Q3 2020 Earnings Call
[music] Good day and welcome to the prospect capital third fiscal quarter earnings release Conference call.
All participants will be in listen only mode should you need assistance. Please signal a carbon specialist christened starkey followed budget.
After todays presentation, there will be an opportunity to ask questions.
You asked a question you My question Star then one on your telephone keypad <unk>.
Please note. This is that is being recorded.
I would now like to turn the conference over to John Barry Chairman and Chief.
Please go ahead.
Thank you Chad good morning, everyone. Joining me on the call today, our grill, Isaac our President and Chief operating Officer.
And Christian Vanda, our Chief Financial Officer.
Kristen.
Thank you John.
This call is the property of prospect Capital Corporation unauthorized use is prohibited.
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 and that's forecast due to the impact of many factors.
You're not undertake update our forward looking statements unless required by law.
Additional disclosure please see our earnings press release, and our 10-Q filed previously and available on the Investor Relations tab on our website Prospect Street Dotcom now I'll turn the call back over to John.
Thank you Kristen.
We have prospect have managed investor savings for 32 years.
16 years ago, we brought public prospect Capital Corporation.
Over the decades, we've weathered multiple business challenges stock market crashes.
Credit market dislocations Hurricanes liquidity crunches epidemics pandemics.
Learning something from each challenge.
Right is us for the next one.
We have learned the batten down the attaches when we see storm clouds.
And to one for all our sales for maximum speed as the rising Sun brings a new morning.
And new opportunities.
During the last recession.
It's like other boats, we went on all offense to purchase Patriot capital.
First acquisition of any BDC.
Purchasing patriot at 50% event Navy enhance dividends for years to come.
Can we do that again.
We'll see.
We are reviewing new investment opportunities emerging each day.
As part of that process, we are seeking shareholder shareholder approval.
For a one year option to sell shares below a navy.
Subject to board approval.
Other conditions.
We may not have been able to purchase patriot without that approval.
For the March 2020 corridor.
Our net investment income ran <unk>.
Was $68.5 million.
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Our ratio.
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Over the past 10 quarters.
Our ratio then I like to distributions has averaged 113%.
Well, then I exceeding distributions by $85.7 million.
During that period.
In the March 2020 corridor.
Our net debt to equity ratio.
74.1%.
Over the past 10 quarters.
And in corridor.
Out of cash.
Debt to equity ratio has ranged from 60.2% to 75.1% averaging 69%.
Over the last two years other listed Bdcs have increased leverage with the typical with the BDC in March 2020 at roughly 114% debt to equity.
40 percentage points higher than us.
We have not increased our target leverage instead, you act in lower risk.
We recently reduced our minimum 1940 act regulatory asset coverage.
To 150%.
We also you elected Exemptive relief to provide additional regulatory cushion.
Through December 31st 2020.
We have no plans to increase leverage beyond our historical target of 0.7.
2.85 debt to equity.
Were 218% to 243%.
Said coverage.
Prospects balance sheet.
Highly differentiated.
From peers with 100% of prospects funding coming from unsecured.
And nonrecourse debt.
Which has been the case the last 12 years.
Unsecured debt.
Was 92.5%.
Prospects total debt.
In March 2020.
Compared to roughly 40% for the typical listed BDC for December 2019.
Well again, 50% 50 percentage points less than us.
Our unsecured and diversified funding profile.
Provides us with lower risk.
And enhanced investment strategy and balance sheet flexibility.
All right Avi stood at $7.98 per share in March.
Down.
68 cents.
Or 7.9% from the prior quarter.
That compares to a 14% decline.
And then navy per share for the typical listed BDC.
For March 2020.
Our 600 basis point outperformance is a direct result of our decision to de risk rather than chase leverage.
We are staying true to that strategy.
Has served us well since 1988.
Controlling and reducing portfolio and balance sheet risk to protect the capital entrusted to us.
And to protect the ability.
Capital to generate earnings for our shareholders.
Our net loss.
For the quarter was $185.7 million or 51 cents per share.
Largely due to unrealized appreciation.
From a macro conditions.
We are announcing monthly cash distributions to shareholders.
Six cents per share.
For each of May.
June July and August.
Representing 145 consecutive shareholder distributions.
These four months.
At the same distribution rate.
As for each of the past 32 months.
We plan on our next dividend announcement.
In August.
Since our IPO.
16 years ago through our August 2020 distribution.
At our current share count.
We will have paid out $18.12 per share to original shareholders aggregating $3.1 billion in cumulative distributions to all shareholders.
Our percentage of total investment income.
From interest income.
Was 90% in the March 2020 corridor.
An increase of 3%.
From the prior quarter.
