Prospect Capital (PSEC) 9 Feb 232023 Q2 Earnings call transcript

Welcome to the Prospect Capital Second Fiscal Quarter Earnings Release and Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Mr. John Barry, Chairman and CEO. Please go ahead.

Sara. you, Thank everyone. Good morning,

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

call Unauthorized This Thanks, of the prohibited. Prospect. John. use is is property

statements intended do call to be update not and are undertake Safe This vary to forward-looking developments subject highly Actual to to likely that unless protection. materially forward-looking law. statements results contains required are by Harbor and our we

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

Now I'll turn John. the call back over to

investment Thank or basic the you, common rate Kristin. December In $X.XX share of was quarter share, or our million, common net our distribution $X.XX. per income, $XXX.X exceeding per NII by NII

is now XXX%. NII basic Our distribution coverage of common our

is a XX.X% on basic Our booked X close. yield annualized on based NII and stock February our basis X.X%

common applicable $XX.X Our to or net stockholders basic share. per $X.XX was common income million

common the to $X.XX at down share $X.XX December, NAV depreciation mark-to-market unrealized quarter, Our prior from macro per stood in conditions. from largely X.X% and due

Over quarters from quarter, asset quarter time XXXX per net September highest industry with XX delivered share, per common company by December NAV increasing XX.X% pre-pandemic common over the development the in Prospect to growth value XXXX in share period. the the business the that

inception invested Prospect investments, $XX.X investments. has of in these XXXX, exiting Since billion across XXX XXX

previous chasing past industries dated during not controls, peers financing. direct macro our cyclical avoidance management volatility of of other of of our and periods outperformed have We longer as derisking, including well risk flexible a result utilization leverage, as as

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

five debt not approach at of half to or instead cautious increased has past for the points electing than debt other higher debt less risk increased total typical now approximately BDC lower the years, Prospect. the leverage, Prospect BDCs Running the list dynamics. from leverage industry, macro debt XXX% XX of leverage, of a equity, with lower with Over leverage percentage rest have a given than at

we to announced Act's XXX% Act rating increased XX our which XXXX, XXXX only equity but our agencies. to pursue preferred junior asset significant equity, towards issuance, moved treatment by perpetual capital our but which May subsequently regulatory counts flexibility equity coverage gave coverage, minimum which In to also debt XXX%, gets cushion, asset us not equivalent to our

plans have target our debt increase are below we X.XX We debt to equity, our significantly range. currently and to historical leverage target no X.X beyond such of to actual drawn

from coming XX% from XXXX December Prospect's debt XXX% least case XX Prospect at listed of total debt, for balance points of or debt peers XX.X% Unsecured higher percentage for highly the in funding years. debt and unsecured sheet with differentiated was is nonrecourse BDC. typical than our our the XX for

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

pleased On steady monthly front, the are of cash the we shareholder report declaration distributions. Board's distribution continued to

cash we consecutive set our $X.XX $X.XX distributions past per for of and per distributions shareholder next shareholder announcing Consistent common share plan April. XXth, May. the of with XXth, March cash monthly February, distributions. in each three practice, months announcing and of share These are We represent on XXth

against stability long the over providing delivering greater macro a shareholder to distributions, elsewhere. goal Our backdrop, term volatility is sustain

Since common XXXX, per over current and $XX.XX and less original our the $X.XX, share have period share distributions $X.XX our aggregated share, count, our cumulative preferred all have common during common in coverage. paid distributions $X.XX shareholders, our we to years our while $X.XX October XXX% XX billion to per will per at dividends, NAV shareholders. ago, December through common aggregating Since aggregated with exceeding NII NII share per common distributions shareholder distribution, XXXX representing April IPO has by two common share this representing times

which preferred. billion to institutional of in top to $X.XX capacity accretive the sized $X.X focused increased with broker broker-dealer investors, could preferred continued shareholder and pleased independent of preferred fashion. and $X.XX addition equity five and stock successful $XXX billion currently date systems following two billion announce regional well return our top as strong We've systems. programs, listed perpetual distributions as including; also our in are in an be fashion an RIAs in dealers, our launches broker-dealer approximately initiatives to multiple preferred on We raised on enhance potentially from preferred wirehouse and NAV million We're accretive first, including NII, non-traded programs, support equity

