Q2 2020 Earnings Call
Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited this call contains forward-looking statements within the meaning of the Securities laws that are intended to be subject to Safe Harbor protection actual outcomes and results could differ materially from those forecasts due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law for additional disclosure see our earnings press release and our 10-q filed previously and available on the investor relations tab on our website Prospect Street, now. I'll turn the call back over to John.
Thank you, Kristin.
Or they December 2019 quarter.
Our net investment income was 67.9 million or 18 cents per share down at Penny from the prior quarter.
A ratio of two distributions was one hundred and 3%
In the December 2019 quarter our net debt-to-equity ratio was 64.1% down to 5.2% from the prior quarter and down 10.9% from December 2018 as we continue to maintain a prudent young age profile and cautious approach to Capital to Capital deployment in the current environment.
Our net loss for the quarter was eleven point two million dollars or three cents per share a decrease of $0.08 from the prior quarter primarily due to a decrease in Port portfolio valuations during the December 2019 quarter.
We are announcing monthly cash distributions to shareholders of six cents per share for each of February March and April representing one hundred forty-one consecutive shareholder distributions.
We plan on announcing our next series of shareholder distributions in May 2020 since our IPO 16 years ago through our April twenty twenty distribution at our current Share account. We will have paid out $17.88 per share to original shareholders aggregating over $3,000 in cumulative distribution to all shareholders are nav stood at $8.66 per share in September down $0.21 from the prior quarter our balance sheet as of December 2019 consisted of 86.3% off floating-rate interest assets and 95.8% fixed rate liabilities.
10 months we've trimmed our cost of term debt issuance commensurate with reductions in treasuries while also retiring more expensive upcoming maturities.
Our percentage of total investment income from interest income was 86.9% in the December 2019 quarter a decrease of 3.3% from the prior quarter and in and an increase of 2.8% from the December 2018 quarter off. Thank you. I'll now turn the call over to Grier. Thank you. John are scale business with over six billion of assets and undrawn credit continues to delivering a solid performance. Our experienced team consists of approximately 100% channels, which represents one of the largest middle-market credit groups in the industry.
with their scale longevity
Experience and deep bench we continue to focus on a diversified investment strategy that covers third-party private Equity sponsor related and direct non-sponsored lending a prospect sponsored operating and financial buyouts structured credit real estate investing and online lending as a December 2019 or controlled Investments at Fair values to 45.8% of our portfolio up 1.8% from the prior quarter.
This diversity allows us to Source a broad range in high volume of opportunities, then select in a disciplined Bottoms Up manner the opportunities we deemed to be the most attractive risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single-digit percentage of such opportunities are non-bank structure gives us the flexibility to invest in multiple levels of the corporate Capital stack with a preference for secured lending and seen tons as of December 2019 our portfolio at fair value comprise 41.5% secured first-lien 24.7% secured second lien on a 15% subordinated structured notes with underlying secured first-lien collateral.
.9%
Unsecured debt and 17.9% Equity Investments resulting in Eighty 1.2% of our investments being assets with underlying secured debt that benefits from bone. No pledge collateral prospects approach is one that generates attractive risk-adjusted yields in are performing interest-bearing Investments. We're generating an annualized yield of 12.8% as of December 2019 up ten basis points in the prior quarter. We also hold Equity positions in certain Investments that can act as yield enhancers or capital gains such positions generate distributions. We've continued to prioritize senior and secured debt with our origination to protect against downside risk while still achieves above-market yields through credit selection discipline and a differentiated origination approach.
As of December, we held 120 ft of companies down five from the prior quarter due to repayments and exits with a fair value of 5.2 $7 billion. We also offer in you to invest in a diversified fashion across many different portfolio company Industries with no significant industry concentration. The largest is 16.8% off as of December or acid concentration in the energy Industries to the 2.2% and our concentration in the retail industry stood at 0%
non-accrual
As a percentage of total assets stood at approximately 1.6% in December a decrease of 8% from the prior quarter are weighted average portfolio net leverage stood 4.75 times ebitda up 06 from the prior quarter or weighted average even portfolio company. 69.5 million in December up from $62 million, the prior quarter origination and the December quarter aggregated $327 million. We also experienced 432 million of repayments and exits as a validation of our Capital preservation objective and sell down of larger credit exposures resulting in debt repayments of 155 million.
