Detailed Analysis Of Prospect Capital's Fiscal Q2 2019 (Includes Current And Future Considerations)

|
About: Prospect Capital Corporation (PSEC), Includes: ARCC, BDCL, BDCS, BIZD, MAIN, NEWT, SLRC, TSLX
by: Scott Kennedy
Summary

On 2/6/2019, PSEC reported results for the fiscal second quarter of 2019. PSEC reported NII, earnings, and a NAV as of 12/31/2018 of $0.221, ($0.184), and $9.02 per share, respectively.

In this assessment article, I will summarize my previous account projections versus actual results. This includes a detailed discussion regarding several of PSEC’s valuation accounts within the company’s income statement.

PSEC’s quarterly NII was a modest underperformance while the company’s quarterly NAV fluctuation was a minor underperformance (slightly more severe decrease versus my expectation; within my projected range).

While I was encouraged by the recent performance of several of PSEC’s control investments, I correctly projected some underperforming investments would be written-down during the quarter.

My buy, sell, or hold recommendation and current price target are stated in the “Conclusions Drawn”section. I also include my updated list of positive and negative catalysts/factors to consider.

Introduction/Recap:

On 2/6/2019, Prospect Capital Corp. (PSEC) reported quarterly net investment income (“NII”) of $0.221 per share, earnings per share (“EPS”) (also known as “net assets resulting from operations”) of ($0.184), and a net asset value (“NAV”) as of 12/31/2018 of $9.02 per share. In comparison, I projected PSEC would report quarterly NII of $0.247 per share (range $0.217 - $0.257 per share), EPS of ($0.106) per share, and a NAV as of 12/31/2018 of $9.10 per share (range $8.90 - $9.30 per share) in the following article:

Prospect Capital's Fiscal Q2 2019 Projected NII Increase And NAV Decrease (Includes Current Recommendation)

When calculated, my NII, EPS, and NAV projections had a variance of ($0.026), ($0.078), and ($0.08) per share, respectively. As such, I believe PSEC’s quarterly NII per share figure should be seen as a modest underperformance (towards the low end of my projected range) while the company’s EPS and NAV per share figures should be seen as a minor underperformance (lower half of my projected range). As I analyzed PSEC’s quarterly results, I came to the determination the company’s modest NII underperformance mainly centered around the company’s expense accounts while its minor valuation underperformance centered around several portfolio companies.

In addition to explaining how a few portfolio companies contributed to these variances, this article will discuss how these events impact current and future operations. I will now summarize my prior article’s account projections and compare each account to PSEC’s actual results. I will discuss PSEC’s accounts in the same order as provided in my NII and NAV projection article (link provided above).

PSEC’s Projected Versus Actual Results (Overview):

To begin this assessment analysis, Table 1 is provided below. Table 1 shows my prior account projections and compares these figures to PSEC’s actual results for the fiscal second quarter of 2019. For comparative purposes, I also include PSEC’s actual results from the prior three fiscal quarters (additional data/insight for readers).

Table 1 – PSEC NII and EPS for the Fiscal Second Quarter of 2019 (Actual Versus Projected)

PSEC NII and EPS for the Fiscal Second Quarter of 2019 (Source: Table created entirely by myself, partially using PSEC data obtained from the SEC’s EDGAR Database)

PSEC’s Income and Expense Accounts:

In my prior PSEC NII and NAV projection article (see link above), I projected the company would report an “average” amount of loan originations and add-on investments during the fiscal second quarter of 2019 when excluding the year-end restructuring of National Property REIT Corp.’s (“NPRC”) debt investments. This assumption/projection came to fruition. PSEC reported loan originations and add-on investments of $226 million for the quarter. In comparison, when excluding NPRC’s year-end debt restructuring, I projected quarterly loan originations and add-on investments of $224 million.

