Prospect Capital (PSEC) 9 Nov 172018 Q1 Earnings call transcript

Good morning and welcome to the Prospect Capital Corporation First Fiscal Quarter Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

Kate. you, Thank

the President on our morning Grier are Financial Joining Chief call Operating our and Brian? Oswald, Officer Eliasek, Officer. me this and Chief Brian

Corporation. the undertake Thanks, call due within intended the securities call property to Unauthorized the results to to statements use unless law. of that of contains John. Actual protection. forward-looking is is materially Prospect laws differ This meaning be Harbor We This statements could prohibited. do to Capital are our outcomes factors. update and not impact forward-looking required the those Safe of many forecast from by subject

For previously website, additional XX-Q filed and our available release, on prospectstreet.com. Relations our disclosure, our earnings the press of presentation and our corporate Investor see tab

over the John. back I turn Now, will to call

Thank you, Brian.

well points ago. equity ratio, we that net to XX.X% – September chasing XXX originations return booked have to in years. store basis to disciplined capital, XXXX coming $X.XX our the believe profiles actually remain our share, risk per our as or and to point our past quarter. potential investments Executing our million, In will credit risk with approach line for the the pipeline we this in served net current robust quarter and to cycle, has prior maintained equal quarter, from currently down yield $XX.X September was risky, discipline. We fiscal and preserve too avoid to with us investment the yields. dividends. quarter, NII in reduce disciplined serve plan For credit We We of in approach quarter a income well $X.XX year years our at quality target poor credit from prior the the in just us this debt committed range being a down reduced investments, through our

quarter share, the base. the quarter. due our within In $X.XX a $X.XX structured was September to net and the down credit asset or prior depreciation over income $X earning million investments June from quarter per Our unrealized interest lower

We rates. calls lending are improving pipeline refinancings, optimizing performance refinancings, yields working our cash including and NPRC’s extensions, to controlled execute a NPRC’s new including improving structured of increasing refax, operating originations, credit through through enhancing investment securitizations multifamily online flows estate robust in higher through business, portfolio, realizations real LIBOR and floating based and portfolio, in rate on

coupon lowering average utilization the of On revolver liability on side, issuance. of capital increased plan and we new lower cost our weighted a term combination management through

shareholders have are on monthly consecutive share plan distributions. January, cash We share of count series distributions to shareholders. We will announcing shareholder distributions in our XXX ago and current next XXXX, distribution to paid through announcing IPO, to February. XX distributions years share for Since exceeding at all November, our shareholder shareholders billion out of $X.XX $X.X representing we per $XX.XX original per our January in December cumulative

the quarter. Our September, $X.XX stood per $X.XX in NAV prior share down in at

and XX.X% assets Our rate to from increases. interest-earning XX benefit fixed floating rate as balance September positioning of of XX.XX% liabilities consisted sheet rate us

income management We since that time as Management alignment basis the options. on in of over the never $XXX than with purchased own basis when amount including company’s quarter. a same has recurring benefit believe in September market of there and sold from long other cost no management stock, December Our shareholders in purchase in is XX% total not significant stock management that investment of hundred the management percentage greater the Prospect, interest $XXX income for open the combined our XXXX. largest shareholder especially and has to over Prospect’s between of income Prospect purchased as shareholders was more on million measured the and a share. is has by than stock of and periods

in business has with rate management dynamic the handling cycles. experience investment by been and for team opportunities both decades, economic interest Our served challenges up and

We to current believe to call we reserved. than productive those reduce when the assets turn provide opportunities you. over Grier. risk the dry we believe same periods. one substantial utilizing yield Thank future to now free built and powder have is us to it the is the environment will will learned with have At purchase time more the of attractive time, we I and reach