Two, on credit a of asset deploy facility yields at originations selected targeted as balance LIBOR rates risk-adjusted underleveraged and SOFR Three, senior of equity and greater four, tightening returns from X.XX% SOFR. utilization secured capital secondary of and and increased one investments And to today's of incremental our Fed short-term yields. cost available approximately increase we sheet. based total current deliver with our an month cost-efficient revolving boosting debt primary

stock as as market alignment Prospect and there particularly has believe shareholders a shareholders is management largest the same other in we shareholder sold open purchase never share. for no purchased of We management basis a stock, is in between management amount the to management have. Prospect's the has and greater on than when significant

and Our of owning equity senior representing approximately outstanding, eat management billion happily measured currently asset of common our approximately net $X.X value. team cooking, at own XX% our shares as employees

Eliasek. to will over Grier Thank you. now call I turn the

John. you, Thank

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

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

particularly with we Consistent we downturn significant we powder with This investment during maintained opportunities us to to a leveraged allows the past volume us a origination arise. opportunities, Then dry to on the secondary an pullback other next as in will cycles, Unlike manner spread have approaches expect the in coupled many attractive groups, from primary a risk-adjusted select to to broad wider other expect groups, diversity increase ones. maintain with enable that we of such highly see continued capitalize and bottoms-up on a opportunities most and be source high range attractive basis. opportunities. deem opportunities disciplined they of

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

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

structured underlying value X.X% lien X% with our prior quarter, debt, debt, comprised December, the X.X% from As second down at lien secured subordinated of XX.X% down assets lien in first collateral, notes quarter. equity XX% X.X% from from first prior X.X% portfolio fair the up unsecured collateral. underlying up the number XX.X% the benefiting from from prior investments resulting being secured our quarter prior X.X% from investments, prior quarter, That and of with down and the debt XX.X% borrower-pledged debt quarter,

percentage generating investments, is risk-adjusted December, In to significant we're that an annualized from interest-bearing points quarter our performing contributor yields. generates of prior this Prospect's XX.X% past X.X as and NII of increase growth the attractive one quarter. yield of approach a an

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

As quarter of fair of two increase prior an with an of the billion, portfolio approximately companies, from increase of held we million. $XXX a December, value $X.X XXX

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

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

the restaurant our leisure X.X%. concentration and the stood at sector X.X%, industry hotel, and retail at Our stood in concentration in

up Nonaccruals, as a from percentage the from approximately December, quarter at X.X% prior June and of down X.X% in total X.X% assets, stood XXXX. of

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

in Our at million. the December portfolio company $XXX $XXX Originations quarter aggregated EBITDA million. weighted average per stood

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

an in-place XXX significant across and estate, living senior through XX REIT capital buyouts our comprised XX.X% During expansion senior acquisitions, estate lending, billion focused originations real with year workforce, date, X properties, we've middle-market XX multifamily, we've the To and yield largely in deployed in into past the properties, properties, attractive stabilized $X.X and self-storage, X the structured quarter, our XX To X.X% on housing, X.X% notes. lending properties financing. acquired date, X student and X.X% living, December multifamily to in private strategy, properties. year arena real middle-market

business of this business environment, segment, point. real current properties in we're dynamics, significant occupancies, of suburban in recently have last rising businesses. the support high-returning our over recapitalizations our programs increase has as attachment a underneath rents, preferred high third-party an nature showing years, more work-from-home income the validation structures private capital growth resulting and strong the estate financing cost corporate focusing REIT, hedge value-added yields financing attractive higher inflation credit In from that collections, on benefited with NPRC, renovation several and this our alongside investment cash

repeat redeploy our not realized completely into distributions back invested where from capital net return of of properties average has we exited acquisitions, property NPRC, with an at cash XX an partially more than objective XX.X%, as relationships. of an deals, December, of average and NPRC multiple received invested to with exited to rate times, realized property and capital new recapitalization, internal including manager including X.X of capital

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

million structured notes As of December, XX we nonrecourse held $XXX across investments. subordinated

this a That's billion. quarter, notes strategies X,XXX XX% portfolio size In structured a cash quarter, asset around and to These XX.X% of base underlying XX.X%. GAAP on difference notes the annualized significant $XX basis, portfolio the static portfolios portfolio. total grow resulting X.X% prior structured of for relatively up our around and loans from the December a in investment structured a amortization portfolio generated less subordinated with maintained yield an our credit investment representing of dollar now We've basis. than our comprising our of comprise the other of and cost electing yield

