guess the question is, whether that was levered at 4.5 times which put you in the 4.5 to 6, which is fine I guess, the question is, are you comfortable taking leverage on good companies HIG obviously being the sponsor here, taking leverage on companies in the five to six times if you believe this is a good credit and are getting an outsized deal?

Grier Eliasek

Right, it’s not appropriate for us to comment on confidential situations where we don't companies but I'll say this about this credit, you’re quoting some numbers perhaps on a trailing basis. In some cases you’ve got things, happen to the company where run rate situations are significantly higher profitability and much lower leverage levels than you’re quoting. You’re quoting one unsecure mezzanine type investment on our balance sheet. We actually don't have that many and we became comfortable on underwriting with this particular credit.

Brian Oswald

I'll on general multiples. Just speaking for myself, when I look at the multiple on a company, I am not taking into account current market euphoria, applause meters, bubble economies, competition, we need to get this deal, put this money to work. I look at these transactions and I take a look at whether I believe it’s extremely highly likely the company can service the debt on a conservative, we've all heard that word too many times, set of projections. Rarely would we be able to get up beyond say, a 3.7 or 5 or 4 without some very important circumstances causing us to believe that there is some special stability. Which is why the syndicated market often is more difficult, if you look at those transactions, they are at higher multiples. We have to be very careful in picking shoes.

Grier Eliasek

EBITDA leverage is a term that's invented by James Bond salesmen in the 1980s, right. EBITDA is not cash flow. And we look at that, but our credit templates which have been well honed of many years of doing that, look much more at fixed charge coverage ratios as well as operating leverage of the business and your fixed variable cost making a big difference. So we look at, for example breakeven revenues to decline is something we look. What percent does the revenue have to decline before you bust through a 1.0x (ph) fixed charge coverage. Such coverage being an output of not just EBITDA leverage but also taxation on a company, capital expenditures which the tooth fairy doesn’t pay for and many other items. So that's how we think about underwriting. I'll give you some other data that will be helpful. System wide across our portfolio, through the attachment point of our debt, weighted average leverage is about four times. I think there is one other peer which just closes their weighted average leverage, if you factor in their sort of off balance sheet in there, about 4.5 of a scale, more appropriate to us. So we think we’re earning towards the higher end on the yield side, towards the lower end of the leverage side and also the higher end on our percent, senior secured out of the group. So we think we’re doing a pretty good job as it pertains to leverage risk as well as what we’re getting paid for every unit of risk.

Jonathan Bock – Wells Fargo

Totally agree and I just say, I mean that's one investment of many and I appreciate the color. Now I guess also focusing in on CLO equity in this environment, obviously that's been a very attractive business for you as the structure in the primary market. my question is though, as we look at the BSL market to your point, people would often characterize that as higher risk today than perhaps a few months ago and so maybe understanding it, if those market returns in general on a risk adjusted base are worse, it is those same CLOs upon receiving your equity that then go and purchase in the BSL market and so I'm trying to understand, while the 20% returns are nice, just trying to understand the risk element of that equation given that those CLOs are now being essentially forced to deploy capital in BSL and upper end middle market transactions at a point when perhaps risk adjusted returns are lower than they have been.

Grier Eliasek

I want to first, start by clarifying something that maybe is implied on your question on passivity that is not there. We create these vehicles, they are not served up to us like some paper off of a desk. We sit down with the collateral manager and create them. there are invention if you will along with the collateral manager and we are underwriting with the collateral manager every single credit in the book and when you have 60 plus people, you have a lot of bodies and industry expertise in-house, we have your IT experts, our food and beverage experts, our energy experts and so on and so forth that are pouring through credits. So, that's one piece. We’re getting comfortable with that in conjunction with the collateral manager.

