- This article is in response to the flurry of comments from previous articles discussing oil/energy exposure for BDCs.
- Prospect Capital has around 5.1% of its portfolio invested in companies with direct energy related exposure.
- Additionally, the company has other portfolio companies that could be impacted by lower oil prices.
- Prospect Capital also has exposure to oil/energy in its CLO investments that account for 18.5% of the portfolio.
Prospect Capital: A Sequential NAV Decline And Potential Sell-Off Will Be A Buying Opportunity
- Prospect Capital's shares disappoint, and are weighed down by uncertainty over Prospect's 2Q 2015 net asset value.
- I was wrong in my prediction that the stock price would more quickly approach net asset value.
- Should Prospect Capital reported a lower net asset value in 2Q 2015, driven by CLO losses, this could be a interesting buying opportunity for long-term investors.
An Interview With Grier Eliasek, President And COO Of Prospect Capital
- COO Grier Eliasek discusses some of the recent events for Prospect Capital.
- Why was the dividend reduced?
- How will the proposed spin-offs boost returns?
- Read more to find out.
Prospect Capital's Upcoming Fiscal Q2 2015 Earnings And NAV Projection
- I am projecting PSEC will report a modest decrease in NAV during the fiscal second quarter of 2015 (NAV per share projection is stated within the article).
- Part of the projected decrease in NAV is due to PSEC distributing quarterly dividends in excess of NII.
- The other part of the projected decrease in NAV is due to PSEC recording several realized losses on the company’s CLO portfolio.
- However, I am also projecting PSEC will generate an economic return of 1.93% for the fiscal second quarter of 2015.
- My buy, sell, or hold recommendation for PSEC is stated in the “Conclusions Drawn” section at the end of the article.
Memo To Prospect Capital Corporation's Potential Investors: Why I'm Long
- Conservative capital structure, improving financing terms and yield enhancement process.
- Dividend cut is more likely to secure shareholder income streams.
- Potential spin-offs in sectors that are expected to outperform the market.
- Little exposure to oil & gas production and energy sectors with the majority being controlling interests.
- Prospect Capital saw its stock decline in December and is now trading at a large discount to net asset value.
- PSEC is one of the largest BDCs and has an excellent management team, which has been purchasing the stock heavily of late.
- PSEC's investments are diverse and will likely perform well under any reasonable scenario.
- PSEC does have some energy investments that create the possibility of write downs but, even given a stress test, PSEC looks cheap here.
- PSEC has plans for restructuring that could provide the catalyst leading to a higher valuation.
- The goal of this article is to clear up the confusion regarding my opinion of dividend coverage for Prospect Capital compared to Medley Capital.
- I downgraded Medley Capital after it reported results on December 8, 2014.
- I upgraded Prospect Capital after it cut its dividend on December 8, 2014.
3 Reasons Why Prospect Capital Is Set To Rebound In 2015
- Prospect Capital is dirt cheap, trading at more than a 22% discount to NAV.
- Will the stock rebound in 2015?
- At current prices, Prospect Capital yields over 12%.
- Prospect Capital's shares have failed to rebound after the dividend cut was announced in early December.
- Net asset value discount has started to increase again lately.
- Share buybacks below accounting book value could immediately create value for shareholders.
- Share repurchases, on the other hand, would likely lead to higher share prices and deprive investors of a great opportunity to buy a high-yield investment at a distressed price.
Memo To Prospect Capital Management: Aggressively Buy Back Discounted Shares
- Discounts to NAV Represent a Lucrative Opportunity if Acted Upon.
- PSEC Should Act on Shareholders' Behalf and Take Advantage of the Opportunity.
- Problem for Management: Their Fees Take a Hit.
Prospect Capital's Net Asset Value Sustainability Analysis (Post Fiscal Q1 2015 Earnings)
- This article discusses three topics/trends impacting PSEC's future NAV sustainability.
- First, PSEC's recent dividend policy change should start having NAV benefits beginning in the fiscal third quarter of 2015 (quarter ending 3/31/2015).