John. you, Thank

with of scale and billion $X deliver to Our performance. around business continues solid assets undrawn credit

groups representing estate investment of strategy consists XXX yield team Prospect non-sponsor credit experienced and and credit, industry. private bench, on deep that one investing sponsor-related we of buyouts, continue lending. With structured longevity, experience focus diversified middle-market the third-party the direct covers and lending, and real largest Our equity in a operating financial sponsored professionals approximately to scale, online our

of XX% risk-adjusted deem allows September This that the the most broad and our of diversity basis. volume be investments manner, As a fair on to source to a our value high of at opportunities attractive XXXX, we us opportunities selected stood range bottoms-up portfolio. at disciplined controlled a

of Our a and of invests in team thousands percentage single-digit opportunities disciplined opportunities. such a low annually typically manner evaluates in

preference in a Our stack loans. senior capital flexibility the secured levels us with and non-bank of multiple structure invest gives for the lending to corporate

comprised September debt from spread secured at annualized As investment is attractive XX.X% of of X.X% continued XX.X% around investments pledge borrower of resulting lien, unsecured as assets the and down XX.X% XX secured XX.X% XX% are basis were yields our equity being collateral, an debt fair performing generates market. in XXXX, yield whole debt that loans, value lien generating second points business September first underlying small one due the lien, quarter first benefiting of approach investments X.X% secured with secured compression our portfolio adjusted XX.X% to credit risk in structured and XXXX, underlying from prior Prospect’s collateral. asset with

distributions. can that contributors certain act investments positions or as We generate in yield such also capital gains positions enhancers hold equity as

first selection differentiated a to secured our achieving and continued origination with originations still approach. senior debt have against and to yields lien protect risk, discipline downside We through while market above prioritize credit

XXXX, a fair September portfolio As of value we of $X.XX billion. held companies XXX with

continue to company many largest a with significant diversified industries concentration. also different is no XX.X%. invest fashion The portfolio We industry in across

basis in X.X% percentage XXXX, prior of the industry at stood at asset in our September X%. quarter. XXXX at stood our approximately total in retail As down stood concentration energy industry a assets the the X.X% in Non-accruals and as September XX points concentration of

average leverage Our times EBITDA, net prior at X.XX quarter. weighted from portfolio the stood X.XX up

stood opportunities to loans. our sole perceived self-originated portfolio syndicated the the risk-adjusted in broadly majority In reward million self us agented XXXX. be non-anchor compared recent originated causing market of consists years, average to to million agented, our June anchor middle-market we investor proactive prioritize efforts. company The weighted and EBITDA for from and September $XX.X of sourcing portfolio per at $XX.X Our XXXX, in up higher

continues the differentiated center quarter $XXX September drive call the same nearly million flow $XXX XXXX Our deal in proprietary business. aggregated initiative as Originations the quarter. million, to in for our prior

$XXX experienced in objective as of resulting also preservation of validation our million. repayments of capital the We exits net and $XX million repayments

attractive business early XX% the look September and state. in recapitalizations, certain debt, agented sponsor property Today, rents, value-added objective including validation our programs, quarter, have During resulting occupancies, debt, X% lending non-agented redeploy comprised doing acquisitions multiple an online consolidated increase XXXX private yield our properties, has financing acquisitions REITs originations into including investments, recent our real alongside in businesses. investments state and as real attractive renovation completely largely we high NPRC’s anchoring income into real new quarter-to-date. Abbington, financing. credit made from Bexley yields estate XX% Gate, growth portfolio as and multifamily focused most exited we NPRC a quarter, this corporate returning XX-year we XXXX and have this with club Vista, the in capital XX% REITs, strong stabilized quarter, benefited through with in the cash an rising on the In June NPRC. to has our arena Mission been of

NPRC both expected. expected NPRC recently realized relationship, returns. record, recapitalizations with two management with rate property continue track We repeat exits expect attractive acquisitions exits strong and with locked multiple closed a with has and acquisitions to and is more pending a

online In years, This portfolio XX% to end we, at addition the X online have at business, consumer assets, of NPRC, focus certain past advance which have including securitizations securitization is borrowers. includes support over currently return NPRC facilities working NPRC’s online small and annualized credit grown asset other a the as lending costs and real X and rate and significant and and X focused with well business second than we business. all financing as expanding NPRC our NPRC for X securitization while In bank platform lending online portfolio the more June on multiplatform the years, XXXX refinancing estate activity, online to most quarter, past attractive currently platforms. the on consumer its of closed delivering expected near-prime consumer recapitalization third losses. its from net is capital NPRC assets. super-prime, on prime productive a is of redeploying

