Q1 2022 Prospect Capital Corp Earnings Call
Yeah.
Good morning, and welcome to the prospect capital first fiscal quarter earnings release and conference call.
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Please note. This event is being recorded I would now like to turn the conference over to John Barry Chairman and CEO. Please go ahead.
Thank you Anthony.
Joining me on the call today are grill, Isaac our President and Chief operating Officer, and Christian Van <unk>, Our Chief Financial Officer Christian.
Thanks, Jon This call is the property of prospect unauthorized use is prohibited. This call contains forward looking statements that are intended to be subject to safe Harbor protection.
Actual developments and results are highly likely to vary materially and we do not undertake to update our forward looking statements unless required by law.
For additional disclosure see our earnings release, and 10-Q filed previously and available on our website Prospect Street Dot Com now ill turn the call back over to John.
Thank you Kristen.
In the September quarter.
Our net investment income or NII well.
Was.
$81.4 million.
Our 21 cents per common share.
Exceeding our distribution rate.
For common share by three cents.
Our basic net income attributable to common stockholders.
Was $209.7 million.
Or 54 cents per common share.
As the overall value of our investment portfolio increased for the sixth consecutive quarter due to a combination of positive company specific.
And macro.
Factors.
Our N a V stood at $10.12 per common share in September.
31 cents and three 2% from the prior quarter and representing our sixth quarter in a row with NAV growth.
Our NAV per.
For common share is now at the highest level.
Since September 2015.
Or six years ago.
We have outperformed our peers during the past multiple quarters of macro volatility.
As a direct result of our previous de risking.
Not chasing leverage as well as other risk management controls.
We are staying true to the strategy that has served us well since 1988.
Controlling and reducing portfolio and balance sheet risk both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders.
In the September quarter.
Our net debt to equity ratio was 48, 2%.
Down 25.9 percentage points from March 2020, and down 7.7 percentage points from the June quarter.
As we continue to run and under leveraged balance sheet.
Which has been the case for us for multiple quarters.
In May 2020.
We moved our minimum 1940 act regulatory asset coverage to 150%.
Equivalent to 200%.
Debt to equity.
Which not only increased our cushion, but it also gave us flexibility to purchase our subsequently announced too.
To pursue I'm, sorry to pursue are subsequently announced junior capital perpetual preferred equity issuance.
Which counts toward 40 act asset coverage.
But which gets significant equity treatment by our rating agencies.
We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.72 0.85.
<unk> to equity.
And we are significantly below such target range now.
<unk> balance sheet.
It is highly differentiated.
From peers with 100% of prospects funding coming from unsecured.
And nonrecourse debt.
Which has been the case for prospect.
For over 14 years.
Unsecured debt.
Was 96% of prospects total debt.
In September 2021.
Or about 33 percentage points higher than around 63% for the typical listed BDC.
On the cash shareholder distribution front.
We are pleased to report the boards declaration of continued steady monthly distributions.
We are announcing monthly cash common shareholder distributions of six cents per share.
For each of November December and January.
Three months represent the 51st Fifty-second.
And 53rd in a row consecutive stable per share right.
Genuine over four years of stable monthly cash shareholder distributions.
Consistent with past practice we.
We plan on our next set of shareholder distribution announcements in February.
Yeah.
Our goal.
Over the long term.
Is to maintain and ideally grow this steady monthly cash shareholder distributions.
As we seek to provide low volatility stability to our shareholders amidst a macro market backdrop.
That delivers greater volatility elsewhere.
Since our IPO.
Over 17 years ago through our January 2022 distribution.
At the current share count.
We will have paid out $19.14.
Per common share to original shareholders.
I agree gating.
Approximately $3.5 billion in cumulative distributions to all common shareholders.
Since October two.
2017.
Our NII per common share.
The aggregated $3.15.
While our shareholder distributions per share have aggregated $2.88.
Results in our NII exceeding distributions.
During this period by.
By 27 cents per share.
Our NII cover distributions and the June.
2021 fiscal year.
And has exceeded distributions.
In the 2021.
Fiscal year to date.
By three cents per share.
We are also pleased to announce continued preferred shareholder distributions.