- Second, I have classified 94% of PSEC's investment portfolio performing near or above expectations as of 9/30/2014 (6% of portfolio was performing slightly, modestly, or materially below expectations).
- Third, PSEC's investment portfolio continues to have several portfolio companies with moderate unrealized FMV losses (capital depreciation) thus modestly raising the risk of the company's future NAV sustainability.
- Projections for PSEC's NAV per share ranges for the next three fiscal quarters and my buy, sell, or hold recommendation are stated in the "Conclusions Drawn" section of the article.
- Prospect Capital recently held an investor webinar to clarify their business and address concerns about management's philosophies.
- They discussed the growth of the company, the reasons behind the recent dividend cut, answered questions about their portfolio, and mentioned catalysts for unlocking shareholder value.
- They reiterated that no stock was being sold into the recent decline.
- They have changed philosophies on dividend policy in response to perceived investor desires and market conditions.
- They seemed very bullish despite current market sentiment.
- Prospect Capital's investor webcast on Thursday was primarily intended to reassure investors about the company's earnings and distribution prospects.
- Management stands behind Prospect Capital, which is something investors could have already gathered from the open market transactions reported earlier this month.
- Tax loss harvesting and impatient shareholders have very likely contributed to Prospect Capital's share price decline lately.
- Prospect Capital remains a top-notch income investment with an attractive cash flow yield and capital appreciation potential.
While Investors Are Freaking Out, Insiders Are Buying Prospect Capital By The Wheelbarrow
- Prospect Capital's recent insider filings show that members of management executed significant purchase transactions last week.
- While shareholders still discuss the dividend cut, management delivers a strong vote of confidence in Prospect Capital.
- Insider transactions in light of the recent sell-off are a very bullish sign.
- Prospect Capital's shares now yield 12%+.
Understanding Prospect Capital's Recently Announced Material Dividend Reduction And Change In Policy
- In a prior article, I correctly projected PSEC would reduce the company’s dividend in the near future.
- However, I was disappointed by PSEC’s “earlier than anticipated” dividend decrease (February 2015 versus my projection of April 2015) and the severity of the reduction.
- In the past, PSEC’s management team has either stated or implied the company’s dividend was inherently based on the following two main factors: 1) NII; and 2) net ICTI.
- To better understand PSEC’s dividend reduction, this article analyzes the company’s two dividend metrics and also discusses management’s recent “change in rhetoric” regarding future dividend policy.
- Summarized thoughts about PSEC’s new dividend policy, including highlights from the analysis performed on the company’s dividend metrics, are stated in the “Conclusions Drawn” section of the article.
We've Now Approached 'Stupid' Levels For Prospect Capital
- Recent cuts to the dividend and tax-loss selling have resulted in the company trading at a massive discount to book value.
- Past "missteps" may have been beneficial to today's company.
- The new reduced dividend is much more sustainable, does not substantially rely on new underwriting, and provides upside, while downside is limited from here.
- The spin-off strategy provides additional upside value.
- Massive insider buying displays unparalleled management confidence.
Prospect Capital: Insiders Are Backing Up The Truck
- PSEC is seeing insiders buy large amounts of stock.
- This is following a near 10% decline following a widely anticipated dividend reduction.
- At current prices, PSEC yields 12% and trades at a massive 23% discount to NAV per share.
Dec. 18, 2014, 10:25 AM
- Barclays is buying the dip in Ares Capital - upgrading to Overweight from Equal Weight - but the also-beaten-up shares of Prospect Capital (PSEC +2.8%) don't prove as enticing to the team, which downgrades to Equal Weight from Overweight.
- Prospect is making a nice move higher in line with the rest of the market, and Ares is up a full 4.7%.
Dec. 17, 2014, 3:41 PM
- Popular high-yield ETFs HYG and JNK are each ahead by 2% in today's session as the energy sector - which makes up a sizable portion of the high-yield universe posts a strong rally, with the XLE higher by 4.1%.
- BDCs can sort of be considered the equity equivalents of junk bonds, and they're putting in a big rally today as well.
