The SEC's ordering of an accounting change could result in lower GAAP interest income, but the cash income from the impacted investments will remain the same, says analyst Andrew Kerai. "We believe this could positively impact the company’s net asset value and taxable earnings."
Why? Because incentive fees are based on GAAP NII - as this turns lower, incentive fees will follow, thus boosting taxable income and book value. Far from being seen as a negative, the SEC decision, says Kerai, means more distributable income for shareholders, and should thus be viewed in a positive light (management may feel differently, which is why it's appealing the decision).
Previously: SEC orders accounting change at Prospect Capital