On the heels of successful launches of our $1 billion.
0.5% preferred program.
And $150 million.
5.35%, which did preferred.
We have raised over $394 million.
And preferred stock today.
With strong support from institutional investors.
<unk> and broker dealers.
The recent addition of two top five sized independent broker dealer systems as well as top wire house and regional broker dealer systems.
We are currently focused on multiple initiatives.
To enhance our NII, our OE and then a V and.
An accretive fashion.
Including <unk>.
Our 1 billion dollar perpetual preferred equity program.
Our $150 million.
5.35%.
Listed.
Repurchase preferred stock issuance.
Greater utilization of our cost efficient revolving credit facility.
With an incremental cost of approximately 1.44%.
Today's one month LIBOR.
Retirement of higher cost liabilities.
Including <unk>.
Multiple recent successful tender offers and repurchases.
Issuing a lower cost notes.
Including recent five to 30 year senior.
On secured notes.
With coupons of approximately.
2.25% to 4%.
And increased originations of senior secured debt and select equity investments to deliver targeted risk adjusted yields and total returns.
As we deploy available capital from our current under leveraged balance sheet.
We believe there is no greater alignment between management and shareholders.
For management to purchase.
A significant amount of stock.
Particularly when management has purchased stock.
On the same basis.
As other shareholders.
In the open market.
As we have.
Prospect management is the largest shareholder in prospect.
And has never sold a share.
Senior management and employee insider ownership.
Is currently approximately 28%.
Of all shares outstanding Rep.
Representing approximately.
$1.1 billion of our common equity.
I'll now turn the call over to Greer.
Thank you John.
Our scale platform with around seven and a half billion of assets and Undrawn credit continues to deliver solid performance in the current dynamic environment.
Our experienced team consists of around 100 professionals, which represents one of the largest middle market investment groups in the industry.
With our scale longevity experience and deep bench, we continue to focus on a diversified investment strategy.
It spans third party private equity sponsor related lending die.
Direct non sponsor lending.
Prospect sponsored operating and financial buyouts.
Structured credit.
And real estate yield and total return investing.
Consistent with past cycles.
We expect during the next downturn to see an increase in secondary opportunities.
With wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged one.
This business diversity allows us to source, a broad range and high volume of opportunities then select in a disciplined and bottoms up manner. The opportunities we deem to be the most attractive on a 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.
Our non bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with.
With a preference for secured lending and senior loans.
As of September 2021.
Our portfolio at fair value.
<unk>, 949.4% secured first lien debt.
$16 five per cent other senior secured debt.
11.6% subordinated structured notes with underlying secured first lien collateral <unk>.
And 22, 5% as.
It was a combination of unsecured debt.
Other debt and equity investments.
Resulting in 78% of our investments 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 11.6% as of September.
Down 0.1% from the prior quarter.
We achieved an increase of <unk>.
30 basis points from June 2020, despite a headwind from the past year decline in LIBOR.
So we expect reasonable stability now due to our LIBOR floors.
We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions.
We've continued to prioritize senior and secured debt with our originations to protect against downside risk while.
I'll still achieving above market yields through credit selection discipline and a differentiated origination approach.
As of September we held 124 portfolio companies stable with the prior quarter with a fair value of $6 4 billion.
An increase of 229 million from the prior quarter.
We also continue to invest in a diversified fashion across many different portfolio company industries.
The preference for avoiding cyclicality and with no significant industry concentration the law.
Largest 17, 9%.
As of September our asset concentration in the energy industry stood at 1.3% our concentration in the hotel restaurant and leisure sector stood at 0.4%.
And our concentration in the retail industry stood at zero percent.
Non accruals as a percentage of total assets.
Stood at approximately point <unk>, 5% in September down.
Down 1% from the prior quarter.
And down <unk>, 4% from June 2020.
Our weighted average middle market portfolio net leverage.
The 4.88 times EBITDA.
Abstention <unk> below our reporting peers.
And down 0.13 from the June 2021 quarter.
Our weighted average EBITDA per portfolio company stood.
Stood at $95 3 million in September.