Secondly, we’re focusing on primary issuance. So what's important about that as CLOs are sometimes called arbitrage vehicles, I don't necessarily love that term arbitrageas much but the point is that, when you are pricing CLO, it’s a spread vehicle and you’re locking in your liabilities at that point in time and you also know what the initial composition of the assets look like and then really your two major risks to monitor are number one, loss risk which is function of defaults and loss giving default and number two, reinvestment risk. So we’re mitigating I guess the first by constructing the portfolio in conjunction with the collateral manager partners ourselves and working with top quality people and screening out those that we don't think pass mustard.

And we deal with the second by purchasing equity as opposed to junior tranches and by having a controlling interest net equity because we control the call right and what's great about the call right is if the world gets worse, if spreads increase, we make more money. If spreads go up, your liability is the same. The world gets more frothy and spreads decline, and your spreads starts to come in a little, that's the reinvestment risk standpoint. You just call the deal. Sell the assets into improving market, bank your 20-25% return today and maybe you put capital into a new deal, maybe you put it into something else entirely.

So we try to be very thoughtful about micro risk and macro risk. I think the credit quality speaks for itself. A couple of years of focusing very hard on this and of course being a field manager ourselves, our middle market CLO which is a rated vehicle is itself an on balance sheet CLO with zero defaults. Zero defaults and then the yields speak for themselves as well if you’re writing a larger check, you can throw your weight around and demand attractive returns from collateral managers that are arrangers of these deals. So we've been doing just that.

Jonathan Bock – Wells Fargo

That is very unique and that is an excellent color. Maybe one additional question, just as it relates to dividend income…

Brian Oswald

Hold one, before we leave Artic Glacier, I did want to point out with the fundamental investment premise behind the deal was, which I'm sure you’ll agree with. Global warming.

Jonathan Bock – Wells Fargo

I would say that's pretty good. Appreciate that. Now diving into dividend income, I do understand dividend income as it relates to gas solutions, that's a nice supplement to overall NOI. But as we see this, particularly is the fair value of that asset continues to decline, so 125 in March, 70 this past quarter and 44 today, it would seem that that the party will eventually come to an end and so judging by today's valuation perhaps there is two quarters or so left to help supplement dividend income. Maybe give us the sense of where NOI settles and maybe kind of your view NOI dividends, post the great investment that was gas solutions.

Grier Eliasek

Well, absolutely and that has been a terrific investment for us. We’ll continue to get income from that investment in calendar year 2013 as well be it not as much as we've been enjoying. And look, we've been banking substantial amount of dividends on a spill back basis and as we've disclosed, we have delivered significantly greater income in the accumulative life of our company and certainly over the last year and so we’ll have those benefits going into 2013. We don't provide forward guidance on a net investment income beyond the existing corridor. We've provided guidance for the December quarter. But we do as a board sit down on a quarterly basis and obviously select dividends, distributions and announce dividends for the next three months.

And we’re very comfortable with the dividends that we've announced and there has been discussion on our last earnings call. there is discussion about potential dividend increases and the like and we discussed that too and we’ll keep examining that every quarter. We’ll keep examining whether or we use special dividends. We’re not sure you necessarily get a benefit from a non-recurring dividend like a recurring one. So we’ve been really focused on making sure we can deliver sustainable recurring dividends into the future.

Jonathan Bock – Wells Fargo

That's great because I guess that would then beg the question and I appreciate your comments about EBITDA in the high yield bond market, similar to often times BDCs and NOI coverage of the dividend because just as EBITDA isn't cash, NOI often isn't cash either particularly stable cash as fees and dividends or extremely volatile and so when I look at kind of stable cash coverage which is NOI less your fees and pick for others I know it’s not big here, NOI less fees from the dividend on that basis, it appear that you cover only 50% of your dividend. So perhaps, how do you look at the dividend itself and particularly funding it from stable cash flow sources because in the even the economy backs up all of a sudden, perhaps fee income isn't what you or more importantly many other BDC managers would realize.

