Seeking Alpha

SEC orders accounting change at Prospect Capital

  • Prospect Capital (PSEC -1.3%) opens lower after ho-hum earnings and the disclosure of the SEC's order to restate financials to consolidate on its balance sheet those companies in which Prospect has more than a 50% interest.
  • The disclosure was dug out of Prospect's 10-Q by Seeking Alpha author Lawrence Zack Galler, who finds it curious the company has not done so previously. Not only does Prospect not consolidate these entities, says Geller, but it says it should be able to count interest income on loans owed effectively to itself.
  • Prospect also elects not to consolidate debt owed to others by these companies which stands senior to Prospect's claims, says Geller. "Such debt is material."
  • Prospect intends to appeal the SEC ruling.
  • In light of the SEC action, Prospect does not expect the Nicholas Financial (NICK -0.9%) deal to close before the termination date of June 12. Prospect is in talks to amend the current agreement.
  • The company earnings call is set for 11 ET.
  • Previously: More on Prospect Capital Q1 results
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Comments (21)
  • Guardian3981
    , contributor
    Comments (2042) | Send Message
     
    Anything yielding 12% should be greatly scrutinized, this is no surprise.
    7 May, 10:39 AM Reply Like
  • Matthew Davis
    , contributor
    Comments (3838) | Send Message
     
    You probably don't know much about BDC's then and they have paid this dividend consistently for years.
    7 May, 10:59 AM Reply Like
  • Dave DeWitt
    , contributor
    Comments (43) | Send Message
     
    Where do you think the NAV will settle in?
    7 May, 11:24 AM Reply Like
  • Matthew Davis
    , contributor
    Comments (3838) | Send Message
     
    No idea, as I am not very good at speculative valuation. I don't even know what the projected nav of the NICK deal would have created or subtracted.
    7 May, 11:36 AM Reply Like
  • COBeeMan
    , contributor
    Comments (1331) | Send Message
     
    Added a little to my position on the drop. This too will pass, and isn't the SEC answer to RUSSELL Indexes regarding accounting rules for BDCs due on the 15th?
    7 May, 12:18 PM Reply Like
  • bookie71
    , contributor
    Comments (28) | Send Message
     
    I thought that you had to have 80% ownership before you consolidated. Color me stupid!
    7 May, 12:21 PM Reply Like
  • Bingy77
    , contributor
    Comments (144) | Send Message
     
    You have to consolidate when you have control, which under GAAP is usually 50%.
    7 May, 08:27 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1331) | Send Message
     
    I read in the comments of another SA article today that it is over 50% ownership, but that for transparency purposes exceptions can be made depending on the level of control maintained.
    7 May, 12:32 PM Reply Like
  • dhdhoora
    , contributor
    Comments (408) | Send Message
     
    Ok, does anyone have an idea as to what impact this will have -- especially the market perception of the company with consolidated entities? My guess is that there may well be negatives with the consolidation and the market will go "OMG these guys are losing money..."

     

    All the very best,
    Don
    7 May, 12:33 PM Reply Like
  • James_B
    , contributor
    Comments (131) | Send Message
     
    My fear is that NAV will be negatively affected and PSEC will trade lower based on updated valuations of the company. This is a basic accounting violation, I'm surprised they reported as such, it's really disappointing. Of course, the companies they have majority ownership in can be valued higher, which will increase NAV but I doubt that is the case. It's all speculation at this point.
    7 May, 12:41 PM Reply Like
  • huthutho
    , contributor
    Comments (240) | Send Message
     
    Why do I think this is another "much ado about not much" scenario... LNCO comes to mind. Interpretation of accounting principles leaves much to the company to decide, so long as it is consistent. I'm sure others will weigh in with their "but the SEC may say differently..." arguments, but at the end of the day, while NAV may fluctuate, the payouts will continue, even if at a slightly lower rate. So, if the impact is a part of a percent reduction in payout, I'll add to my position. I'm certainly not selling.
    7 May, 01:18 PM Reply Like
  • arthur_bishop1972
    , contributor
    Comments (2328) | Send Message
     
    <Why do I think this is another "much ado about not much" scenario... LNCO comes to mind>

     

    Maybe...and maybe Barron's runs an article on how PSEC is like the Titanic...and Hedgeye next...maybe.

     

    I hope not though.
    8 May, 01:21 AM Reply Like
  • White Lily
    , contributor
    Comments (11) | Send Message
     
    What if PSEC cut dividend ?
    7 May, 01:25 PM Reply Like
  • NV_GARY
    , contributor
    Comments (2267) | Send Message
     
    Note- the passcode for the telephone coverage of the conference call today does not work-- I called their investor rep and he is 'out to the office' apparently.

     

    The 10-Q pg 100+ lists their take on what might happen--a lot to take in.
    7 May, 01:31 PM Reply Like
  • dhdhoora
    , contributor
    Comments (408) | Send Message
     
    NV-Gary!

     

    Thanks so much for the reference in the 10-Q! It indicates that the company is indeed wrestling with this issue and that they are in substantial disagreement with the SEC in consolidating holding companies. The idea behind the SEC ruling was that companies must consolidate 50+% entities that provide substantially all of their goods and services to the owner. This is clearly not the case. Nevertheless, if the ruling goes against them, they will continue with non-GAAP reporting to show performance consistent with historical practice. Interesting that even if the ruling goes against them -- not a simple task to estimate total impact. Since most holdings are privately held outfits, no real way for us to project -- but a lot of positives as well as negatives in the exercise.

     

    My guess is that $PSEC will wrestle with SEC and find a way through the gap in the GAPP ...

     

    All the very best,
    Don
    7 May, 02:07 PM Reply Like
  • davidbdc
    , contributor
    Comments (3158) | Send Message
     
    hmm - never like hearing the SEC is issuing actual negative opinions on your accounting. If they have to restate I assume this will increase our leverage ratio and may curtail some activity later this year.

     

    They need to get this straight and buttoned up and ok's by the SEC yesterday.
    7 May, 01:33 PM Reply Like
  • COBeeMan
    , contributor
    Comments (1331) | Send Message
     
    I would like everyone who is worried to immediately sell their PSEC stock! I have a buy order at $10 and it can't quite seem to get there. ;)
    8 May, 11:33 AM Reply Like
  • Javelina
    , contributor
    Comments (47) | Send Message
     
    I've studied this all weekend and I WILL buy at the open in the morning. Just my honest plan.
    11 May, 04:52 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2706) | Send Message
     
    Javelina,

     

    Can you explain what you know that leads you to buying at the open tomorrow?
    11 May, 07:19 PM Reply Like
  • Javelina
    , contributor
    Comments (47) | Send Message
     
    I have a MBA (finance). Just my honest opinion after evaluation.
    12 May, 09:24 AM Reply Like
  • locutus49
    , contributor
    Comments (1057) | Send Message
     
    Stock moving up at opening. This is old news.
    12 May, 09:37 AM Reply Like
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