An increase of $6 2 million and 7% from June 2021 as we continued to achieve solid profit growth with our portfolio of companies.
Originations in the September quarter.
Aggregate at $425 million.
We also experienced $324 million of repayments and exits as a validation of our capital preservation objective.
Resulting in net originations of $101 million.
During the September 'twenty, 'twenty, one quarter, our originations comprised 94.5% middle market lending three.
<unk>, 3.2% middle market lending and buyouts.
And 2.3% real estate to date, we've deployed significant capital in the real estate arena through our private REIT strategy largely focused on multifamily workforce stabilized yield acquisitions.
With attractive 10, plus year financing N P. R C. Our private REIT has.
Has real estate properties that have benefited over the past several years and more recently.
From rising rents.
Showing the inflation hedge nature of this business segment.
Strong occupancies high collections suburban work from home dynamics.
High returning value added renovation programs.
And attractive financing recapitalizations.
Resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses.
N P. R. C. As of September has exited completely 34 properties at an average IRR of 24, 1%.
With an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships.
We currently have multiple other property exits in process, we expect to add to our growing track record of positive realizations.
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 September we held $751 million across 39, non recourse subordinated structured notes investments.
These underlying structured credit portfolios comprised around 1700, and 50 loans and a total asset base of around 16 billion as.
As of September the structured credit portfolio experienced a trailing 12 month default rate of 26 basis points down 74 basis points from the prior quarter and representing nine basis points less than the broadly syndicated market default rate of 35 basis.
Point.
In the September quarter. This portfolio generated an annualized cash yield of 24% and GAAP yield of 12, 2% with the difference representing an amortization of our cost basis.
As of September our subordinated structured credit portfolio has generated 1.37 billion in cumulative cash distributions to us representing around 97% of our original investment.
Through September we've also exited 10 investments totaling 287 million with an average realized IRR of 15, 7% and cash on cash multiple of 1.45 times.
Our subordinated structured credit portfolio consists entirely of majority owned positions.
Such positions can enjoy significant benefits compared to minority holdings in the same tranche.
In many cases, we receive fee rebates 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 when loan asset valuations might be temporarily low.
We as majority investor can refinance liabilities on more advantageous terms remove bond baskets in exchange for better terms from debt investors in the deal.
And extend or reset.
The investment period to enhance value.
We completed 30 refinancings and resets.
Since December 2017.
So far in the current December 2021 quarter.
We booked 226 million in originations and experienced $87 million of repayments for 139 million of net originations our originations have consisted.
100% middle market lending thank you.
I'll now turn the call over to Kristin Kristin.
Thank you Greg.
Believe our prudent leverage diversified access to match book funding substantial majority of unencumbered assets weighting toward unsecured fixed rate debt avoidance of unfunded commitments and lack of near term maturities demonstrate both balance sheet strength.
Well as substantial liquidity to capitalize on attractive opportunities.
Our company has locked in a ladder of liabilities extending 30 years into the future.
Today, we have zero debt maturing until July 2022.
Our total unfunded eligible commitments to non controlled portfolio companies totaled approximately 42 million representing less than 1% of our asset.
Our combined balance sheet cash and Undrawn revolving credit facility commitment currently stand at approximately $1 1 billion.
We're a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond develop.
Of note the program.
Issue under a bond and equity ATM acquire another BDC and many other lists of first.
2020, we also added our programmatic perpetual preferred issuance to that list of Firth <unk>.
In 2021, I enlisted perpetual preferred as another first in the industry.
Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right hand side of our balance sheet.
As of September 2021, we held approximately $4 six 1 billion of our assets as unencumbered asset.
Representing approximately 71% of our portfolio.
The remaining assets are pledged to prospect capital funding, a nonrecourse SPV where in April 2021, we completed an upsizing and extension of our revolver to a refreshed five year maturity.
We currently have one point to 775 billion of commitments for 41 banks.
Increase of a London 11 lenders from March 2021, and demonstrating strong support of our company from the lender community.
The facility revolves until April 2025, followed by a year of amortization.
With interest distributions continuing to be allowed to us.
Our John pricing is now LIBOR, plus 2.05% a decrease of 15 basis points from before.