Grier Eliasek

Jon, first I think we’ll take issue with that 50% number and maybe you can talk to Brian offline on how you arrive at that. But I would say and now we’re getting to the question of recurring versus non-recurring for a business which we covered a little bit in our last call. upfront fees and exit prepayment premium are a part of the recurring business model of what we do as lenders. We charge them on the front end and we get them almost always on the backend and we would generally make five year loans, plus or minus a year or so and they tend to pay often three and we’re getting a prepayment premium and in good times they pay often to and at slower times they maybe pay off in four.

Some of them pay out much earlier in that sort of upper middle market closed eye syndicated book, we put some assets on the books earlier in 2012. Some of them have already paid off and paid a 104 prepayment premium on the way. That's a pretty attractive one. So if you literally zero out everything good that happens in the company pertaining to a structuring fee from origination and a prepayment premium and you actually (inaudible) no value. I mean you can create an ugly model for any business I suppose but I would be immediately disagree with that model.

Operator

And our next question is from Greg Mason of Stifel Nicolaus.

Greg Mason – Stifel Nicolaus

I wanted to talk a little bit about the internodes that you’ve been issuing. I've just been very surprised at that rate is falling from 7% down to 5.7% I believe was the first week of October pricing. How much lower do you think that rate can go and you raised 30 million of those in the September months. Is that pace sustainable or can that even grow and as we think about these internodes?

Brian Oswald

The answer is that we continue to see rates dropping on the dead side. I can’t announce what the next rate that will issue out but it’s even lower than the 5.7% for seven year debt. I mean some of that decreased income from some of it’s a 10 year debt and some of it’s a seven year debt but yes, we have taken down the average rate by about almost 100 basis points over the last six months. And I continue to think that interest rates will decrease. We've seen some baby bond, 30 years bonds that have been in the mid to high 6% rates. So that tends to indicate that our future issuances will be at lower rates even than what we've seen so far.

Grier Eliasek

I'll add to that also Greg that our internodes only have one year of call protection. So should spreads decline much further, we can refinance that debt without penalty which is different from say the converged markets where we know there’s play that tend to be non-call life.

Greg Mason – Stifel Nicolaus

And then the pace, 30 million in September, that's been increasingly it looks like every month. What do you think is the run rate of this debt you can issue on a monthly basis?

Brian Oswald

I think that's reasonable, I think that's where we’re looking at as floor. We've been out of the market for about a month and half right now, we’ll take a little time to get the investors back while we were waiting for the SEC to clear our shelf. We were out the market. so I think it will be a little slower in November but I think once the investors realize that we’re back issuing in this market that's probably a reasonable number and growing from there.

Grier Eliasek

Where we like to grow Greg, I think it’s probably our most attractive and flexible cost of capital business and it’s a dead issuance and as Brian said, in his prepared remarks, we focused very hard on having a balance sheet that is flexible in terms of the allowed collateral all of our term debts is unsecured. All of our term debt has no maintenance financial covenants. All of our term debt has no cross defaults with our secured revolver. These are actually unique things to our company among all of our peers. I don't think people always appreciate when they assess risk and not just rewards. We have about 3 billion of assets just under as of 930 and we have 2.2 billion that's completely unencumbered. So if you have another recession hits and who knows we’ll have one in 2013, I’d still call it double dip or whatever it will be at this point, but we’re in a great spot and we’re in a great spot by having 16 banks in our facility. So you don't get one panicky off an overseas bank that tries to put a bullet in your brain like what happened to folks in the last cycle. So I want to make sure that people leave this call with a sense of how we've constructed the balance sheet.

Greg Mason – Stifel Nicolaus

And then one final question I think in the queue, in energy solutions you have $82 million of cash there that you say can flow back in as a dividend or a repayment of debt. How much, I believe you say, if its earnings and profits, you have to classify it as a dividend. How much of that 82 million could be classified as earning and profits and come into the income statement? Just for our modeling purposes as we think about that.