- Prospect Capital (PSEC +1.5%), Main Street (MAIN +4.1%), Blackrock Kelso (BKCC +2.4%), Triangle Capital (TCAP +6.4%), KCAP Financial (KCAP +2.6%), THL Credit (TCRD +3.5%), Medley Capital (MCC +2.2%), Fifth Street Finance (FSC +1.5%)
- ETFs: BDCL, BDCS, BIZD
Dec. 11, 2014, 4:42 PM
Dec. 9, 2014, 12:57 PM
- Unable to catch a bid for a few sessions, mortgage REITs (REM +1%) have turned higher in afternoon action, led by Annaly (NLY +0.7%) and American Capital Agency (AGNC +1.5%).
- Helping are jitters in the stock market (though U.S. averages are well off the lows), and a 10-year Treasury yield that's retreated all the way to 2.21% after hitting the mid-2.30s on the back of Friday's strong jobs number.
- Armour (ARR +1.1%), Two Harbors (TWO +0.9%), CYS Investments (CYS +1.4%), Invesco (IVR +1.8%), American Capital Mortgage (MTGE +1%), Hatteras Financial (HTS +2%), Capstead (CMO +2%).
- Other ETFs: MORT, MORL
- Also showing some green are the recently beaten-up BDCs, including Prospect Capital (PSEC +0.2%), Fifth Street Finance (FSC +0.2%), Ares Capital (ARCC +0.5%), FS Investment (FSIC), Triangle Capital (TCAP +1.7%).
- ETFs: BDCL, BDCS, BIZD
- Previously: Money flows back into fixed income (Dec. 9, 2014)
Dec. 8, 2014, 11:30 AM
- A bellwether of sorts in the BDC sector, Prospect Capital (PSEC -6.2%) earlier announced a big dividend cut, and the suspension of its stock issuance program so long as the share price is so far south of book value.
- Prospect has some of its own issues to deal with, but common across the sector is too much money chasing too few deals, and the resultant lower yields for lower quality lending.
- Fifth Street Capital (FSC -2.9%), Triangle Capital (TCAP -6.1%), TICC Capital (TICC -2.2%), KCAP Financial (KCAP -1.7%), Medley Capital (MCC -2.3%) Gladstone (GLAD -3.6%), OHA Investment (OHAI -5%), Blackrock Kelso (BKCC -1.1%), Main Street Capital (MAIN -0.2%), PennantPark (PNNT -1.3%).
- ETFs: BDCL, BDCS, BIZD
- Previously: Prospect Capital suspends ATM stock issuance program as dividend is cut (Dec. 8, 2014)
Dec. 1, 2014, 11:17 AM
- Fifth Street Finance (FSC -4.1%) reported mediocre FQ4 results earlier this morning, but nothing particularly out of line with the rest of the sector for the quarter ended September 30.
- Nevertheless, the entire industry (BDCS -2.2%) is lit up red in mid-morning action: Prospect Capital (PSEC -3.7%), Ares Capital (ARCC -2.2%) FS Investment (FSIC -2.4%), Main Street (MAIN -2.1%), Triangle (TCAP -3.5%), OHA Investment (OHAI -3.8%), FIdus Investment (FDUS -4.2%), PennantPark Investmnet (PNNT -3.2%).
- ETFs: BDCL, BDCS, BIZD
Nov. 7, 2014, 12:22 PM
- "We're not giving away the crown jewels on this call," says one of Prospect Capital's (PSEC +2.2%) executives on a contentious earnings call following its plan to try and unlock value by spinning of certain of its businesses.
- Analysts/investors on the call are frustrated by a lack of detail, but the Prospect executive (presumably CEO John Barry or COO Grier Eliasek) notes the company's plans/ideas have been outright stolen by competitors in the past. Management, however, believes the parts - its CLO structured credit, online lending, and real estate businesses - are greater than the market currently values the sum.
- Still nicely higher on the session, Prospect has given back about one-third of its gains since the call started.