I also correctly projected PSEC would have a below average amount of portfolio sales/repayments/restructurings when excluding the year-end restructuring of NPRC’s debt investments. However, PSEC actually reported a slightly higher figure versus my expectation. PSEC reported quarterly portfolio sales/repayments/restructurings of ($164) million for the fiscal second quarter of 2019. In comparison, when excluding the NPRC’s year-end debt restructuring, I projected PSEC would report portfolio sales/repayments/restructurings of ($131) million. These two factors ultimately led to PSEC reporting accrued interest income that was close to my projection.

Using Table 1 above as a reference, I projected PSEC would report “total interest income” of $160.7 million for the fiscal second quarter of 2019. In comparison, PSEC reported total interest income of $158.0 million. When calculated, this was a minor variance of $2.7 million. This variance is mainly due to the following factors: 1) minor underperformance within PSEC’s control portfolio; and 2) minor outperformance within the company’s collateralized loan obligation (“CLO”) portfolio.

First, I want to “hone in” on PSEC’s control investment portfolio. PSEC’s minor underperformance within this portfolio was mainly due to events regarding Interdent, Inc. (Interdent) and Pacific World Corp. (Pacific World). Readers of my recent PSEC articles should know I continued to stress these two portfolio companies were at heightened credit risk for continued fair market value (“FMV”) depreciation over time and the high probability of additional debt investments being put on non-accrual status (even after Interdent’s recent restructuring). Simply put, this is what occurred during the quarter. The following quote from last quarter’s PSEC assessment article (link provided above) supports this previously correct assumption:

“…I also believe PSEC’s large monetary investments in Interdent and Pacific World Corp. (Pacific World) need heightened monitoring over the foreseeable future…”

PSEC’s Senior Secured Term Loan C with Interdent (which has a 100% capitalized payment-in-kind [PIK] interest rate of 18.00%) and Senior Secured Term Loan D (which has a 100% capitalized PIK interest rate of 1.00%) were put on non-accrual status the first day of the company’s fiscal second quarter of 2019. In comparison, I anticipated PSEC would put these two investments on non-accrual status towards the end of the quarter. All of PSEC’s debt investments with Interdent need to be carefully monitored regarding possible/likely non-accruals and FMV write-downs during calendar year 2019.

PSEC’s Senior Secured Term Loan A with Pacific World (with a principal balance of nearly $100 million) was put on non-accrual status on 10/24/2018. In comparison, I anticipated PSEC would this put specific debt investment on non-accrual status towards the end of the quarter. In the end, these two portfolio companies were basically the variance between my projected control investment accrued interest income and what PSEC reported. I believe these non-accruals should be seen as a negative factor/trend.

PSEC’s minor outperformance within the company’s CLO portfolio was mainly due to the slightly higher weighted average yields generated during the quarter versus my projection. During the fiscal second quarter of 2019, PSEC’s CLO portfolio increased its weighted average annualized Generally Accepted Accounting Principles (“GAAP”) yield from 14.4% to 15.5%. In comparison, I projected PSEC’s CLO portfolio would increase its weighted average annualized GAAP yield to 15.0%.

Moving down Table 1, both PSEC’s dividend income and the company’s structuring/fee income were basically as expected (each account under a $1.0 million variance). When looking at Table 1 over the past several quarters, this was the fourth consecutive quarter PSEC reported any meaningful amount of dividend income. A majority of PSEC’s dividend income came once again from the company’s equity investment in NPRC and Valley Electric Company, Inc. (Valley Electric). Both portfolio companies continued to have sufficient earnings and profit (“E&P”) to make a GAAP distribution during the quarter. I believe this should be seen as a positive catalyst/trend and I would continue to be encouraged if similar E&P distributions occur in the future. A vast majority of PSEC’s structuring/fee income came from NPRC’s year-end debt restructuring.

When PSEC’s total interest, dividend, and structuring/fee income are combined, I projected the company would report “total investment income” of $190.7 million for the fiscal second quarter of 2019 (see red reference “A” in Table 1 above). In comparison, PSEC reported total investment income of $187.9 million. When calculated, this was a variance of ($2.9) million (rounded) which was well within my stated range.

