Seeking Alpha

Buy the dip in Prospect says National Securities

  • 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
Comments (13)
  • Brucejfern
    , contributor
    Comments (1239) | Send Message
    It might be a mistake to assume that a consolidated PSEC balance sheet will enhance net asset value. It is entirely within the realm of possibility that assets on these subsidiaries is less than the liabilities because of any number of fair market value adjustments meaning the net after consolidation reduces NAV.


    CPAs who were required after the Enron scandal to take required courses to learn about special purpose entities (SPEs) which is what PSEC's subsidiaries are really all about found out that many SPEs get formed in a way to shift just enough control away from the parent so you don't have to consolidate because you do not want to consolidate an entity where asset values are less than liabilities.


    It is this uncertainty that will hang over PSEC. I don't think the SEC is going to give way on this and frankly I always thought a pro-forma balance sheet presentation would be the perfect compromise so that investors could decide whether they would invest in a PSEC or any other entity when you look at the pro-forma presentation.


    If PSEC cannot resolve this soon it appears they would have to shut in the ATM program because I cannot believe issuing shares at these dividend yields can result in that much if any accretive deals. PSEC's cost of equity is not competitive with so many in the peer group.
    11 May, 02:53 PM Reply Like
  • elliot_mllr
    , contributor
    Comments (1154) | Send Message
    There are two technical points that people should get straight.
    What the SEC wants consolidated with PSEC are not the underlying portfolio companies, contrary to the National Securities article written by Mr. Kerai and which can be accessed by clicking on his name in the above article. To the contrary, under the Investment Company Act a non-investment company (that is, an operating portfolio company) cannot be consolidated with an investment company unless it performs services only for the investment company and not for third party customers. What the SEC wants consolidated are the intermediate holding companies formed by PSEC to hold the shares of the underlying portfolio companies.
    Secondly, as a result of such consolidation the assets--as well as the liabilities--of the portfolio companies would be deemed owned by the holding company and therefore by PSEC. Therefore, there would be no damage to the balance sheet of PSEC unless on an aggregated basis the liabilities of the portfolio companies were greater than their assets and therefore the portfolio companies were insolvent. Not only is that not the case here, it is not likely to be the case either. Comparing PSEC to Enron is simply unrealistic, and, with respect, I strongly believe that Brucejfern is creating an unrealistic dynamic which is highly unlikely ever to occur.
    Elliot Miller
    11 May, 04:15 PM Reply Like
  • User 12566041
    , contributor
    Comment (1) | Send Message
    Is the divined safe
    12 May, 02:45 AM Reply Like
  • elliot_mllr
    , contributor
    Comments (1154) | Send Message
    I believe it is.
    12 May, 11:35 AM Reply Like
  • Smoothdaddybuff
    , contributor
    Comments (5) | Send Message
    Do you think it possible that a 777 could go down in the Pacific and there will never be a piece of it recovered?
    12 May, 01:24 PM Reply Like
  • Husker Bob
    , contributor
    Comments (268) | Send Message
    And what does that have to do with the price of bread in India? Let's stick to the subject.
    12 May, 01:40 PM Reply Like
  • koolsool
    , contributor
    Comments (290) | Send Message
    The commenter who uses Enron as a comparison probably has a short position. John Barry the CEO of PSEC bought 100,000 shares on March 20th in the opened market for $10.80 a share. What I would like to see, is John Barry buying 100,000 more shares at the today price of $10.15. To confirm that he still has confidence that this will pass & the share price will recover.
    12 May, 08:33 AM Reply Like
  • huthutho
    , contributor
    Comments (218) | Send Message
    So if I understand this correctly, Brucejfern is saying (in part) subsidiary assets may be less than liabilities (and we can't tell from looking at the reports), but elliot_mllr is saying such is not the case. My question for elliot_mllr is: how do you know that such is not the case, if the reports do not reveal it? (I.e., what is Brucejfern missing?)


    I will continue to hold PSEC until this is resolved, and collect the dividend.
    12 May, 08:43 AM Reply Like
  • elliot_mllr
    , contributor
    Comments (1154) | Send Message
    The underlying portfolio companies are not insolvent. There is at best a minuscule amount of debt owned by PSEC that is non-accrual. That fact is available from the call, from the 10-Q and elsewhere. Brucejfern does not argue otherwise; he says that in the future maybe things will turn terrible and the underlying portfolio companies will have liabilities in excess of their assets, which would make them bankrupt under the Bankruptcy Code. I believe that is unrealistic.
    Elliot Miller
    12 May, 11:39 AM Reply Like
  • huthutho
    , contributor
    Comments (218) | Send Message
    Thank you, elliot_mllr, for your reply. I'm still learning and regret I didn't take more biz classes in grad school! ;-)
    12 May, 12:33 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2182) | Send Message
    Personally I feel when Brucejfern starts to say negative things about a stock that the smartest people here at SA own, I start to accumulate a position in lots as the stock initially drops.


    I think he is a good contrarian indicator. I am buying PSEC in lots. if it continues to drop I might buy some more. My average price is about $10.74, so if Mr. Barry bought at $10.80, I am in good company.
    12 May, 08:50 AM Reply Like
  • eaglelr
    , contributor
    Comment (1) | Send Message
    I am sure that is something that we all want to know is how safe is the dividend ??
    12 May, 09:05 AM Reply Like
  • locutus49
    , contributor
    Comments (867) | Send Message
    PSEC has committed to paying the dividend through December, and you can believe them or not. They also have said they have plenty of cash, and cash flow, to cover dividends. Again, you can believe the anti-PSEC crowd, or PSEC management and the analysts who cover them.


    Insinuations of wrong-doing do not count as facts.


    Long PSEC.
    12 May, 04:23 PM Reply Like
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