- Previously: Prospect Capital up 2.6% after announcing spinoff strategy
Nov. 6, 2014, 4:51 PM
- Prospect (NASDAQ:PSEC) hopes to "unlock value" by spinning off certain "pure play" business strategies to shareholders. Those to be spun are strategies which have grown faster than the company's overall growth rate over the past few years, and that need something less constraining than a BDC structure to continue that growth.
- Initial focus will be on three separate companies consisting of portions of Prospect's CLO structured credit, online lending, and real estate businesses. The goal is to complete the spinoffs in early 2015.
- Turning to Q3 operations, NII of $94.5M or $0.28 per share vs. $82.3M and $0.32 one year ago. NII rose and NII per share fell Y/Y thanks to non-recurring dividend and prepayment income in the year-ago period. Dividend is roughly $0.33.
- Net increase in net assets from operations of $84.1M or $0.24 per share vs. $79.9M and $0.31 one year ago.
- Net asset value per share of $10.47 vs. $10.56 at the end of Q2.
- Shares +2.6% after-hours
- Conference call tomorrow at 11 ET
- Previously: Prospect Capital NII in-line, misses on revenue
Oct. 15, 2014, 11:05 AM
- The spread of the junk bond index over Treasurys was below 300 basis points around the start of the summer, and around 400 bps near Labor Day. With today's sharp drop in Treasury yields (without a comparable move down in junk), the spread has blown out to more than 500 basis points.
- HYG -0.25%, JNK -0.3%
- Rough publicly traded equity proxies for high-yield, if you will, BDCs remain stuck in a bear market. Prospect Capital (PSEC -3.6%), Fifth Street Finance (FSC -2%), Main Street Capital (MAIN -3.8%), Blackrock Kelso (BKCC -2.6%), TICC Capital (TICC -5.1%), KCAP Financial (KCAP -4.7%).
- BDC ETFs: BDCL, BDCS, BIZD
- High-yield ETFs: HYG, JNK, HYLD, SJB, ANGL, HYLS, UJB, XOVR, QLTC
Oct. 10, 2014, 4:24 PM
- "The sector's drawdown is 50% of what occurred in the 2011 euro-crisis without anything like the accompanying conditions," writes a bullish BDC Reporter, noting the sector is lower by about 14% since its February high, and stalwart Ares Capital (ARCC -3.1%) is trading at a discount to book value for the first time in years.
- Another example is TCP Capital (TCPC -2.5%), down about 15% from a high hit three months ago. The company has paid out a steadily-increasing dividend since going public, current and future earnings are in excess of the payout, the balance sheet was recently strengthened with medium-term debt capital, the average cost of debt is 2.63%. and its investments yield 9.2%. What's not to like?
- If the current benign business and credit cycle is indeed over, then BDCs have further to fall. If, as BDC Reporter believes, low rates are here to stay for awhile (and even if rates rise the BDC sector should prosper), BDCs are reaching bargain levels.
- ETFs: BDCL, BDCS, BIZD
- Today's action: Prospect Capital (PSEC -2.9%), Fifth Street Finance (FSC -3.5%), FS Investment (FSIC -3%), Apollo Investment (AINV -2.1%), Triangle Capital (TCAP -1.6%), THL Credit (TCRD -2%), OHA Investment (OHAI -4.2%).
Sep. 22, 2014, 2:55 PM
- As income favorites, business development companies often catch a bid during broader market selloffs (and bond market rallies), but the small caps (IWM -1.3%) are bearing the brunt of today's selling and the BDCs tend to fall into the that sector (though excluded from Russell indices).
- Fifth Street Finance (FSC -1.1%) has a market cap of $1.3B; Main Street Capital (MAIN -2.6%) - market cap of $1.4B; Apollo Investment (AINV -2%) - $2B; Triangle Capital (TCAP -1.3%) - $730M; Ares Capital (ARCC -0.4%) - $5.1B. Hanging in there better than the rest is Prospect Capital (PSEC -0.1%), with a $3.45B market cap.
- ETFs: BDCL, BDCS, BIZD
Sep. 2, 2014, 10:27 AM
- It's a mixed securities shelf with common and preferred stock, along with debt as being possible vehicles for a capital raise. Up about 1.3% early in the session, Prospect (NASDAQ:PSEC) is ahead by 0.6% at the moment.