Still using Table 1 above as a reference, I projected PSEC would report “total operating expenses” of $100.6 million for the fiscal second quarter of 2019. In comparison, PSEC reported total operating expenses of $107.1 million. When calculated, this comes out to be a variance of ($6.5) million. This variance is mainly due to a higher than projected base management fee, accrued allocated overhead, and other general and administrative expenses when compared to my projections. This was partially offset by a lower income incentive fee during the quarter (since expenses were higher).

Regarding PSEC’s base management fee, I would point out this included a “one-time” fee of $2.8 million in relation to SB Forging Company II’s (SB Forging) escrow balance (and all remaining cash). I am not entirely “sold” on the notion this classified realized gain per GAAP should have been distributed to PSEC (at the very least not classified within the base management fee account). When calculating all net changes, this negatively impacted PSEC’s quarterly NII by ($0.006) per share. Excluding this event, PSEC’s NII would have been $0.227 per share.

Continuing to move down Table 1, when all the amounts above are combined, I projected PSEC would report NII of $90.2 million for the fiscal second quarter of 2019. In comparison, PSEC reported NII of $80.8 million. When calculated, this was a variance of ($9.4) million or ($0.026) per share. As such, I believe PSEC’s reported NII was a modest underperformance when compared to my expectations. Let us now discuss PSEC’s valuation accounts.

PSEC’s Valuation Accounts:

Continuing to move down Table 1, I projected PSEC would report a “gain (loss) on the extinguishment of debt” of ($1.0) million for the fiscal second quarter of 2019. In comparison, PSEC reported a loss on the extinguishment of debt of ($0.5) million. This slightly less severe loss versus my projection was mainly due to less unamortized fees being “trued-up” upon realization regarding PSEC’s InterNotes® that were redeemed during the quarter.

I believe PSEC’s entire investment portfolio, from a valuation perspective, was a minor disappointment when compared to my expectations during the company’s fiscal second quarter of 2019 which ultimately led to the company reporting EPS of ($0.184) versus my projection of ($0.106). This directly led to PSEC reporting a NAV as of 12/31/2018 of $9.02 per share versus my projection of $9.10 per share.

I projected PSEC would report a combined net realized loss and unrealized depreciation of ($128.0) million during the company’s fiscal second quarter of 2019. In comparison, PSEC reported a combined net realized gain and unrealized depreciation of ($147.7) million. When calculated, I believe this ($19.7) million variance was a minor underperformance due to the fact, as of 12/31/2018, PSEC’s investment portfolio was valued at $5.84 billion. Let us take a deeper look at several areas of PSEC’s investment portfolio to determine why this minor net variance occurred.

1) PSEC’s CLO Portfolio:

As stated in my PSEC NII and NAV projection article (link provided above), I correctly anticipated most CLO investments would experience a decrease in valuations due to volatility in broader credit markets during the calendar fourth quarter of 2018. Simply put, CLO markets were not immune to such volatility as assets suffered a quick “dent” in pricing.

In addition, when analyzing PSEC’s CLO portfolio, market participants need to consider there was a continued “flattening” of the forward U.S. London Interbank Offered Rate (LIBOR) curve during the calendar fourth quarter of 2018. This factor added to the severity of broader CLO price decreases during the quarter. On the liability side of the equation per se, due to the fact most of a CLO’s liabilities are “floating-rate” in nature (which are directly tied to current/spot U.S. LIBOR), including the fact that most investments currently have cash LIBOR floors of say 1% (typically higher floors with more vintage securitizations), an increase in current/spot U.S. LIBOR up to a certain percentage actually negatively impacts current and projected near-term discounted cash flows. However, most cash LIBOR floors were already surpassed which helped mitigate the severity of decreases in cash flows stemmed from continued yield/spread compression (discussed next). More recently, PSEC’s refinanced CLO investments have benefited from a reduction to net borrowing costs to help offset this trend.

