Prospect Capital (PSEC) 10 May 222022 Q3 Earnings call transcript

Good afternoon, and welcome to Prospect Capital’s Third Fiscal Quarter Earnings Release and Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to the Chairman and Chief Executive Officer, John Barry. Please go ahead.

Joe. you, Thank can everyone I hear hope me.

the our Eliasek, on Chief Officer. are Van Grier and Chief Financial today President Kristin? Operating our Joining Dask, call Officer; Kristin and

call unless do forward-looking statements vary highly statements are Unauthorized our This by Thanks, harbor of to be likely not materially, that update the and protection. forward-looking This contains prohibited. to Actual intended Prospect. developments John. undertake law. call to use is required subject is we safe to and property are results

see additional XX-Q For website, press filed previously our disclosure, earnings prospectstreet.com. release and our and available on

Now, I’ll back to John. turn the call over

per Welcome, Thank share million Kristin. investment $X.XX by income, March NII, everyone. you, rate quarter, or our exceeding net common In the share, per $X.XX. $XX was common or distribution our

income quarter to or and positive a value of company-specific was $XXX.X net common as for basic increased due macro consecutive portfolio factors. shareholders attributable the the million share common eighth to our overall per $X.XX of Our combination investment

NAV eighth Our the representing per and March, in row quarter prior X% share our $X.XX common and in NAV up growth. from a with at quarter stood $XX.XX

XXXX Our share level September at ago. is over six the NAV since years highest now common per

per those invested over the by from XXXX, $XX.X share December increasing the in value exiting the period. the Over quarters with has eight quarter, share XXXX December quarter NAV time XXX common XX% Prospect growth the common billion XXX pre-pandemic in investments, Since business asset industry of Prospect net to in XXXX per highest delivered has that investments. inception across development company

volatility leverage the our result as during risk as previous management outperformed macro derisking, our We past direct multiple chasing peers of quarters other controls. well not a have as of

quarter, entrusted generate for controlling staying true capital In and up March an reducing our our sheet, been was capital to the to net has portfolio of multiple continue December XX.X%, XXXX protect and percentage sheet underleveraged ratio XXXX, us percentage that and down from are since earnings X.X we debt-to-equity the for protect XX.X risk, for served us March the the quarters. us run to which ability to and as such both the points balance We to balance well points from to has strategy that case shareholders. quarter

approach, equity, May also only regulatory XXXX, agencies. listed significant but subsequently rest listed junior given Over Prospect which Act our around typical equity from not but Act BDC capital by the announced to perpetual Running has macro a years, us rating coverage, coverage gave XXX% leverage, In debt XXX% or have cautious equivalent higher which XXXX moved industry, past not Prospect. XXX% for cushion, leverage our to equity to lower the treatment counts debt ‘XX gets equity a points asset toward asset we to issuance, four of to which total overall leverage debt the other electing now lower increased with at at with XX half of increased the debt our debt percentage than increased flexibility dynamics. minimum leverage risk our approximately preferred BDCs instead pursue

XX% Prospect’s listed was for XX.X% which unsecured years. of the Unsecured BDC. been and is than debt target from funding range. total leverage increase peers than XXX% case the plans such March historical with balance Prospect below highly coming and of debt nonrecourse of no to points from significantly has actual to XXXX, typical or debt higher currently beyond XX in to debt X.XX drawn differentiated Prospect’s are more for our about for percentage XX have target We we X.XX Prospect’s our sheet debt, around equity,

strategy investment us with provides significantly our more unsecured flexibility many BDC diversified peers. than profile Our sheet funding lower and and and balance significantly of risk

are distributions. Turning X cash to the Board’s front, declaration steady more report of we pleased to distribution monthly the

common We $X.XX XXth, August. August. and of cash continuing represent stable in set practice, distributions distribution $X.XX four distributions. are per plan each the of announcing June, These consecutive May, XXth monthly monthly shareholder our of months share XXth years Consistent for with shareholder XXth, per distribution, cash we five July shareholder of and next share announcement past on

seek grow have distributions XX October share by exceeding to XX, many goal steady Our billion and X% the cumulative for NII share is aggregated distribution our term nearly current distribution, as shareholders than stock August Shareholders per Since common ago, the ideally same the participating macro returns DRIP $X.X for to while flyers aggregated the shareholder that on March volatility, ended period has high dividends. months XXX share. XX XXXX, $XX.XX $X.XX, our ‘XX shareholder per in amidst $X.XX returns we a during in volatility years resulting household return out do non-participating paid maintain common pay common delivers and will to backdrop count, distributions market common cash of to not our total a this shareholders, all stability NII shareholders, our this elsewhere. more Both shareholders common our provide common preferred household per return through $X.XX over in name at to long over combined. low than that greater greater monthly period our approximately aggregating are a IPO S&P have XXXX, received distributions on per share glamorous and names Since share technology the greater than we original XX%. more