Thank you everyone I'll now turn the call over to Grier.
Thank you John.
Our scale platform with over 6 billion of assets, an undrawn credit continues to deliver solid performance.
In the current challenging environment.
Our experience team consists of approximately 100 professionals.
Representing one of the largest middle market credit groups in the industry.
With our 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 sponsor lending.
Prospect sponsored operating and financial buyouts.
Structure credit.
Real estate yield investing and online lending.
Consistent with past cycles.
We expect to see an increase in secondary opportunities.
Coupled with wider spread primary opportunities with a pull back from other investment groups.
Securely highly leveraged one.
As of March 2020 are controlled investments at fair value.
The 43% of our portfolio down 2.8% from the prior quarter.
This diversity of strategies allows us to source, a broad range and high volume of opportunities.
Then select in a disciplined bottoms up manner the opportunities we deemed to be the most attractive on a risk adjusted basis.
Our team typically evaluates thousands of opportunities daniely.
And invest in a disciplined manner in a low single digit percentage of such opportunities.
Our non bank structure.
Gives us the flexibility to invest in multiple levels of the corporate capital stack.
For the preference for secured lending and senior loans.
As of March 2020, our portfolio at fair value comprised 44.8% secured first lien.
An increase of 3.3% from December.
23.6% secured second lien.
Decrease of 1.1%.
13.7% subordinated structured notes with underlying secured first lien collateral.
And a decrease of 1.3%.
0.9% unsecured debt flat from before.
And 17% equity investments down 0.9%.
Resulting in 82.1% of our investment.
I'll, 0.9%.
Being invested being assets with underlying secured debt benefiting.
From borrower pledged collateral.
Prospects approach is one that generates attractive risk adjusted yields.
And our performing interest bearing investments were generating an annualized yield of 12.4% as of March 2020.
Down 0.4% from the prior quarter.
We also hold equity positions in certain investments they can act as yield enhancers or capital gains contributors as such positions generate distribution.
We've continued to prioritize senior and secured debt with our originations to protect against downside risk.
While still achieving above market yields through credit selection discipline and a differentiated origination approach.
As of March 2020, we held 121 portfolio company sub one from the prior quarter, where the fair value of 5.14 billion.
We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration the largest is 14.7% down 2.1% from the prior quarter.
As of March 2020, our asset concentration in the energy industry.
Stood at 1.7% down 0.5% from the prior quarter.
Our concentration in the hotel restaurant unless you're sector.
0.4%.
And our concentration and the retail industry.
<unk> zero percent.
Non accruals as a percentage of total assets.
Stood at approximately 1.6%.
In March 2020.
Even with the prior quarter.
Our weighted average portfolio net leverage.
And at 4.63.
Times EBITDA.
Down 0.12 from the prior quarter.
Our weighted average EBITDA per portfolio company.
Stood at 72.3 million.
In March 2020.
Up from 69.5 million the prior quarter.
Originations in the March 2020 corridor.
Corrugated 402 million.
We also experienced 267 million of repayments.
And exits as a validation of our capital preservation objective and sell down of larger credit exposures, resulting in net originations of 136 million.
During the March 2020 corridor, our originations comprise 62.6%.
Agented sponsor debt.
27.3% non agency debt.
Including early look anchoring and club investments.
8.8% rated secured structured notes.
And 1.3% corporate yield buyouts.
To date, we've deployed significant capital in the real estate arena through our private right strategy.
Largely focused on multifamily workforce stabilized yield acquisition.
With attractive 10, plus year financing.
NPR see our private rate has real estate properties that have benefited over the last several years from rising rents.
Strong occupancy high returning value added renovation programs and attractive financing recapitalization.
Resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses.
In PRC has exited completely over 30 properties with an objective to redeploy capital into new property acquisition.
Including with repeat property manager relationships.
We continue to monitor our rent collection, which are holding up well in the current environment.
Our structured credit business has delivered attractive cash yields.
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 March 2020, we held 704 million across 39, non recourse subordinated structured notes investment.
These underlying structured credit portfolios comprised around 1700 loans and a total asset base of around 18 billion.
As of March 2020, the structured credit portfolio experienced a trailing 12 month default rate of 91 basis points.
Representing 93 basis points less than the broadly syndicated market default rate of 184 basis point.
In the March 2020 corridor this portfolio generated an annualized GAAP yield a 15%.
As of March 2020.
Our subordinated structured credit portfolio has generated 1.19 billion in cumulative cash distributions to us.
Representing around 85% of our original investment.
Through March 2020, we've also exited nine investments totaling 263 million with an average realized higher or 16.7% and cash on cash multiple of 1.48 times.
Our subordinated structure credit portfolio consist entirely of majority owned position.