During the December quarter. Our origination is comprised 43.7% Asian. It's sponsored debt, 31.7% non-asian to debt including early look anchoring and Club Investments with 19.9% rated secured structured notes and 4.7% corporate yield buyouts today. We deployed significant capital in the real estate Arena through our private read strategy largely focused on multifamily Workforce stabilized yield Acquisitions with attractive ten year plus financing NPR see our private Reit hath estate properties that have benefited from rising rents strong and occupancies. Hi, returning High value-added renovation programs and attractive financing recapitalizations resulting and an increase in cash yield as a validation of this income growth business alongside our corporate credit businesses.
nprc has
Completely over 20 properties with an objective to redeploy Capital into new property Acquisitions including with repeat property manager relationships. We expect our excuse to continue and of identified multiple additional properties for potential exit in calendar years, 2020 and Beyond are structured credit business has delivered attractive or a shield demonstrating the benefits of pursuing majority Stakes working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on attractive risk-adjusted opportunities, as of December, we held 791 million across 39 non-recourse subordinated structured notes Investments, these underlying structured credit portfolios comprised around 1700 loans and a total asset base of around eighteen billion.
As of December the structured credit portfolio experience a trailing 12-month default rate of 51 basis points, representing 88 basis points less than the broadly syndicated Mark default rate of 139 basis points in the December quarter this portfolio generated an annualized yield of 14.6% As of December. Our subordination structured credit portfolio has generated 1.16 billion in cumulative cash distributions to us representing around 83% of our original investment banker December. We've also exited nine Investments totaling $263 million with an average realized I are of 16.7% and cash-on-cash multiple of 1.48 times.
are subordinated
Your credit portfolio consists entirely majority-owned positions such positions can enjoy significant benefits compared to minority Holdings in the same trench in many cases. I receive fear a Bates because of our majority position as majority holder. We control the ability to call a transaction in our sole discretion in the future and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than win loan asset valuations might be temporarily low.
Where's majority investor can refinance liabilities and more advantageous terms remove Bond baskets and exchange for better terms from dead investors in the deal and extender reset the investor. Enhance value. We've completed over 25 refinancings and resets over the last two years so far in the current March quarter, we've booked 322 million in Iraq Nations and receive payments of $78 million resulting in that origination of $245 billion. Our origination have comprised 77% agent in sponsoring a 16% non-asian to debt and 7% rated secured structured notes. Thank you. I'll now I'll turn the call over to Kristin. We believe our office is Diversified access to matchbook funding substantial majority of unencumbered assets and waiting toward unsecured fixed rate debt demonstrate both balance sheet strength as yep.
substantial liquidity to
Lies on attractive opportunities. Our company has locked in a ladder of liabilities extending twenty-three years into the future. We are a leader and innovator in our market place. We were the first company in our industry to issue a convertible Bond develop a notes program issue under a bond ATM acquire another game any other lists of Firsts shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction the the right-hand side of our balance sheet as of December 2019. We had approximately 3.94 billion of our assets as unencumbered assets representing approximately 73% of our portfolio. The remaining assets are pledged to Prospect Capital funding. We're in September. We completed an extension of our revolver to a rep.
Five year maturity.
We currently have one point zero seven seven five billion of commitments from 30 banks with a 1.5 billion total size accordion feature at our option off the facility revolves until September 2023 followed by a year of amortization with interest distributions continuing to be allowed to us.
Outside of our revolver and benefiting from our unencumbered assets. We've issued at Prospect Capital Corporation including in the past two years multiple types of investment-grade secured debt, including convertible bonds institutional bonds, baby bonds and program notes. All of these types of unsecured debt have no Financial covenants. No asset restrictions and no cross defaults with our revolver. We enjoy an investment-grade triple berating from Kroll and investment-grade triple berating from Michigan Joan an investment-grade Triple B negative rating from S&P and an investment-grade rating from Moody's so a total of 4, investment-grade greetings. We've now tapped the unsecured term debt Market on multiple occasions to ladder our maturities and to extend our liability duration out twenty-three years.
our debt maturities
10 through 2043 with so many banks and debt investors across so many debt tranches. We substantially reduced our counterparty risk over the years.
