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# Rebuttal To Prospect Capital Corp. Unsafe At Any Price

## Summary

• 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%.

### 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