Such positions can enjoy significant benefits.
Parents of I know already holdings in the same tranche in many cases, we receive sea ray big fee rebates because of our majority position.
As a majority holder, we control the ability to call the transaction in our sole discretion in the future and we believe such options adds substantial value to our portfolio.
We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low.
We as majority investor can refinance liabilities done more advantageous terms.
Remove bond baskets in exchange for a better terms from debt investors in the deal.
And extend or reset the investment period to enhance value.
We've completed over 25, refinancings and reset since December 2017.
So far in the current March 2020 corridor.
We booked 14 million in origination.
Originations have comprised 70% agented sponsor debt and 22% non agented debt.
Thank you I'll now turn the call over to Kristen Kristen.
Thanks Grant.
We believe our prudent leverage diversified access not look funding substantial majority of unencumbered assets weighting toward unsecured fixed rate that avoidance of unfunded asset commitment and lack of near term maturities demonstrate both balance sheet strength as long as substantial liquidity capital.
Life on attractive opportunities.
Our company has locked in a ladder of liabilities extending 23 years into the future.
Today, we have here has gotten maturing until 2020 Tam for over two years from now.
Our total unfunded eligible commitment to non controlled portfolio company totaled approximately 15 million or less than 0.3% of our assets.
Combined balance sheet cash and undrawn revolving credit facility commitment.
Please stand at approximately 785 million.
We arent leader and innovator in our marketplace. We were the first company in our industry issue our convertible bond.
Let the notes program.
Under a bond ATM acquire another BDC and many other less that's fair.
Shareholders unsecured creditors alike should appreciate a thoughtful approach differentiated in our industry, which we have taken toward construction at the right hand side of our balance sheet.
As of March 2020, we held approximately 3.56 billion of our assets unencumbered assets, representing approximately 68% of our portfolio.
The remaining assets are pledged prospect capital funding where in September we completed an extension of our revolver to a refreshed five year maturity.
We currently have 1.07 75 billion its commitments 30 bank with a 1.5 billion total size accordion feature at our option.
The facility revolves until September 2023, followed by year amortization with interest distribution continuing to be allowed to last.
Of our floating rate assets, 90.1% have LIBOR floors with a weighted average floor of 1.55%.
Outside of our revolver and benefiting from our unencumbered assets that we issued at prospect Capital Corporation, including in the past few years multiple types of investment grade unsecured debt, including convertible bonds institutional bond baby bonds and program notes.
All of these types of unsecured that have no financial covenants, no asset restrictions and no cross default with our revolver.
We enjoy an investment grade triple B negative rating from S&P and investment grade Pete Delaney Threep rating from Moodys and it Doesnt grade Triple B negative rating from Kroll.
And then investment grade Triple B rating from Egan Jones with the first three at the recently reaffirmed.
We have now tap the unsecured term debt market on multiple occasions to ladder, our maturities and to extend our liability duration at 23 years.
Our debt maturities extend your 2040 drain.
So many banks and that investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the March 2020 corner, we repurchased 47 million of our April 2020 notes, which we subsequently retired in full at maturity.
34 million of our July 2022, Nance 655000 of our June 2024 now.
And 67 million other programs.
We also continued our weekly programmatic internet issuance.
In the first half a calendar year 2016 during market volatility, we've reduced our leverage ratio by flooding originations and allowing repayments and exits to come in China ordinary course, and we expect similar benefits in the current environment.
We now have eight separate unsecured debt issuances, aggregating 1.4 billion not including our program net with maturities extending June 2029.
As of March 2020, we had 673 million as program notes outstanding with staggered maturities through October 2040 train.
We also recently added shareholder loyalty benefit to our dividend reinvestment plan or trap that allows for a 5% discount to the market price for <unk> participants.
As many brokerage firms either do not make dividend reinvestment plans automatic or had their own synthetic Trent.
No thats, 5% discount benefit we incurred any shareholder interested in trip participation to contact your program.
Make sure to specify you wish to participate in the prospect Capital Corporation Drip plan through DTC at a 5% discounts and obtain confirmation at the same from your broker.
Now I'll turn the call back over to John.
Mr. Barry perhaps your line is needed.
Thank you we can now answer any question Oh, yes. It is yes that get Kristen.
We're all remotes, so I apologize to everyone. My line was muted.
Thank you everyone. We can take questions now.
Thank you Sir at this time, we'll begin our question and answer session to ask your question you May Press Star then one on your telephone keypad, if you're using a speaker phone.
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This time, we'll pause momentarily to assemble our roster.
Once again, if you have a question. Please press Star then one.
Okay. Thank you everyone have a wonderful morning wonderful afternoon Backstopped by.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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