On the asset side of the equation, continued spread/yield compression over the past several years has negatively impacted overall investment returns within these securitizations. This is mainly due to prepayments/refinancing of higher-yielding debt investments which are being replaced by lower-yielding debt investments. Due to the fact most of PSEC’s current CLO investments are within the equity tranche (residual interests/subordinated notes) of these securitizations, the fairly recent spread/yield compression had negatively impacted overall yields within this portfolio to a greater degree in 2016. However, now that most underlying investments have surpassed their respective cash LIBOR floor, CLO securitizations have begun (similar to business development companies [BDC] in general) to experience an increase in asset yields. However, in some cases where a CLO has not been refinanced/reset/re-issued, this recent increase in asset yields have only “matched” (or were not in excess of)an increase in floating-rate liabilities.

PSEC’s CLO residual interests/subordinated notes are in the “lowest tranche/bottom basket” when it comes to income distributions. If there is a noticeable uptick in underperforming/non-performing loans (defaults), a material decrease in the weighted average interest rate associated with the underlying loans that make up a particular securitization, and/or a notable increase in the weighted average interest rate associated with all outstanding borrowings (which has recently occurred), the residual interest (equity) tranche of a CLO bears first risk loss of this income. This methodology is known as a CLO’s “waterfall” calculation which I have discussed at length in prior PSEC articles. This is why this particular tranche of the CLO can generate highly attractive yields under certain positive environments/life cycles (say north of 25%) yet also have very poor yields under certain negative environments/life cycles (say single digit or even no yield).

This all gets back to an investment’s “risk versus reward” metric. Within a CLO’s residual interest/equity tranche, there is heightened risk for poor investment returns but also a heightened reward if the securitization is performing above expectations. Furthermore, one also needs to consider a securitization’s lifecycle when understanding/projecting interest income and valuation fluctuations. Other-than-temporary impairments (“OTTI”) that occurred during 2016 within several CLO investments are good examples of what could occur within equity tranches of certain older/legacy securitizations that are not refinanced/reset/re-issued.

Mainly due to the continued flattening of the yield curve and quick “dent” in overall/sector pricing, I projected PSEC’s CLO portfolio would record net unrealized depreciation of ($45) million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized depreciation of ($39) million. Due to the size of PSEC’s CLO portfolio (FMV of $937 million as of 12/31/2018), I believe a $6 million variance is a very minor outperformance. This variance was mainly due to the fact there was some quarterly net appreciation within PSEC’s recently/newly acquired CLO debt investments along with some modest appreciation (proportionately speaking) within one CLO equity investment that had a transfer of managerial duties (which is assumed to raise overall yields in the future). Let us now move on to another area of PSEC’s investment portfolio.

2) PSEC’s Control Investments:

There were several modest-notable FMV fluctuations when it came to PSEC’s control investments. I would like to “hone in” on the following control investments (in alphabetical order): 1) CP Energy Services Inc. (CP Energy); 2) NPRC; 3) Pacific World; 4) Universal Turbine Parts, LLC (Universal Turbine); and 5) Valley Electric.

When it comes to CP Energy, mainly due to the recent sharp decrease in crude oil prices versus earlier last year and the more “muted” perceived operational synergies from the business combination with Arctic Oilfield Equipment USA, Inc. (Arctic), I projected PSEC would record net unrealized depreciation of ($10) million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized depreciation of ($12) million. When calculated, this was a variance of ($2) million which I believe should be considered a very minor underperformance from a valuation perspective (FMV balance of $130 million as of 12/31/2018).

Regarding NPRC, I projected PSEC would record net unrealized depreciation of ($20) million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized depreciation of ($29) million. When calculated, this was a variance of ($9) million which I believe should be considered a very minor underperformance from a valuation perspective (FMV balance of $1.02 billion as of 12/31/2018). I would also point out, as discussed earlier, NPRC provided both dividend and structuring/fee income during the fiscal second quarter of 2019 totaling $24.6 million (which, by itself, inherently lowers valuations). In a nutshell, NPRC’s valuation continued to be positively impacted by the increase in property values over the past several years and the previous “locking-in” of attractive long-term financing on its properties. NPRC’s real estate investment trust (“REIT”) portfolio continued to provide attractive returns during the quarter. However, this was offset by NPRC’s online lending portfolio which continued to underperform; mainly due to a rise in delinquencies. I would note to readers, when analyzing NPRC’s income statement, one should really “back out” certain GAAP expense items to get a better sense of the company’s “core” earnings.