Grier Eliasek

I don't have the exactly breakdown at our fingertips here maybe you can talk to Brian offline but really the bottom line guidance factors all that in for the existing quarter of $0.41 to $0.46.

Operator

And our next question is from Jerry Luther of Retail.

Jerry Luther – Retail

I am just a private investor and my concern is the fact that we’re trading at less than NAV, that we have this huge input in cash from the dilution of the stock and the upcoming tax consequences for a private investor, why are you electing not to issue a special dividend before the end of the year?

John Barry

I should describe to you some in greater detail, some of the thinking that we went through starting in June, July and August, really before even, when tax rates go up, what tends to happen is that owners of businesses look to restructure or sell them in order to get out of the way of the upcoming tax increases. And that’s why when people see these tax increases coming, there is a huge burst of transaction activity. In June, July and August, we were concerned to make sure that we had adequate dry powder to take advantage of these opportunities because when many people were trying to close deals at the same time, what you’ll find is that we can get better deals.

I don't know how many of our competitors are well situated now to participate in the year-end deal flow to the extent then we will be able to but in June and July we were worried that we would not have capital, we would have to perhaps step aside, perhaps tell our deal people why don't you take it easy on that deal, why don't you lift your foot off the gas pedal which is never good for any business to tell the people within, in those spirits (ph) we’re supposed to get out there and get deals and close deals and represent the company to counterparties, that we’re here, will be there, we’ll close for you. We never had to do it because we've been careful husbanding our capital and planning capital raises.

So in June, July and August, we were concerned to avert the risk of being caught short having a great investing season in the last quarter of the year but not be able to participate. What we did to deal with that problem was first, we reviewed all of our processes if we’re getting our 10-K done, reviewed all of our processes for filing our shelf, we rung out every second of time that we could. The result was that our shelf was cleared really as the hurricane the Northeast and the SEC actually wasn’t even clear until after the hurricane had hit with full force and the SEC was closed, many businesses were closed, underwriters were flooded and we knew we needed to get this transaction done before the election.

I feel we’re pressured knowing that. We were able to thread the needle, getting our self-clear in the midst of the hurricane, speaking to underwriters, while some of them were dysfunctional, some of them were unable to do anything because their infrastructure was flooded and getting a deal off days before the election and I think everyone has seen what's happened in the marketplace. So now we've gone out into the fields, we've harvested our hay, it’s in our barn and the doors are shut tight and so we feel we’re in good shape over the next few months.

If instead, we had declared a special dividend, I don't know what we’ll be telling people, we're not here for you, we don't rely on prospect, deal people how about some time off. I don't think we can run a successful business on a stop and start basis. What we’re looking to provide is a stable dividend that grows steadily. If you look into the annals of investment research, you will find that companies that have a stable steady, reliable dividend that grows slowly, have the lowest cost of capital and when you have the lowest cost of capital, you have an advantage on a competitive playing field, vis-à-vis your competitors which Grierand Brian just mentioned, how we've been able to work down our cost of capital.

Now as a major shareholder myself and all the people on this call, at our end here at prospect, our major shareholders, we’re not happy to move stock, we need to price it down 6%, 7%, 7 and change, but that is the cost of raising capital. We view it as a one-time only cost. The underwriters need to be paid that, they push their stock out there to a discount, why are people suddenly going to buy our stock in volume unless they get a discount. It’s a one-time sale. Each time we do an offering, we have to put our stock on sale.

But the sale doesn’t last forever. It’s a few days, it might be a few days. Someone who sits there and waits, if you look at the stock charts, it’s always come back. Stock climbs up, we need more money, it caps down a little bit, then it starts to climb back up again. So, for me, I feel that's a great time to buy stock. How many other investments are out there where you can earn a 12% or 10% or 11.6% dividend with the kind of safety that we’re able to present here. I mean that's how we view it. I mean obviously we’re cheerleaders for what we’re doing in for the company but for someone who would like to sell stock, I would say that if you still sit, if past patterns reassert themselves or persist, if we regress into the mean, you will see our company again have the stock price trade at the same premium to net asset value, at the same multiples of dividend that it has in the past, because the company is less risky and better positioned than it was before the offering.