business our providing with management majority the stakes, on risk and issuance pursuing class opportunities. underwriting benefits Our world has underwriting working of structured exceeded focusing strong teams, performance credit collateral attractive initial primary through demonstrating adjusted expectations,

billion. a portfolios XXXX, September total structured structure loans base credit X,XXX investments. across over XX comprised $XX The $X.X non-recourse of credit billion we As and underlying of asset held over

outperformance XX XXXX, In XXX and points syndicated down this points September GAAP of an points of As portfolio basis points basis XX the of of points. points default June quarter, points, and structured a annualized rate the down of the broadly quarter XX rate generated basis the prior in basis quarter. basis decline our the This XX.X%, XXXX prior credit yield prior XX-month yield XX XX.X%, in the cash of was basis points quarter. September XX basis XXX trailing a up basis from than XXXX portfolio from in less experienced default a market XX quarter

distributions September representing IRR we of million, $X cash generated investments our Through average $XXX credit exited XX% of with in structured XXXX, original XXXX, As investment. billion September multiple cumulative portfolio XX.X% X.XXx. realized our XX totaling also and of an of us, existing to cash-on-cash have has

of credit portfolio In tranche. consists minority structured in cases, Such received because majority Our compared physicians. rebates fee position. significant to majority-owned same benefits physicians holdings the can many entirely we our of enjoy

to ability our the we As in a substantial value control and discretion to our call such believe options majority we add transaction future sole the holder, in portfolio.

years terms for than deal, might from and terms, of investor, refinance on debt extend rather option waiting liabilities to the to We, low. remove in more advantageous call optimal period baskets an investment in exchange transaction valuations also bond the majority reset the have better known in a when as can asset temporarily loan enhance fashion investors We value. be as

has yield paid portfolio equity us an credit XXXX. cash Our XX XX, months average the ended structured September XX.X% in

far $XXX December net So the resulting we in quarter, originations originations zero in current million. XXXX in of $XXX and received repayments million booked

real Our comprised the debt operating you. have X% buyouts. XX% non-agented call debt, Brian. over XX% estate, and I to agented X% originations will turn now Thank sponsor

leverage, funding, capitalize assets believe access fixed diversified rate to demonstrate to towards prudent as weighting Grier. as Thanks, our balance matchbook opportunities. unsecured strength of and sheet majority liquidity unencumbered on both attractive We substantial well substantial debt

float company upside hand towards locked Shareholders construction our years interest providing majority our creditors extending unsecured fixed thoughtful potential rate rise. in of alike XX of approach the should industry, Our taken future, shareholders to sheet. right differentiated ladder as appreciate has while the with the we the which loans into our balance in the rates of have side significant over liabilities of LIBOR and

accordion remaining our at until representing AA As our XX to Prospect plus and are to $XXX XX% Prospect convertible XXX capital Capital assets, with is unencumbered of assets grade revolver institutional of revolver assets held program million our The investment billion our distributions including with allowed debt, year September revolver, benefiting Corporation our has basis bonds, have notes. at banks funding, of us. we total of pledged multiple $X.X and size to option. followed X billion LIBOR and $X.X which unencumbered unsecured The a types and points assets, XXXX, approximately portfolio. at of approximately a priced XXXX of as amortization March we rated continuing be revolves issued baby feature from bonds bonds, Outside interest by with

rating no All covenants, of cross have enjoy unsecured from plus with asset grade from of BBB We these grade financial reaffirmed. defaults revolver. minus S&P, investment no restrictions, types rating which and investment our no was BBB debt recently an of Kroll

than and maturities ladder now multiple duration unsecured have XX market our We more the liability our tapped years. on to occasions debt extend to

in Our including debt reduced June bond note X.XX%, maturities proceeds the XXXX, June extend the note quarter, our we XXXX convertible refinanced in We August million July the debt convertible the counterparty banks debt and May $XX.X have years. $XXX.X million note $XXX many substantially over years, non-program risk million million also XXXX X four our bonds term year. issued debt which we maturing the amount $XXX and in upcoming latter October utilizing bond our tranches, our so our convertible with million in so through of the XXXX $XXX we repurchased in XXXX, substantial In across December investors a past maturities significantly had in quarter. of XXXX in repurchase a convertible baby to XXXX, many XXXX,

through XXXX. $XXX the our million – program maturing November notes called also We have of called

of liability million. of year the we have maturities For $XX calendar remainder XXXX,