Regarding Pacific World, this portfolio company is a global supplier of nail and beauty care products. As highlighted in prior PSEC articles, in May 2018 the company exercised its shareholder voting rights and appointed a new Board of Directors (“BoD”) for this struggling portfolio company. Simply put, PSEC “took control” of operations/managerial oversight. Over the prior several quarters, Pacific World has continued to experience operational weakness. Such weakness has recently become more severe due to recent U.S. trade tariffs (in this case imported supplies/products). This has directly increased Pacific World’s credit risk. For example, PSEC’s Senior Secured Term Loan B (principal balance of $102.2 million as of 12/31/2018) was put on non-accrual status as of 5/21/2018 while the company’s Senior Secured Term Loan A (principal balance of $97.3 million as of 12/31/2018) was put on non-accrual status as of 10/24/2018 (as discussed earlier). I projected PSEC would record net unrealized depreciation of ($20) million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized depreciation of ($32) million. When calculated, this was a variance of ($12) million which I believe should be considered a minor-modest underperformance from a valuation perspective (FMV balance of $133 million as of 12/31/2018). This variance was due to PSEC writing-down Pacific World’s Senior Secured Term Loan B by an amount greater than my expectations. This was partially offset by a less severe valuation decrease within Pacific World’s Senior Secured Term Loan A (which was put on non-accrual status this past quarter).

Regarding Universal Turbine, this portfolio company is a global supplier of airplane engines and relatable parts. In December 2018, PSEC purchased all the voting stock of Universal Turbine and appointed a new BoD for this recently struggling portfolio company. Similar to Pacific World, PSEC took control of operations/managerial oversight. Over the prior several quarters, Universal Turbine has continued to experience operational weakness, including credit downgrades and asset impairments. Such weakness has recently become more severe due to U.S. trade tariffs (in this case imported parts). As such, PSEC’s Senior Secured Term Loan B (principal balance of $34.9 million as of 12/31/2018) was put on non-accrual status as of 7/1/2018. I currently believe there is a modest-high probability PSEC’s Senior Secured Term Loan A (principal balance of $31.0 million as of 12/31/2018) will be put on non-accrual status (or will be “converted” to a PIK loan) at some point during calendar year 2019. I projected PSEC would record net unrealized depreciation of ($5) million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized depreciation of ($8) million. When calculated, this was a variance of ($3) million which I believe should be considered a minor underperformance from a valuation perspective (FMV balance of $37 million as of 12/31/2018).

Regarding Valley Electric, this portfolio company provides electrical services in Washington State and is one of the top electrical contractors in the country. As implied within PSEC’s dividend income account, Valley Electric has recently notably improved the company’s operational performance. I projected PSEC would record net unrealized appreciation of $5 million for the fiscal second quarter of 2019. In comparison, PSEC recorded net unrealized appreciation of $8 million. When calculated, this was a variance of $3 million which I believe should be considered a very minor outperformance from a valuation perspective (FMV balance of $90 million as of 12/31/2018).

When analyzing PSEC’s entire investment portfolio, I had the following (overvaluations) undervaluations when compared to the company’s reported FMV fluctuations during the fiscal second quarter of 2019: 1) CLO portfolio by $6 million; 2) CP Energy by ($2) million; 3) NPRC by ($9) million; 4) Pacific World by ($12) million; 5) Universal Turbine by ($3) million; 6) Valley Electric by $3 million; and 7) the remainder of the company’s investment portfolio by ($3) million.