June XXXX and fiscal covered distributions exceeded fiscal and shareholders XXXX shareholder the by and common share. has common in the distributions preferred per to in preferred year NII Our $X.XX year-to-date

successful $XXX X.X% We listed shareholder on and $X.XX launches are programs also pleased of to X.XX% of announce continued our distributions billion, the preferred million, heels preferred. preferred

independent RIAs as well and have broker-dealers, including broker investors, preferred sized institutional million with wirehouse in We and X raised of systems $XXX top addition systems. from to strong the dealer date approximately regional as broker-dealer recent top X stock support

purchase basis open management management for significant as exceed stock, largest returns and on and to boost in senior when perpetual incremental is shareholders of issuing LIBOR cost to sold from risk-adjusted X.XXX%. unsecured of other no with never asset and one-month and greater senior a fashion, an We powder retirement in recent first, our Two, X.XX% selected we on our fashion. accretive available including, in at shareholders multiple our dry of has tender And Fifth, alignment today’s X $X.XX than utilization yields. focused programs, NII, particularly capacity liabilities, approximately notes, LIBOR. increased to cost market. increase X.X% and successful Prospect shareholder underleveraged purchased increased believe sheet. Three, and total Prospect’s an in between currently there Four, management share. of originations the the a revolving NAV recent is tightening cost-efficient floors could investments credit including to has issuances facility rates to ROE the of to of XX-year preferred our a with management be billion including accretive note greater amount coupons approximately current which yields are equity potentially deploy as targeted on enhance Fed based same equity We our deliver stock sixth, in higher unsecured debt repurchases. balance initiatives short-term and of offers lower-cost

to employees over common team turn management shares eat now senior $X.X of billion NAV. currently Grier. will of own approximately outstanding, Our I our as call measured the our XX% cooking, you. at and representing owning equity Thank

Thank you, John.

continues Our scale platform billion undrawn with in deliver environment. Capital current performance of Corporation $X assets and over the to Prospect at dynamic solid credit

Prospect-sponsored lending, sponsor-related with increase coupled estate experienced and private we our investment to scale, bench, have in lending, a opportunities structured to we of of expect disciplined the with in we longevity, expect This attractive with opportunities one on arise. on industry. capitalize attractive highly to on that With deem approaches us spans an broad investing. next dry diversified over of a financial powder see the one. Our they represents team diversity buyouts, select credit, significant of pullback which third-party secondary primary investment we to other many most downturn manner opportunities yield origination experience us XXX and consists a real equity middle range to the wider source cycles, maintain the and allows continue as focus investment from in operating and opportunities, and largest market bottoms-up to then groups, high groups, a will strategy a basis. direct past Consistent opportunities, during the groups be enable risk-adjusted such professionals, particularly deep volume that maintained spread leveraged we other Unlike continued non-sponsor

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

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

As investments, yields. underlying XX.X% is of our benefiting structured XX.X% interest-bearing secured portfolio prior with our and we’re second borrower-pledged of debt, secured unsecured debt XX.X% March lien generating annualized assets X.X% March at generates with XX.X% flat as approach attractive performing XXXX, our fair value equity lien of subordinated in resulting XXXX, debt, notes first first collateral debt, lien XX.X% underlying investments, comprised in that an the of being In yield quarter. one risk-adjusted with from Prospect’s collateral. investments

gains investments, risk, they contributors, as with approach. against yield such can originations achieving positions We’ve equity to protect generate to or hold discipline certain selection credit differentiated We our continued as and yields while and also also prioritize origination above-market enhancers capital through a positions distributions. act secured debt senior in downside

prior March of from as with an XXXX, prior fair of we the the portfolio the companies, of value billion, million increase quarter. $XXX quarter a As held XXX $X.X same