In the December 2019 quarter, we repurchased 3 million of our April 2020 notes 36 million of our July 20-22 notes and ninety six months of our program notes. We also continued our weekly programmatic enter notes issuance has if the need should arise to decrease our leverage ratio We believe We Could origination and allow repayments and exits to come in during the normal ordinary course as we demonstrated in the first half of calendar year 2016 during Market volatility month. We now have eight separate unsecured debt issuance has aggregating 1.5 billion not including our program notes with maturities extending to Jun 2020, G as of December 2019. We had 622 million of program notes outstanding was staggered maturities through October 2043 birth.
I'll turn the call back over to.
Thank you Kristin. Well, we're done for now. Let's see if we have any questions.
We will now begin the question-and-answer session to ask a question. You may press star than one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question page at this time. We'll pause momentarily to assemble our roster.
And our first question will come from Matt Jaden with Raymond James, please go ahead.
Hi morning, everyone.
Good morning. So first question is on PGX Holdings. So $100 second-lien marked at about $85. So I guess I'm kind of questions. So first it looks like last May there was some regulatory issues with the cfpb and then secondly with that kind of looking the first lean more liquid debt that's trading in the high 40s as far as we can. Tell any any commentary on the asset going forward.
Sure. You're willing to take that. Well, I have a bunch of things to say but I agree. There's always a better person to go first Matt. Okay, so pissed at first of all to clarification, if you're examining the services like Market often times that those services that were in particular will have a price which actually is a result of zero trades. So my understanding is there have been zero trades in in the last nine months in that paper. So that's not not a real price on the first-lien exactly pertaining to the the the business and its Outlook. We've been a lender to that company for many years the company provides a valuable service to Consumers to really correct errors in their credit report dead.
Which of course helps consumers?
Helps them improve access to and in terms of credit as a result of improving their their credit scores through that error correction process. So it's a viable consumer service is not a debt collection company. It's a it's a service for primarily individuals. The company is dealing with some regulatory issues right now that are somewhat technical in nature and we'll take a very long time to resolve as we understand it. But we understand folks in the picture are positively disposed no guarantees, of course for a positive outcome for the business and the company continues in the meanwhile business as usual to provided services to Consumers consumers subscribe, they get the benefits from the company of credit score are fixing dead.
and the following
And benefits to their to their credit and again, we've been a lender this company for many many years from when it was a much smaller business just seen a lot of organic growth over the years. So those are some of my comments on you want to add to that? Yeah. Well Matt, thanks for asking because we bought the value that the value of each Security in our portfolio is set either precisely by an outside evaluation firm in this case Lincoln or within a within a range, which is also set by Lincoln and I can I think it's accurate to say that the deal team and Hig and other people were amazed at the valuation that low put on this Thursday.
Dirty, but we can't do anything.
About it because we are limited to valuing every security at the exact valuation provided by Lincoln.
Unless there's a range in which case we can be within the range. So that's the first thing to know our opinions on on how these things happen. If we disagree with the weekend those opinions, I guess are interesting. The first problem is this cpf be is that wage called the unit of The Fad that that that is a Consumer Protection Bureau has a beef with the company and am trying to remember what it is. What is what is in fact the assertion that the cpft is making?
Well a technical aspect associated with whether or not one is allowed to charge in it's a fairly modest subscription relative to Thursday. It's received at the beginning of the subscription versus at the end after definitive benefits have been delivered. So that that's the Layman's gist of it off right and Greer would I be misstating if I if I said the lawyers and the business people view this as one of these regulatory actions that will take time to resolve but not one that will end up requiring a substantial change to the office business model.
Correct, right. That's my impression. Number two. We were quite surprised not to see a I don't know if it's a single trade-off Market allegedly in the forties who would sell in the forties somehow is factored into the valuation of the entire company. You couldn't you couldn't go by that first 40 go out there and try it.
You couldn't buy it at fifty or sixty or seventy or well we were told you can't buy it at a hundred.
No, I I haven't conducted my own investigation, but that's what I've been told.