Conclusions Drawn:

Readers have continued to request that I provide these types of “update/follow-up” articles showing how my quarterly projections “stacked-up” to PSEC’s actual results. I believe the analysis above accomplishes this request. Since a company’s operating performance (quarterly earnings) is one of the key drivers to stock price valuations, I believe these types of projection/assessment articles are appreciated by most readers (owners and non-owners of PSEC alike). In addition, this article provides my overall (and in my opinion non-bias) thoughts on the quarter which I believe most readers see as beneficial when assessing certain investing strategies.

From the analysis provided above, it was determined PSEC’s quarterly NII and EPS/NAV fluctuations were a modest and minor underperformance, respectively when compared to my expectations.

When looking at the valuation fluctuations within PSEC’s CLO portfolio, Valley Electric, and several of the company’s control portfolio companies not discussed above, I believe the company slightly outperformed my expectations. I believe this should be seen as a positive catalyst/trend.

However, when looking at the valuation fluctuations within CP Energy, NPRC, Pacific World, Universal Turbine, and several of the company’s control portfolio companies not discussed above, I believe the company slightly-modestly underperformed my expectations. I believe this should be seen as a “cautionary”/negative factor/trend. I also believe PSEC’s large monetary investments in Interdent and Pacific World Corp. (Pacific World) need continued monitoring over the foreseeable future. This will continue to partially offset other portfolio companies that have recently improved operations or have continued to report attractive operational performance.

Some new readers to my articles could be thinking why, if I currently have a position in PSEC (see my disclosures at the end of the article), would I mention some of these cautionary/negative events? The answer is simple and straightforward. I try to remain as “non-bias” as possible when it comes to PSEC’s analysis. If I believe a certain underlying portfolio company/investment is overvalued or has an increase in credit risk at any given point in time, I will state as such even if I currently have a position in PSEC. This notion is true regarding any stock I analyze (whether I hold a position or not). I believe long-term readers of my articles have come to know (and trust) this level of non-bias.

For readers curious about PSEC’s dividend sustainability (after the notable reduction back in September 2017), please see the following article as to why I correctly projected the company would maintain its dividend per share rate for February-April 2019 (contrary to some other viewpoints):

Prospect Capital's Updated Dividend And NAV Sustainability Analysis - Part 2 (Includes Fiscal Year 2019 Monthly Dividend Projections)

My next PSEC dividend sustainability article will be available to readers prior to the company’s next set of dividend declarations (prior to May 2019). This future article will include my PSEC estimated quarterly net investment company taxable income (“ICTI”) and cumulative undistributed taxable income (“UTI”) balances through calendar year 2019.

My BUY, SELL, or HOLD Recommendation:

In my opinion, the following positive factors/catalysts should be highlighted for existing and potential PSEC shareholders: 1) recent price stabilization/“bounce back” within the high yield debt market (positively impacts valuations where credit risk remains low); 2) quarterly economic returns generated from the fiscal third quarter of 2016-fiscal first quarter of 2019 (this past quarter’s performance was more of an “outlier”); 3) recent refinancing/resets/re-issues of some CLO investments (positively impacts current and projected future discounted cash flows); 4) continued strong cumulative performance regarding several control investments (including positive impacts from recent passage of the Tax Cuts and Jobs Act [TCJA]); 5) continued modest exposure to the oil and gas sector when compared to the BDC peers I currently cover (positive since crude oil prices have rebounded from depressed prices during late 2015-early 2016 [Freedom Marine aside]); 6) continued low exposure to the retail sector (some parts negatively impacted by continued change in consumer behavior/trends); 7) continued high percentage of floating-rate debt investments (86% as of 12/31/2018 versus 86% as of 12/31/2017); 8) continued high percentage of fixed-rate liabilities (89% as of 12/31/2018 versus 100% as of 12/31/2017); 9) recent net increase in the company’s weighted average annualized yield (13.1% as of 12/31/2018 versus 12.5% as of 12/31/2017); 10) insiders have not sold any shares of the company since I began covering this stock in 2013; 11) recent improved operations within several once struggling investments (Spartan Energy Services, Inc. and Venio LLC were taken off non-accrual status during the fiscal second quarter of 2018); 12) $0.06 per share monthly dividend continues to have a high probability of being maintained over the foreseeable future;13) recent “uptick” in dividend income provided by NPRC and Valley Electric; and 14) fairly recent insider purchases by several members of the executive management team (especially John Barry).