Our $X.X decrease our demonstrated not come payments arise and course the of need ratio, XXXX from half but including have the believe in million originations to is during could If notes, calendar revolver our undrawn. we we XXXX. year slow to issuances unsecured maturities currently should exits ordinary aggregating volatility. leverage billion, we March We June $XXX during X ranging the now allowing to market XXXX separate debt program first as

had maturities of program XXXX. outstanding As XX, with we of staggered million $XXX through XXXX, September notes October

the to I Now, call turn will over back John.

Brian. you, answer questions. now We thank can Hey, any

go The first Raymond comes Please Instructions] from of [Operator Leslie question Vandegrift James. ahead.

Hi, guys.

structured we credit, quick you mentioned question on saw markdowns market, the a the on in which the comments. Just

Just a color into that you going XXXX? more this wanted where quarter see to bit and get and there

not right in for of but which us rates are is cautious why impacting ultra LIBOR, outweighed in credit, for and asset sitting state the business to – discount you in also of XX, this difficult compression people in factors, on of X the out a a up, that’s rates we including of these an is originations, being thank as rather in the in wrapped in now the structured a now, capital within Leslie, broadly but default in it’s new to factor in from that spread here general, front, now. reduction weeks It’s a of outperformed have negative will significantly at positive for reduction middle-market core type factor we be a stop on Sure, securities. floating quarter the the that gas a not perspective There will lot increase and asset seen question. what are spread excellent of right is lot in on market, paper industry tell from and now, XX-month a compression chasing the true valuation increase November right in pedal play lot an you tell rate which valuation there just syndicated the But with difficult which X trailing general market passing just we deals have December continue. of the

is structured business by in liability of reduction the credit enabled it being in spreads. a of Some

question you point say AAA then, as the of expect what much that a spread how investors a will floor is at asset on get ledger. So, available the arbitrage side to is hit what for impacts the paid

being too means than two is Too in of declining CLOs good time times risk at default The the being Too or too As about a historically times bad we former. and rates. generally your of structured good general have spiking means bad. credit, talked worse latter the spreads. and time

income call that but the some that’s third-party in think in also par loans now into we just XXX recognition about at to a right taking and investment prices which right are point a the call quarter, yield cash our base. course for redeploy as less of And only about have of spread goes many driving points a the on an our highly in valuation income, and our in recognition, on that income that things as utilizing that others structured take recognized of doing is the that other the or investment we side was received means, yields to valued worsens portion than deals on reduction I a oftentimes below the as cost have the too do well. XXX% That’s the in the significant favorable capital basis. our recognized important notice are ability credit driven, Note, do but dollar yields. That underlying lost two-thirds GAAP an credit to and every front, range for former reduce of income income follow-up picture. there, within to but marketplace the being is the not on to income third basis. to Any very structured cautious questions net cash we the and pressure And reason we for are times piggybank and significantly good, other And focus premium robustly protection conservative are third are benefit places. that that’s trading We of future also that now accounting which we Leslie. basis cost compression is cash proceeds if also at reduce storehouse our and very, about a conservatively was business, net

Yes.

now, cycle, are of the Just of the the the remarks, being companies also prepared now on focus where the just now now doing there? with on issues like the bit in online you so of other route of kind controlled XX% on control CLOs those one more it you side right a the whether if portfolio, but or conservative your traditional more price right the is because wherever on, that more mentioned good is on going it’s on in lending is to too portfolio

Sure.

in the while write-down side in through have that business estate CLO control for much chunk business. declined a now. XX% a kind We real our that NPRC, been investment majority That in of piece, which And of of through controlled the of part to about biggest XXs part of the investments business. one not new significant is the in low not which way The in structured include chunk book is actually of our singular does that making which business. the in credit

estate real performing bright our been the we business with and a spot arguably quite business. best businesses real of one has recently, performance of Our are pleased