XX.X%. in and invest concentration. industries a The many no also We avoiding preference to with portfolio fashion company with largest for cyclicality continued diversified is across significant a different industry

concentration energy X.X%. As of in asset XXXX, our industry at stood March the

total and from stood retail and leisure March of X.X% XXXX, XXXX. as concentration X.X% the a at X.X% prior approximately at our the in and in down remaining stood industry in hotel, of at sector Our June static quarter stood Nonaccruals percentage X%. the concentration assets from restaurant

average below market EBITDA, at reporting peers. our leverage middle times portfolio Our weighted substantially net stood X.X

portfolio an stood as our XXXX March and the companies. of Our X% weighted growth increase of average $XXX.X quarter with EBITDA solid million Originations achieve March $X.X December million. per million aggregated portfolio profit in to company at XXXX, we continue from in $XXX XXXX

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

have quarter, and March real REIT During that estate completely March, workforce, XX lending, in on multiple properties yield average XX.X% notes into of occupancies, as yields XX.X% new arena deployed with we’ve properties recapitalizations, multifamily, recently, redeploy a XX.X% this several to of NPRC, collections, business the our capital structured acquisitions benefited segment, corporate cash middle work-from-home more subordinated increase capital REIT, our attractive originations the the average realized rents invested significant an and date, has property our of business financing. middle of inflation X.X% as renovation with an strong manager focused last XX-year high-returning XX.X% dynamics, over including programs acquisitions, To private exited cash value-added growth buyouts, at market credit and property X.X resulting our rising real largely X% estate, with nature other. an times has repeat and alongside from NPRC, income to in showing strategy, lending stabilized and years the market objective through X- hedge attractive comprised IRR in financing validation real private of estate this suburban capital businesses. relationships. high of

demonstrating credit with risk-adjusted yields, cash world-class teams, has attractive benefits through structured providing business and working the pursuing Our stakes, primary on favorable of issuance strong majority collateral management focusing underwriting opportunities. delivered

our $XX March, structured held billion. static strategies subordinated a We’ve comprised a portfolio. underlying base structured loans around across structured XX% electing on portfolio of portfolio asset grow investments. XX portfolios These a for and and notes notes million our resulting in X,XXX maintained of subordinated now the credit $XXX of total investment dollar structured comprising around our As investment basis, other than less nonrecourse notes we size to

points As a the broadly basis market from XX trailing XX-month default March, structured yield X.X% less experienced of significant representing prior than an and of default X basis GAAP rate credit basis quarter points of representing of the rate the cost the and points, XX basis generated cash syndicated annualized portfolio the XX a March of with In our XX.X% yield basis. of this difference quarter, portfolio amortization points. down

our distributions cash-on-cash XX cash $X.XXX in March, average generated investments, times. with realized multiple of XXX% structured of X.XX original portfolio also of representing As IRR realized of subordinated around cumulative our investment. XX.X% Through has and to we’ve an $X.XX billion totaling credit us, billion March,

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

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

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

we So repayments million far for and $XXX million in million booked originations. originations June have quarter, of in $X $XXX XXXX of the experienced net current

market middle estate, have consisted you. over will XX.X% of originations Our now the lending XX.X% buyouts, call X.X% market to Kristin. lending, Other. I and Kristin? and middle turn real X.X% Thank

Thanks, matched-book substantial as substantial of attractive to assets, funding, both balance commitments access our avoidance of prudent unfunded as fixed weighting rate liquidity leverage, debt, strength asset to sheet unencumbered unsecured diversified of lack on demonstrate toward capitalize Grier. We and maturities opportunities. near-term well believe majority

calendar of maturing the years maturity of of million Our Company XXXX. liabilities our future. is only our extending in has debt Today, year a all $XX.X locked XX sole for ladder into

commitments eligible totaled of approximately companies X.X% assets. $XX portfolio unfunded Our approximately non-controlled representing to million, total our

and stand at sheet commitments revolving Our $XXX undrawn approximately combined credit cash balance facility currently million.