However, the following cautionary/negative factors should cause heightened awareness for existing and potential PSEC shareholders: 1) most dividend and structuring/fee income attributed to two portfolio companies, NPRC and Valley Electric (would like to see additional control investments have sufficient E&P to distribute periodic dividends); 2) recent elevated amount of loan prepayments due to refinancing with other market participants or impacts with current corporate interest deductibility (including negotiated lower stated interest rates with existing portfolio companies [negatively impacts NII]); 3) continued modest-material net depreciation within several control/non-control investments over the past several years and increase in non-accruals over the trailing-twelve months (two large debt investment within Pacific World, two debt investments within Interdent, and one modest debt investment within Universal Turbine); 4) “non-amendment” of the company’sInvestment Advisory Agreement with Prospect Capital Management L.P. (regarding the “2%/20%” fee structure) or any type of waived base management fees; 5) above average cost of funds rate when compared to sector peers (“spread” has narrowed recently though); 6) continued low cumulative UTI to help offset any future quarterly net ICTI overpayments (continue to project the company’s net ICTI will be more stable during tax year 2019 though); 7) recent notable net decrease in current GAAP yield within some of the company’s older/legacy CLO investments that have not been refinanced/reset/reissued (negatively impacts both accrued interest income and valuations); 8) modest increase in commitment fees on unused portion of the company’s recently amended revolving credit facility (negatively impacts interest expense; more than offsets the 0.05% decrease in “base rate”); 9) lack of recent share repurchases initiated by the company itself (excludes insiders; would continue to be accretive to NAV); 10) continued issuance of shares in relation to the company’s dividend reinvestment plan (has a dilutive impact when issued at a discount to NAV); 11) fairly recent “change in terms” regarding Interdent’s Senior Secured Term Loan B (now 100% capitalized PIK/deferred interest income of 16.00% which, in my opinion, currently has a fairly low probability of ultimately being received via cash);and 12) recent change in terms regarding NPRC’s debt investments (net decrease in overall stated rates).

PSEC recently closed at $6.38 per share as of 2/11/2019. This was a ($2.64) per share discount to PSEC’s NAV as of 12/31/2018 of $9.02 per share. This calculates to a price to NAV ratio of 0.7070 or a discount of (29.30%).

With the analysis above as support,I currently rate PSEC as a SELL when the company’s stock price is trading at less than a (17.5%) discount to its NAV as of 12/31/2018, a HOLD when trading at or greater than a (17.5%) but less than a (27.5%) discount to its NAV as of 12/31/2018, and a BUY when trading at or greater than a (27.5%) discount to its NAV as of 12/31/2018. These recommendation ranges are a minor decrease when compared to my last PSEC article (approximately three weeks ago). This is mainly due to PSEC’s recent NII underperformance which mainly stemmed from the third negative factor listed above.

Therefore, I currently rate PSEC as a BUY (however, extremely close to my HOLD range). As such, I currently believe PSEC is slightly undervalued from a stock price perspective. My current price target for PSEC is approximately $7.45 per share. This is currently the price where my recommendation would change to a SELL. This price target is a ($0.20) per share decrease when compared to my last PSEC article. The current price where my recommendation would change to a HOLD is $6.55 per share. This price is also a decrease of ($0.20) per share when compared to my last PSEC article. While I was a bit disappointed by PSEC’s quarterly results, I believe the recent negative reaction by markets, when it comes to the company’s share price, already takes the points laid out in this assessment article under consideration.

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader’s current investing strategy. The factual information provided within this article is intended to help assist readers when it comes to investing strategies/decisions.