We have as like generated that generated internal distance. realized well. a rate have on gone And got exited other something we something in has our exits or we the meaning as we mentioned NPRC remarks, have deals prepared of XX% return

value We are and hold, we prune already captured the sell properties from we the force and do the optimization to constantly so a purchase new evaluating renovation deem where properties we important program. have

are has quarter selling buying we So, the that. and active December this new are been also properties properties today we particularly quarter for

closed to others floating of institutional lot relative rate. to basis, have There real on I now, two right view two than investors interesting continue all in got has which how or and credit is anything a is have less are deals something is out year a and significant pocket. We estate corporate capital interestingly who touching a our we last everywhere but asset allocated do the with think in planning have classes, we find to sort already of there

years, rates. it’s real with a counterparty of inflation great business, the cash but we multifamily. technically estate it’s That’s like lock That’s don’t on beneficiary hedge. diversified it’s equity a for an like attractive great gamble interest in not exposure, most we business, yield credit business, and credit we So, the heavy financing XX business,

have in long of a we horizon So, financing. time locked really

do recaps of We parts when as then have estate to we significantly the ability to and got real done outperform portfolio our the dividend position have properties redeploy. significant in monetize

our a rate continue very at look business So, side, low you’ll ratio, It’s very, other the of that in are but investments. in selectively business. business. terms control book-to-book control with and to of we see a us that’s hit parcel part Elsewhere pleased

as at acquisition furniture many and to is able which have hospital a places will been and that see one-stop look the a supply finding and to add-on opportunities addresses other selectively Mighty deploy for there. have we competitive have attractive We you other been institutional Lake, deals, us for segments being doing example, maker And capital. we advantage well – restaurant and where hospitality the capital of

or us an credit, You charge-offs And auto are also installment to typically driven. not largely you then lenders calendar in chase which finance increase buy-outs is in year there two one valuations going high in quite the is and see earlier book, value seeing control in deals financial consumer our business and are at XXXX.

to more and regulatory are also think We the those turning we improvement you with again. the there growth environment seeing to types businesses are and are businesses than corner of favorable out pleased And a bottom starting case see show ago. for and two many much are of a now year or those right

up about for all one time-to-time does so are the you attractive to book your repayments far credit is another things to and significant off, position middle-market will tough well, we looking is the deal-by-deal spike. this any have recap it get We future. particularly but of had control more put as can mention spreads area. So, when and that periods you you decide from bottoms have case it’s well expect in place is even fleeting the the had corporate a money aspect or you And be paid we one a when quarter, either important really of the certainly and repayments to side, credit deploy it’s credit or business capital, very if decision, own it, to sell but the to up side

now business have thing. do hang on credit of steady side flow to a So, to redeploying and you could like be constantly on the cash you recurring I

So, there book. is the lot a of advantages control to

Appreciate it. answering and for the color you questions Alright. on Well, that. the thank all

Thank you, Leslie.

National of from Corporation. go Testa Christopher ahead. Your Securities next question is Please

questions. Thanks good taking my for Hi, morning.

yield, loan massively environment, dividend wondering market looking in guys stock? you are the where trading challenging why the you Just just repurchasing are at not

you means attractive financial can’t synergistic IRR a put to business thank and about like which on have million have we portfolio. the buybacks If about your we XX% for volatility because maintenance legal of we on leverage. a think that in off-sized we repurchased our XX% and to you change areas you we up stock test. including basket basket board, $XXX get that past, in XX% question, credit swiftly years Chris, that to-date. into in from from be our are $X.XX structured year, a the investment about or the XXX% and early had a ago, X thought standpoint, in attached another We not critical for Circumstances we baskets buybacks basket, something uptick others a resets careful are big have and a previously, X.X authorization in managing tax are repurchases, hit it might add-ons the standpoint, impact even It and compliance the exploring worried services end I for manage you coming have can XXXX. rating which big surge crystal used slowed in we of pretty think of Folks to third actually are rating have a we about an our in agencies that The some made it is basket. us to XXXX, volatility. from are that and had example recession huge end industry out XX% other us incurrence, the I clear need negative a of in cautious repayments a to the makes single

tests should where aspects scale about be our in diversity we important. other well careful that. We is careful So, be should about as

