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A Strategy For Enhancing Returns With Prospect Capital

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JSG_DRIP
454 Followers

Prospect Capital (NASDAQ:PSEC) is a business development company (BDC) that lends to and invests in middle market privately-held companies. The company is a closed-end investment company. The company invests primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, project financing and recapitalization. A large majority of its holdings are in industries related to the Energy Sector.

Since Prospect Capital is a BDC, it must, by definition, pay out 90% of its net investment income in the form of dividends to shareholders. As such, since PSEC cannot retain earnings to fuel organic growth, the company taps the debt and/or equity markets on a regular basis to raise capital. In the last 2 years, PSEC has performed 5 secondary offerings as seen in the table below.

Date Closing Price Next Day Closing Price Difference ($)
11/1/2012 11.92 10.86 -1.06
7/10/2012 11.9 10.94 -0.96
2/22/2012 11.39 10.97 -0.42
6/20/2011 10.68 10.14 -0.54
4/4/2011 12.15 11.72 -0.43
average -0.68

In response to the public news of a secondary stock offering, PSEC opens at a significant discount relative to the closing price the day before. On average, the share price drops 68 cents following a secondary.

Using this historical stock price performance, one can calculate the enhanced return gained by buying PSEC the day after the secondary is announced versus the day of (prior to the announcement). The table breaks down the PSEC total return as a combination of dividends and stock price change using both the closing price the day of the secondary and the next day post-secondary. The total return is calculated using the 2/15/2013 closing price of $11.39. The average difference in total return between the initial purchase dates is 6.8%.

Prior to Secondary Following Secondary
date

This article was written by

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454 Followers
Private investor interested in undervalued stocks, ETFs, and bonds.

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