Current BDC Sector Stock Disclosures:

On 9/6/2017, I re-entered a position in PSEC at a weighted average purchase price of $6.765 per share. On 10/16/2017 and 11/6/2017, I increased my position in PSEC at a weighted average purchase price of $6.285 and $5.66 per share, respectively. When combined, my PSEC position has a weighted average purchase price of $6.077 per share. This weighted average per share price excludes all dividends received/reinvested. Each PSEC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha.

On 2/2/2018, I re-entered a position in Main Street Capital Corp. (MAIN) at a weighted average purchase price of $37.425 per share. On 2/5/2018, I increased my position in MAIN at a weighted average purchase price of $35.345 per share. My second purchase was approximately triple the monetary amount of my initial purchase. On 3/1/2018, 10/4/2018, 10/23/2018, 12/18/2018, and 12/21/2018, I increased my position in MAIN at a weighted average purchase price of $35.365, $37.645, $36.674, $35.305, and $33.045 per share, respectively. When combined, my MAIN position has a weighted average purchase price of $34.713 per share. This weighted average per share price excludes all dividends received/reinvested. Each MAIN trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on MAIN.

On 6/5/2018, I initiated a position in TPG Specialty Lending Inc. (TSLX) at a weighted average purchase price of $18.502 per share. On 6/14/2018, I increased my position in TSLX at a weighted average purchase price of $17.855 per share. My second purchase was approximately double the monetary amount of my initial purchase. When combined, my TSLX position has a weighted average purchase price of $18.071 per share. This weighted average per share price excludes all dividends received/reinvested. Each TSLX trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on TSLX.

On 10/12/2018, I initiated a position in Ares Capital Corp. (ARCC) at a weighted average purchase price of $16.40 per share. On 12/10/2018, 12/18/2018, and 12/21/2018, I increased my position in ARCC at a weighted average purchase price of $16.195, $15.305, and $14.924 per share, respectively. When combined, my ARCC position has a weighted average purchase price of $15.293 per share. This weighted average per share price excludes all dividends received/reinvested. Each ARCC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on ARCC.

On 10/12/2018, I re-entered a position in NEWTEK Business Services Corp. (NEWT) at a weighted average purchase price of $18.355 per share. On 12/21/2018, I increased my position in NEWT at a weighted average purchase price of $15.705 per share, respectively. When combined, my NEWT position has a weighted average purchase price of $16.462 per share. This weighted average per share price excludes all dividends received/reinvested. Each NEWT trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a HOLD recommendation on NEWT.

On 10/12/2018, I initiated a position in Solar Capital Ltd. (SLRC) at a weighted average purchase price of $20.655 per share. On 12/18/2018, I increased my position in SLRC at a weighted average purchase price of $19.66 per share, respectively. When combined, my SLRC position has a weighted average purchase price of $19.909 per share. This weighted average per share price excludes all dividends received/reinvested. Each SLRC trade was disclosed to readers in real time (that day) via the StockTalks feature of Seeking Alpha. I currently have a BUY recommendation on SLRC.

All trades/investments I have performed over the past few years have been disclosed to readers in real time (that day at the latest) via the StockTalks feature of Seeking Alpha (which cannot be changed/altered). Through this resource, readers can look up all my prior disclosures (buys/sells) regarding all companies I cover here at Seeking Alpha (see my profile page for a list of all stocks covered). Through StockTalk disclosures, at the end of January 2019 I had an unrealized/realized gain “success rate” of 87.2% and a total return (includes dividends received) success rate of 100% out of 39 total positions (updated monthly; multiple purchases/sales in one stock count as one overall position until fully closed out [no realized total losses]). The modest increase in both percentages, when compared to December 2018, was due to the fact my position in several stocks once again turned modestly-notably positive (mainly due to the recent market rally). I encourage other Seeking Alpha contributors to provide real time buy and sell updates for their readers which would ultimately lead to greater transparency/credibility.

Disclosure: I am/we are long PSEC, ARCC, MAIN, NEWT, SLRC, TSLX. 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.

Additional disclosure: I currently have no position in BDCL, BDCS, or BIZD.