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Rebuttal To Prospect Capital Corp. Unsafe At Any Price


  • No, a 60% discount to NAV is not justified.
  • A simple example to illustrate a crucial point on why losses in NAV must be treated at cost and not at face value.
  • PSEC loss rates have never reached 3%.

This article is a rebuttal of this article, which seeks to claim that Prospect Capital Corporation (NASDAQ:PSEC) deserves a 60% discount to NAV. I dispute several facts and methods presented in this article and revise them to get a better estimate for PSEC's valuation.

Accounting For Losses In NAV

The author counts an NAV decline as a face value loss when we have acquired the NAV at a steep discount.

I have provided the calculations he used below. In his model, we have a NAV of $1000, which was acquired for $700. The problem here is that the author then counts the projected decline in NAV as a loss to the shareholder at face value. As you can see in the image below, the author treats the projected $51 decline in NAV as if the shareholder has lost $51. This is a crucial mistake that greatly impacts the end result.

Let me illustrate why this is wrong with an example:

Suppose you bought 100 $1000 par value bonds at a 30% discount, in other words $700 each. Now let's suppose a year later, 5 of these bonds completely default and are now worth $0 and the rest remain the same.

How much have you lost?

The author would have you believe that you have lost $5000, but in reality, you have lost what you paid on those 5 bonds, which is $3500.

Still not convinced?

Let me give you an extreme example. Suppose all 100 bonds default and are now worth nothing. Did you lose $100,000 or $70,000? Clearly, you lost only $70,000 because that's what you paid.

Now, to correct this, we need to discount the NAV decline in his model by the discount to NAV or the rate at which we acquired it. In his model, that means we

This article was written by

Born in Texas, now in SoCal.  I have a degree in mathematics and computer science and am a software engineer by trade.  My investing goals are similar to many of you, just trying to grow my nest egg and save for the future!

Analyst’s Disclosure: I am/we are long PSEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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