by leader and issuance our firsts. industry, many another a of of side acquire perpetual to to added we and industry. alike of also We BDC thoughtful that right-hand we of Shareholders our preferred our our as list a in our innovator taken In listed were lists company ATM, perpetual issue convertible the industry unsecured creditors in in the toward bond, bond and and equity program, balance a firsts We’re XXXX in marketplace. our the develop the appreciate first issue a notes differentiated programmatic in preferred followed other should another XXXX, first which construction sheet. approach have under

of of to of other The commitments The completed billion XX by approximately As SPV, Capital the an assets of year extension approximately maturity. our Funding, are we facility We interest XX% of company April from unencumbered billion April industry. our lenders from a community assets, pledged representing and $X.XX XX XXXX, until in diversity increase by us. in March company followed revolver allowed with from XXXX to a distributions our support of our strong unmatched any of XXXX, portfolio. upsizing Prospect nonrecourse have March where amortization lender with an held continuing revolves banks, assets we demonstrating be of and remaining $X.X as to to X-year XXXX, a our a refreshed currently

basis from Our plus before. is LIBOR X.XX%, XX now of points pricing decrease a drawn

between basis utilization been Our pricing XX points. has and XX% by undrawn reduced XX%

investment-grade revolver types Capital in visibility for unencumbered rate program past benefiting including bonds, including bonds bonds, exceed We in us from are improvement by multiple average of we giving an with have baby unsecured baskets, at borrowing of debt, notes. base approximately our of rates floors, yields also have our now to we’ve $XXX due these X.XX%. to concentration borrowing million. change Of floating hikes. and the in convertible few beginning increased base which Fed weighted floors our Outside Short-term a issued and our Corporation, our estimate asset floor rate increased assets, years, assets, LIBOR XX.X% from institutional now a Prospect

and rating an of All ratings, negative S&P, our the us BBB we to from no revolver. five investment-grade BBB more rating other investment-grade taking no of from Egan-Jones an and from BBB from these BBB rating, Kroll in covenants, our have types and low rating asset In debt an XXXX, We any financial enjoy cross than unsecured DBRS. restrictions rating no rating industry. grade investment-grade latter company investment-grade BaaX investment-grade an investment-grade received with defaults Moody’s, from investment

have All of ratings outlooks. stable these

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

so we with an March banks million the have quarter, to extend and Our have cost we our through tender debt of retiring credit cost. redemptions, revolving so years. more tranches, $XX In reduced debt across the continued debt substitute XXXX maturities significantly incremental debt In counterparty we many XXXX. offerings our many expensive repayments, XXXX with successful and X.XX% term With lower investors March the substantially risk completed quarter, over InterNotes.

ability potentially have to preferred program We seven an our weekly approximately also maturities date, efficient debt funding perpetual raised unsecured with XXXX. with aggregate have significant of million on on our issuance including continued extending and billion, issuances we our based our separate balance issuance preferred preferred programmatic across notes, in through with aggregating To not stock the programs sheet have We upsize $X.X InterNotes now $XXX basis. programs capacity. such October listed

X% As price average March of our XXXX, of March of outstanding from discount decrease X.XX% of unsecured to DRIP benefit had plan a March loyalty XXXX. shareholder March participants. of XXst, a or dividend market our a X.XX% credit debt from decrease debt usage December X.XX% weighted for average facility DRIP of In we all added financing of December notes that to we for reinvestment and decrease at our XXXX, XXst. a XXXX. Including cost our from XXXX, X.XX% from was allows XX, X.XX%, maturities the XX, March XXXX, At staggered financing XXXX, program through decrease of cost a XX, XX, and X.XX%, was a revolving with weighted million $XXX of

sure firms your automatic wish not brokerage contact with do they broker. many broker. encourage make their shareholder Prospect we Capital Corporation in own participation interested DRIP have specify synthetic X% X% obtain DRIP such through DRIPs As from plan discount, to you in same either or no confirmation discount DRIPs and at to Make the a DTC your and to participate of any

to share can price at of a Our $XX. holders per also preferred elect DRIP

turn to over back John. I’ll Now, the call

any you Thank We now much, Kristin. Okay. answer can very questions.

Instructions] Raymond [Operator Tjaden with first Please comes from go Matt ahead. Our question James.