And then number three there is reason for concern but it's not those two things. It's the fact that Google is a very big a portal has been I think if we we're was it 18 or 20% of the revenues, I forget to eat it and Google now has a new a stricture that allegedly does not allow off credit repair companies to to advertise through Google.
a paid advertisement
but if you go on Google, you'll see plenty of paid ads by credit repair company. So you wonder what is this stricture? And is it only impacting progression off further if you if you go on Google you'll notice that progression comes up on the first page and then on paid area. So what is the impact and what we've heard is it the impact is yet to be seen it's not going to be positive. It's not clear how long how impactful or how long any impact will occur but in my mind that that is the substantive reason I thought well that that is a how would I put a a prompt or Reason?
for concern
Whereas these other this Market thing is absolutely in my mind is not and then as far as these cpf be claimed from what I've been told that is a lesser concern as well. So it's just this Google item and we're do you want to comment more on the Google item? Sure and we analyzed quote unquote Google risk quite frequently increasingly with information based companies that originated customers online starting with whether or not Google itself is a potential competitor. We we view that is very unlikely in this area of of public offering, you know error correction Services. It's quite legal in nature. You have to have law firms involved in the back and forth wage.
the credit bureaus
It seems to be pretty far afield from the type of businesses information based at Google's focused on that's number one. Number two is from origination point is with many direct marketers. There's multiple channels in which customers get originated referrals from existing customers Page search free search direct mail many different channels as you can imagine. So one of those many different origination channels, which is the paid search mechanism there seems to be a somewhat visceral blanket new policy. It's catching up a bunch of companies in it including progression. But when you type in credit repair and and do very often keyword searches along the lines of what the company offers it it shows up very close to the top anyway on a free search a basis. So it remains to be seen what type of wage
Angel impact that
We'll have on the company if any but there are multiple libraries and and mitigants with how the company originates customers or what is a very clear consumer need that the company addresses as the the market leader in this space. And I had one other thing that in math that I just remember that too. I think the our attachment point if I'm not mistaken Greer is around three less than three. Is that right off a little bit higher than that. We'd have to check check in a precise number but it's it's an account under door range of underwriting. It's under four and if you and if you took out if you said oh well 20% I I think I heard it was eighteen to twenty percent of the of the revenue or the or the inquiries were coming from through Google home.
So if you take all that.
Now you're still relatively low attachment point for a pretty steady Eddie business so mad. I'm you you ask a question about a company that among others caught my attention as being I would have put it as a valuation that seems to be in my mind oblivious to some fundamental business things going on there. And if you'll talk to the deal team you'd hear you'd hear an earful about that. So that's progression. No one can predict the future.
You never know with these litigations, right? They scare people. But yeah, hey Matt go out and try and buy the first thing at forty or fifty where it's 60 or 70,000. We're at eighty or ninety. Okay and give us a call if you're able to get any. Okay. All right. We're any other questions Matt? Yeah, Thanks again on the that's all I like your hey Matt Matt. I like your question. Okay. Hey, I'll tell by the way if you could buy any for a below-par, I'll pay you a commission. I hope it's legit. Okay, I'm not going to do anything that's not permitted, but we'll be very surprised if you're able to buy anything at even in part. Okay, where to next month? Okay. So the next to kind of similar to questions, I asked last quarter so an update on internet. So it looks like 11% marked down on the term be any. Yep.
They're given the size of that.
That's why don't I yeah, why don't I see how well I do if I go ahead and Greer and then you can go after me so it entered and as as Madame sure, you know, you seem quite well acquainted with a portfolio has hundreds of millions of dollars of Revenue and anywhere from 10 to 30 million dollars of you. Depending on how things are going. So internet lost internet had I wouldn't call it a Black Swan event. Although that jumps to mind the internet hacker whole set of customers Diversified some higher margin than others the two two of the largest worthy largest customer merged
Then the that ended up being it happened to be also the two of the highest margin customers. So you're too high rep and customers merge one big high-margin customer and you lose that contract that's called bad news entered in corporate headquarters.
Uh, we've changed the management there. We have two great people running this company. They are indefatigable them determined. They are improving the company from top to bottom.
We had a salesperson maybe his nine months ago whose job. It was to improve sales. He did as far as far as I know that's a good job. But he also spent a lot of money doing it and that all hit the bottom line in the last nine months and people some people felt this this sales person was carried away. I haven't yet gotten the the Manifest on whether you know, what the return was on this month sales expenditure series of expenditures.
