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Prospect Capital Corporation Has Tiny NII Miss + Tiny NAV Fall

May 11, 2016 5:52 AM ETPSEC
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One of these two statements are true: (1) I have a noticeable anti-PSEC bias or (2) PSEC is a little bit more slimy than the average BDC. I can not say with certainty which is the true statement.

PSEC Reports NII of $0.2463 compared to a Div of $0.25
What They Earned Prospect Capital Corporation reported for Q1-16 Total investment income of $189.493 million ($0.5326/share); Net investment income of $87.626 million ($0.2463/share); and a Net Increase in Net Assets Resulting from Operations of $75.508 million ($0.2122/share) due to realized and unrealized losses of $12.095 million. PSEC's net asset value per share was $9.61 compared $9.65 last quarter.

What They Own As of March 31, 2016, our portfolio at fair value consisted of 51.6% first lien, 19.2% second lien, 16.6% structured credit (with underlying first lien) (Comment: You know that CLOs are bad when companies use 'euphemisms' for them in listing their asset class allocations.), 0.3% small business whole loan, 1.2% unsecured debt, and 11.1% equity investments. At March 31, 2016, our portfolio consisted of 125 long-term investments with a fair value of $6.005 billion. Prospect's asset concentration in the energy industry stood at 2.9%. As of March 2016, our weighted average portfolio net leverage stood at 4.12 times EBITDA, down from 4.19 times as of December 2015 and down from 4.36 times as of September 2015. The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 0.5%. (Comment: PSEC my be overly aggressive in converting bad debt to equity holdings - and thus hiding the true condition of its portfolio quality.)

Consensus analyst projections from Yahoo Finance:

Earnings History Jun 15 Sep 15 Dec 15 Mar 16
EPS Est 0.25 0.25 0.25 0.26
EPS Actual 0.25 0.26 0.28 0.25
Difference 0.00 0.01 0.03 -0.01

My historical context spreadsheets:

Comment: You know that BDCs own risky stuff when nine of the last eleven quarters had valuation decreases on their portfolios.

Q1-2016 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13 Q3-13
Realized & Unrealized Gains -12.095 -195.965 -63.425 7.987 -5.949 -5.355 -10.355 -12.491 -16.422 -5.671 3.798
Realized & Unrealized Gains/share -.0340 -.5516 -.1777 .0222 -.0166 -.0151 -.0301 -0.0365 -.0492 -.0197 .0111

Q1-2016 Q4-15 Q3-15 Q2-15 Q1-15 Q4-14 Q3-14 Q2-14 Q1-14 Q4-13
Total investment income 189.493 209.191 200.251 198.830 191.350 198.883 202.012 182.840 190.327 178.090
Net investment income 87.626 100.893 91.242 89.518 87.449 91.325 94.463 84.148 98.523 92.215
Investments @ fair value 6.005 6.180 6.431 6.559 6.603 6.524 6.253 6.254 6.006 4.886
Wt Av Share Count 355.779 355.241 356.962 359.091 358.449 354.100 343.359 342.627 333.500 287.016
TII/share $0.5326 $0.5889 $0.5610 $0.5537 $0.5338 $0.5615 $0.5796 $0.5336 $0.5707 $0.6205
NII/share $0.2463 $0.2840 $0.2556 $0.2493 $0.2440 $0.2579 $0.2710 $0.2456 $0.2954 $0.3213
NAV/share $9.61 $9.65 $10.17 $10.31 $10.30 $10.35 $10.47 $10.56 $10.68 $10.73
Wt Av Yield 13.4% 13.3% 13.0% 12.7% 12.4% 12.3% 11.9% 12.1% 12.5% 12.9%
Debt/EBITDA 4.12x 4.19x 4.36x 4.2x 4.2x 4.1x

Comment: On 5-06-16 PSEC at $7.38 sold at a 13.55% compared to a portfolio weighted average yield of 13.4%. A BDC with PSEC's NAV falls and anemic dividend coverage should logically sell with a little more of a spread (or a higher yield) to its portfolio weighted average yield.

Analyst's Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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