But, if you have a store full of perishable goods, you might need to mark them down to move them out. That doesn’t mean that the next day, that low price is going to be available. And so, if someone thinks it’s going to be available as a low price for the indefinite future, well, I guess we’ll see. I would be betting otherwise based on past stock charts. By the way, one thing you can do, remember, a one-time dividend, as Grier mentioned earlier, the company doesn't get much if any credit for that, look at Microsoft, look at the companies that have distributed tons of capital, the stock price doesn't trade up, you do get the money. That's true. But you can get the money the same money by selling some shares without having the share price go down. When we do a special dividend, were we to do one, we would never rule it out. But if we were to do and the share price would trade down for everyone. Now granted you might say, well that's just in the amount of dividend that might be true. But some shareholders would rather just see the company follow the stable dividend policy. Those who would like to lighten up and get some capital out of the company, are free to sell their shares. So, we view it as more of a free market. some shareholders like it the way it is, some will like some capital. You can make that decision on your own without any direction from the hive (ph).

Brian Oswald

Yes, if you did a one-time dividend, you’re going to immediately knock your NAV down by about an amount and as we trade as a multiple of NAV, for the most part, it’s just going to bring the stock down for other.

John Barry

So really the easiest way to accomplish these objectives we feel, system wide is for the company to try to be conservative, stable, steady, not jumping around and then individuals making their own choices. Some might want to buy more of the stock. At the existing price, I wouldn’t discourage them. some might want to lighten up. Some might want to just leave it the way it is and that way each of our, 112,000 shareholders can make their own individual decisions.

Operator

And our next question is from Bob (inaudible). You may go ahead.

Unidentified Analyst

Yes. I just a fast question. Have you ever thought of or considered merging with another business development company?

Grier Eliasek

We haven't thought about that and we in fact did that three years ago, next month, we bought another business development company called Patriot Capital, during the last dislocation and it was a wonderful transaction for us, it was a wonderful transaction for Patriot shareholders. Just about all that book has been realized at this point. I think our IRRs in that deal are in excess of 40% on an annualized basis and if you know of any other deals, we’re happy to talk to you about, we’ll be happy to do that again many times over.

John Barry

We do these things always on a friendly basis and so if you know of people who would be interested in talking to you, we are interested. We’re also interested in buying portfolios. We’re interested in other investments in the financial services business as you’ve probably seen with FT.

Operator

And our next question is from Jeff Singer of (inaudible) Limited.

Unidentified Analyst

When you put this new capital at work, have you guys any forecast to what kind of increase in dividend we can expect over the next couple months after next quarter or two when you put this money to work?

Grier Eliasek

We don't put our guidance for dividends or income beyond the current quarter, I guess some companies even stopped giving guidance period. We give guidance on net investment income and then we announce our dividends on a forward basis certainly for next three months. So we've done each of those things just in the past week that takes us through to on an income side, at the end of December and on the dividend side through the end of January. But again I can tell you that we look at our internal forecast and models and deliver this very carefully as a board every time we sit down and discuss these things and we’re very comfortable with our dividend increase in the past week.

Unidentified Analyst

Got it. Okay, good job. I Actually thought the timing of your deal was great for the longer term use.

John Barry

Well our deal guys are very happy because they now have a full plate of things and there is no worry that, gee maybe we won’t be able to get this one done by the end of the year. so we’re hoping for a very strong fourth quarter. We’ll see what happens.

Operator

This concludes our question and answer session. I would now like to turn the conference back over to Mr. John Barry for any closing remarks.

John Barry

I don't have any. But I do appreciate everyone joining the call. thanks very much.

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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