And as you know, Matt you spend a lot of money on sales. Well, they don't the sales in the profit. Don't all come in the next morning. So that money was spent that hit the bottom line that has heard the companies even in the last quarter and the last year as well. The company is Bob. I'm plan. So the company has a plan its ambitious. No one should be surprised that ambitious plans often take longer to achieve than the management hopes. We'd rather have people be ambitious and shoot for the stars than than acceptable levels of Revenue and even so the company's plan the companies behind plan then when it comes to birth
Our view of the future. It's optimistic. We have actually given the company more money than the company needs because we see higher internal rates of return on expenditures such as purchasing. We seeing new equipment new drills new digital equipment refurbishing reception areas hiring new dental hygienist paying them more. I don't know if I don't know how many people on this phone call saw the the editorial in the Washington Post of all places, but wage wage gains for the bottom quartile of the labor force have been growing faster than wage.
For the top three quartiles something The Washington Post editorial writer said is never occurred in our economy. Well that's impacting a company like Interfaith. Frankly. We're glad to see those wage gains across the bottom quartile of the labor force real real dollar wage gains, but it means that our our expenses for hygienist receptionist and lower lower paid Personnel across the board have exceeded our projections. So the turnaround the really the recovery and turn around I'd entered on his taking longer but I think about, you know, Matt that these are prized companies and we feel that we're on the right track there.
Just add to that entered in so recall Matt, we may have covered some of this in the past. But as an update internet has two primary agent businesses, which is its oregon-based Medicaid business and its feet for services business in you know, they're largely contiguous primarily contiguous states off the business grew substantially the Oregon Medicaid business and then gave a bunch of that back with a a surprising contract loss to John reference before there's an annual contract. Just wrapped up and internet actually regained some of its lost volumes not all of it. But but some of it in Oregon which is encouraging and they're laying the groundwork mm win more in in the future basically with putting up quality-of-care positive statistics for for payers. They're outside of Oregon birth.
blocking and tackling pertaining to
Getting customers to come in for their you know, every six months of hygiene visits managing doctor and and hygienist retention boosting same-store same office revenues. The company's been possibly trading in all those areas in in recent months. So we're we're happy with that progress. They're also looking to potentially grow in California in the Medicaid business there and leverage its core expertise in Oregon. That could be pretty nice neat package over in the future over the next couple of years. John mentioned. These are highly valued businesses strategically and and private equity-backed as recurring Revenue off of companies. We also feel like we've got a nice recession resilient business because the Medicaid rules tend to go up when you have a A downturn in the economy and that wage
The business like like this.
So those are some additional points for consideration about internet map. Okay, last kind of assets specific question would be on a non-accrual specifically Pacific Cluck-U Corp. So about a as I can tell a $38 million dollar right down there. Was that a a specific calendar 1419 event. Is that a reflection of kind of fuel consumptions any any color you can provide their glad we're so PWC Pacific world has been impacted by Jake company specific issues as well as sector related issues Confluence of events, and it's a pretty significant right down versus original cost of this point wage, you know that write down your references on the heels of of several quarters. Actually. It's it's been a very tough situation there involving wage.
John of management and really
A failed strategy and execution of the prior business owner and and prior management that charged into low margins Thursday March and private label and then failed to execute pay vendors on time was able to fulfill orders made customers unhappy. So in taking over the company, we've encountered tremendous challenges to in conjunction with new management to rebuild customer relationships. Mm focus on profitable lines of business and to re-examine potential profit drivers for the future including third-party Brands distribution as opposed to trying to be all things to all people with a large fixed cost structure. So the companies going through a process of rationalizing. It's It's costs. Yep.
to becoming much more asset-light
but when also hampered by macro factors including some of the private label Trends tariffs in China some of which continues grown of or more recently just a lot of a lot of issues on the macro side on top of the company specific ones to deal with so we have you know, touch Focus internally and externally with the management team on improving the company, but it's going to continue to take additional time and capital to do so
Okay, thank you. That's all for me. Appreciate the color guys. Hey, Matt. Thanks very much. Thank you, Matt.
This concludes our question-and-answer session. I would like to turn the conference back over to John Berry for any closing remarks, please go ahead sir. Okay everyone. Thank you for joining the call. Have a wonderful afternoon by now. Thanks Al.
Has now concluded thank you for attending today's presentation. You may now disconnect.