- Previously: Prospect Capital improves size and terms of credit facility
Aug. 26, 2014, 11:48 AM
- Noting this quarter's earnings report contained no usual announcement of future distributions, one caller asks whether a dividend cut is in the cards (the company has previously announced payouts of about $0.11 per month for the rest of the year).
- Another analyst notes there have been several consecutive quarters now when NII didn't match the dividend, and by his calculations, the portfolio yield (now at 12.1%, down from 12.5% the previous quarter) would need to rise 100 basis points for NII to rise to the level of the payout. Will a return of capital be necessary to fund the dividend? Management responds that it wants to fund the dividend out of income, and earlier in the call noted - without giving numbers - that the company still has spillover income to help fund payouts.
- Also noted by management as ways to boost income would be higher leverage, cutting costs, and finding deals with higher yields.
- Previously: Prospect Capital results hurt by slow origination activity
- Down more than 5% earlier, PSEC has been bouncing through the call, now off 2.7%
Aug. 25, 2014, 5:15 PM
- FQ4 net investment income of $84.1M or $0.25 per share is well south of expectations for $0.32 and stands against $98.5M and $0.31 one year ago. Originations slipped to $444M in FQ4 from $1.3B a quarter previous.
- The quarterly dividend is roughly $0.33 per share.
- The debt-to-equity ratio of 72.9% is up from 67.9% at the end of last quarter and 55.7% a year ago. Annualized yield of portfolio of 12.1% slides 40 basis points from the March quarter.
- Net asset value of $10.56 per share slips from $10.68 at end of March quarter. Today's closing stock price was $10.98.
- Conference call at 11 ET
- Previously: Prospect Capital misses by $0.07, misses on revenue
- PSEC -1.9% AH
Aug. 18, 2014, 11:30 AM
- Prospect Capital's (PSEC +0.9%) sizable $210M lending deal announced this morning and 9 booked deals over $100M in the last year suggest it and many of its larger brethren are competing for larger borrowers who don't fit the mold of the larger syndicated loan market BDCs typically play in, writes Nicholas Marshi.
- On the good side, these "story credits" allow Prospect and other BDCs to charge higher rates and fees than are available in the "dirt cheap" syndicated loan market. And Prospect (and others) have become so big that typical middle market deals aren't enough to move the needle on their portfolios anymore.
- Ideally, though, no individual loan would represent more than a tiny fraction of the portfolio, so while "big fish" deals allow for good earnings and maintenance of the distribution today, Marshi worries about the impact of the blow-up of an individual company or of wider credit issues when the next economic downturn hits.
- Other large players today: Ares Capital (ARCC +0.8%), FS Investment (FSIC), American Capital (ACAS +1.4%), Apollo Investment (AINV +0.4%), Main Street Capital (MAIN +0.1%).
- ETFs: BDCL, BDCS, BIZD
Jun. 26, 2014, 3:48 PM
- Leading the way are THL Credit (TCRD +4.1%), Fidus Investment (FDUS +4.6%), NGP Capital Resources (NGPC +3.2%), and BlackRock Kelso (BKCC +3.2%), but the entire BDC sector is lit up bright green a day ahead of its stocks being removed from the Russell indices.
- A selection of others: Prospect Capital (PSEC +0.5%), Ares Capital (ARCC +1.9%), TPG Specialty Lending (TSLX +0.8%), Triangle Capital (TCAP +3.7%), TICC Capital (TICC +2.2%), PennantPark (PNNT +2.7%), Medley Capital (MCC +2.1%), TCP Capital (TCPC +2.2%), Gladstone Commerical (GLAD +2.8%), Capitala Finance (CPTA +2.7%).
- Previously: London Stock Exchange to acquire Frank Russell for $2.7B
- ETFs: BDCL, BDCS, BIZD
PSEC vs. ETF Alternatives
Prospect Capital Corporation is a closed-end investment company. It invests in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes.
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