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

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

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

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

refinancings We resets since XXXX. XX and completed December

the for far repayments million across March $XX current booked XXXX repayments. business, $XX we experienced overall $XX So in quarter, million and million net of of originations our in

real have consisted Our originations XX.X% and middle-market estate. lending of XX.X%

Thank call turn Kristin. you. Kristin? to over I'll now the

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

into the ladder Our locked a extending in years future. company liabilities of XX has

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

Our cash sheet $X revolving undrawn combined commitments billion. currently stands at credit balance and facility over

We a issue notes We another other and company were BDC issue lists in are in a under acquire and a first our our industry convertible develop marketplace. leader of and a the equity bond firsts. program, bond, ATM, many to innovator

we to have the differentiated XXXX, side thoughtful that our In followed also which appreciate approach industry, added issuance perpetual we our in the by preferred the firsts, listed perpetual sheet. taken our unsecured of in our programmatic preferred industry. another and creditors right-hand as of first balance toward list Shareholders should alike of XXXX in construction

a commitments our of December our over $X.X remaining As XX% extension completed over representing pledged from upsizing a in an held diversity SPV, revolver seven assets Funding, unencumbered as to of to where the by any five-year The billion the $X.X lender assets, billion have we are of banks, we demonstrating XXXX, lenders strong from XXXX, XXXX, from refreshed September and August other Prospect of maturity. XX our company nonrecourse of our an assets unmatched We of support portfolio. company increase Capital and in with community our industry. of currently

until us. followed amortization of by facility XXXX, The continuing be September with allowed to year revolves to distributions a interest

these of of floor exceeded rate benefit assets, giving Short-term Our have SOFR hikes. asset drawn a pricing from floors, is floating us LIBOR have rate now rates yields XX.X% SOFR increased X.XX%. with now floors average Of or the weighted X.XX%. our plus Fed

revolver benefiting our the we've few investment-grade notes. in types Outside at and from baby debt, bonds institutional unencumbered Capital assets Prospect unsecured convertible Corporation, and program our bonds, bonds, years, of of including multiple past issued including

investment-grade and investment-grade low an investment-grade covenants, of from from investment-grade have an no defaults asset Kroll, restrictions minus rating revolver. an All from rating enjoy rating no BBB of an minus types in DBRS. no BBB BBB unsecured from our rating from an these rating Moody's, We cross debt investment-grade Egan-Jones and BBB financial S&P, BaaX

more latter In company than XXXX, investment-grade the our received taking in X industry. rating, we us other any investment-grade ratings to

stable have ratings of these outlooks. All

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

through investors debt extend years. banks our maturities nonrecourse debt and across many tranches, have substantially Our XXXX. risk so and With over debt reduced many so we counterparty unsecured the

with have cost. our credit quarter, In the an revolving low utilizing incremental December X.XX% continued cost XXXX we

listed our issuance have across on preferred, March in continued stock sheet programs such funding capacity. the issuance to and XXXX InterNotes and in efficient preferred our to our quarter potentially significant programs based XXXX including date, ability To on December date $XXX an perpetual million with billion we aggregate We the raised also of the in million $X.X weekly have $XX programmatic quarter, with basis. approximately upsize preferred balance current

through We including debt have maturities issuances aggregating XXXX. now program $X.X separate not with October six billion extending our unsecured notes,

December XX, $XXX a had March unsecured through at of with of program weighted from financing December X.XX%, As XX, average of XX, maturities our from XXXX, notes remaining we was decrease debt cost outstanding XXXX, million December staggered September XXXX. XXXX. At constant and XXXX, X.XX%

shareholder XXXX, In discount added for allows X% participants. a to benefit price the plan, for we our market dividend reinvestment that a to DRIP DRIP, loyalty or

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

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

Now back call John. I'll the over to turn

now thank We Kristin, very much. questions. very any And you you much. answer thank Grier, can

Well, thank Have all. now. and morning you you, wonderful afternoon. time. next See a everyone. Thanks Bye

Thank you.

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

now may disconnect. You