We XX% have within mentioned NPRC actively size there. and estate I redeploying capital real on earned Richardson the IRRs approximately

which say the those Chris, of the an would some it business. discussion item So, are makes ongoing I factors, for

induce to those can would of understand mean need the them you and buybacks risk but on accretive board points, actually what and capital implement I the do to less guys return from type actually discount I it? program

to Yes. liability of the cost it can having those cost complying well. incalculable be come down the Chris, doesn’t number, issues, one access of as not

It analysis, doesn’t number. formulaic a it’s down multifactor Chris. come So, one to simple

fair. of touching online Deck? that that’s outlook on business, kind tepid of if Lending the consumer wondering just the Okay, And has Club lending just your and business out changed results on given coming On

always been that’s a our Deck, On with part very of small business. Well, Sure.

how it’s Brian, million a big part book of maybe that think is our right I now, $XX tiny business.

I understand. same but of business I you it’s mean, online? the what line as doing the just in are in

so assets but comes The business part business when it back have to you lenders short-term they Yes. lending liked because swiftly. are to very performance, balance good folks of part been originators X capital always as like in There a mentioned sellers become small small assets to has sheet in such X you themselves of opposed to because us months. has been

consumer talked you see Lending of NPRC there, business, then what a our pertain of assets remarks with like that within lending, made at so of example, about scale You you the that Club, And team side other to really we for any very are Lending platform not tepid hold. hard and to fast. money happy they it’s very venture The there results. this bulk because comes we back types that out large is to portfolios the the which week the are don’t kind scale results we on of do assets Club

prime to near-prime really which as We their opposed too, are not more policy lower in publicly reported is centric centric. in

have securitization investors saw June the remarks as prepared a up with performance. arrangers happy securitization in and Debt are performance, for happy talked are performance. is why I we why next with So, the Securitization you are happy about well. in gearing our which the with the

deploy it books back actively take other a years redeploy might sort capital significant then we a we it it somewhere NPRC those growing not some looking quite we dividend And new business it actually been into Club in that deploying might else any recap deploy capital of at of else out for ones deploy doing have platforms legacy or effectively of done and PSEC and and ago, take the within Lending fashion have somewhere or it, while entirely. to originations, a that to near-prime are

of optimization for part the the Is Chris? all that’s So, ongoing that online business. helpful,

I had I am I guess. muted that sorry

Just many valuation, when nonbinding that that’s in how use on third-party valuation has portfolio? there, higher receive the you are a that bids the indicative the CLO instances than equity you the

certain Yes. I Level the mean, assets. date. to X I speaks third-party as understand a are illiquid you is trying XXX% question, valuation as of it know am the which These highly

in daily the really You have marketplace so. don’t trades

– If many valuation, bid portfolio, but is times not you just nonetheless, higher is portion how could is indicative than – many you nonbinding I their third-party nonbinding how own have the is obviously good let’s on valuation receive indicative firm with if a up a the valuation let’s many that what that times say say you book? how the asking on gives coming on a am the bid

line credit don’t the basis, cost, percent management around basis team, you by or degree. are in third-party. of on a run and much at see here compare have and practitioners an the our you meaningful as know look do is see by the of data I again am don’t to were we Actual third-party. our valuation management had this valuations the look others points on comps CLO actually in people book a at significantly and auditors that have industry recognition, say income structured and What significant not what more a to I by points the written marketplace. a We that what front, XXX non-binding involved they also aren’t you marketplace. want in on is do transactions on. sure, don’t And address book which below Chris. also lot well the a PSECs, they pretty is valuations this below below look the is done to approved team to I valuations. is What see very and you aggregate are a with and in One tune you part RICs the worth report piece, highly other you as illiquid will many is valuation paper when bids close indicative commentary you CLO more is some below XXX% of as at I them

confident in So, we credit are secure our conservative accounting surrounding and our business. very structured

my for taking for that’s me. all Okay, Thanks questions.

you. Thank

time. no over There I our would to for Barry turn conference like remarks. This this additional questions session. the are at question-and-answer concludes John to closing

you Thank joining Okay. thank the Bye Have now. wonderful and for you afternoon a everyone. call.

you. Thank

for conference today’s now concluded. attending The Thank you presentation. has

You disconnect. may now