I on months, taking you of couple off Hey, I all. about for appreciate start on preferred. wanted any afternoon, the fixed can questions. the rates With seen preferreds? and rise last rate changes to Good my demand you talk in base you’ve the your

Sure.

bond the in having in seen an by comes a having for increase preferreds. we it significant course, X.X-year seen The market, seen have positive still through market, factor combination steadily We preferreds aspect picks in uncapped our ago, for another those no aspect showcases that in seen demand the launched we’ve liquidity market. design, weeks. And rate the when grow the its is roughly in stock of fixed One of surge factors. including in We’ve -- benefits. in preferred out We’ve recent there. We’ve is that seen volatility up volatility but of market, that, It reason think markets. our of I really that and largely since volumes the many significant shines.

which holders at as of in a from non-traded is just which are particularly think the a advisers in XX% occurring and representatives starting in month number well recycling REIT M&A, our expect we as events for and reason, same programs share liquidity And XX% that significant to and of the where wealth and particularly to nontrade coming Another management of market. market preferred the there of completed, cash types marketplace, preferred marketplace capital are Prospect in space. research about market we’ll market their share. receiving about weeks that private into other the continue programs had shows data preferred, anticipate now from just benefit the number of we of build

that very demand great the this there. enjoyed with place So, a think, as we plenty have. in programs go, of to continue worked us is raised logical positive a news we’re with ability yes, other capital slowing capital especially ton for the a experience of folks is dramatically. there’s investors after And to because their credit advertised space leverage been significant the to have They capital, private have but out

deals basis-point about months. over were our You’ve sector XXX seen to the in our of its going in or financing in fewer as program well. a attractive plus than program that X preferred of past plus kind in about XXXX offering availing increase ourselves notes bond financing, rather very no perpetual completing bond three X year proactive traded unsecured We first out and costs the institutional

inexpensive So, capital of we plenty in obtained XXXX.

facility its Kristin extended refreshed, upsized facility, diversified and mentioned, of banks as in our also our credit any which, is XX revolving industry. We kind more with than other

we’ve up in access access a capital of for an on looks on And we’re really seeing we’re nice quarter. one a in in our had and and So, positive capital the We March uptick to universe this in loaded same, program. of the market. basis originations to inexpensive preferred enjoying funding attractive

also plenty recessionary quite pipeline capitalized, to pounce a expect our have we federal that spreads of up that on have and for But, well general to that haven’t there a recessionary the leverage significant if to seen downturn, those downturn some and know of build. really The quite scoop continue be and because of going short-lived, do profile. massive quite None financial different, capital are stimulus. scale tends and those wasn’t lots will out access and opportunities, seeing as time, and in low of be next of bargains we’re buy asset a was us and will have there we those lot occur, gapping be same. to capital We’re to there’s ready downturn, should we XXXX to sort accompany rate which pandemic-related that floating significant to

offense and and will scrambling, playing defense benefit. go we’ll others aggressively be be So likely and on able to

year, us expect going that forward. a preferred in and So, been the we past to that strategic terrific program driver continue for has

any could, reset a helpful. me, That’s I rates. should talk if we base more any rate and portfolio your liabilities, drag One assets again, on about you interest from between for your Can mismatch? modest and if mismatch it. Got expect

don’t fashion We burning of much LIBOR we the already have of just floors. mismatch through through a in completed anticipate quarter really a because gone significant

to now and -month three-month is now. we’re tend points exceed driven, to LIBOR They three be XXX LIBOR So, starting about those floors. basis right

And through seeing our so, contracts of already you’re number a in floating reset rate us. burning a significant of benefiting floors

So, dominated side, there’s no And asset the side inverted. floating is it’s of by our while ledger mismatch there. then rate, liability on the

by We’re financing the reaping continues. benefits over and more dominated of and fixed in again, inexpensive, rate down issuance locking the of are and locking of that cheap course XXXX,

from expanded As of quarter different I is the part just billion to as early dropped. ended, on its our this which using cost of mix expect more we own we we and it basis previously secured continued It unsecured and effect a with the dropped basis just diversified peers, articulated our credit banks on approach a dropped $X.X quite quarter revolving of financing prudently an in the bit disclosed of facility, our the in on in completed. many more little

growth average So, direct doing accident not XX all went basis business. lay that suspect for past different drive we I cost what an up, from in a Again, the by not quarter. disclosed, points to and debt our peers been quite our profit reflection we’ve is of our weighted groundwork of to the down, financings,

like that, John turn would remarks. conclude further over will I the There to session. closing any time. And we our question-and-answer at questions no to are conference for this Barry with back

we’ll thank Well, everyone. you, Bye months. a now. afternoon, wonderful in you Thanks see and Have so three much.

all you, Thank

you This today’s Thank for presentation. conference. attending concludes the

now disconnect. You may