Our undrawn pricing.
I mean, 35% and 60% utilization has been reduced by 30 basis points.
We also now have an improvement to our borrowing base due to a change in concentration basket, which we estimate increased our borrowing base by approximately $150 million.
All of our floating rate assets 92, 9% have LIBOR floors with a weighted average floor of 162%.
Outside of our revolver and benefiting from our unencumbered assets. We've issued at prospect included in the past five years multiple types of investment grade unsecured debt, including convertible bonds.
Additional 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 chip will be negative rating from S&P and.
An investment grade <unk> rating from Moody's.
And that's been grade Triple B negative rating from Kroll and investment grade Triple B rating from Egan Jones.
And as investment grade Triple B low rating from D. B R. S.
Earlier in 2021, we received a ladder investment grade rating, taking us to five investment grade ratings more than any other company in our industry.
All of these ratings have stable outlooks.
We've now tapped the unsecured term debt market on multiple occasions.
Latter our maturities and to extend our liability duration out 30 years.
Our debt maturities extend through 2051.
With so many banks and debt investors across so many debt tranches, we substantially reduced our counterparty risk over the years.
And the September 2021 quarter, we completed successful redemption tender offerings and repayments were trying retiring $214 million of our internet and $51 million of our 2022 now.
In the current December quarter, we have retired $24 million of our internet.
In the September 2021 quarter, we issued 300 million in unsecured debt maturing in October 2020, with a coupon of three four or three 7%.
We have continued to substitute more expensive term debt with significantly lower cost revolving credit with an incremental 1.44% costs, coupled with our newly issued 2020 eating out.
We also have continued with our weekly programmatic interference issue and an efficient funding basis.
To date, we have raised our $394 million in aggregate issuance of perpetual preferred stock across our preferred program enlisted preferred.
We now have eight separate unsecured debt issuances aggregating $1 7 billion not including our program notes with maturities extending to June 2029.
As of September 2021, we had $382 million of program notes outstanding with staggered maturities through September 2051.
At September 30th 'twenty, 'twenty, one our weighted average cost of unsecured debt financing with 456%.
Kris 0.30% from June 32021, and a decrease of $1 one 7% from September 32020.
In 2020, we added this shareholder loyalty benefit to our dividend reinvestment plan or drip that allows for a 5% discount to the market price for participants.
As many brokerage firms either do not make jets automatic or have their own synthetic drips with no such 5% discount benefit we encourage any shareholder interested in drip participation to contact your broker.
Make sure to specify you wish to participate in the prospect Capital Corporation jet plan through DTC at a 5% discount and obtain confirmation Epstein from your broker.
Our preferred holders can also elected dropped at a price per share of $25.
Shareholders participating in our common stock for the 12 months ended September 32021 receiver returned three 2% greater than non participating shareholders for a total return of over 70%.
Now I'll turn the call back over to John.
Okay.
Thank you very much Kristin Okay, we can answer any questions.
Yeah.
We will now begin the question and answer session.
To ask a question you May press Star then one telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from Matt P. J <unk> with Raymond James You May go ahead.
Hey, everyone. Good morning, and I. Appreciate you taking my questions first one for me on the preferred issuance. So obviously, a strong quarter of preferred issuance and apologies if I missed it any color you can give on kind of how preferred issuance is shaping up subsequent to quarter end.
And maybe any additional color on the timing of the ramp up to the $1 billion target range.
Sure.
Thank you Matt.
We had disclosed that as of right now cumulative issuance is about 400 million that's inclusive of the 150 million traded perpetual preferred.
We issued this summer so about $250 million approximately of our billion dollar non traded program Uh huh.
Has been a has been issued to date.
We're tracking at approximately.
30, or so million per month, sorry, yeah per month about $15 million for intake, which is every two weeks. This is a rough approximation of can vary of course, which doesn't.
Fully reflect the on boarding of some significant new systems. As we had mentioned have joined the selling a group of late so.
We expect that to ramp up accordingly, and we're quite pleased with.
With our preferred.
Program, which has received.
Wide and pause acceptance really of of all investor types are large and small from institutional to to various types of up high net worth in an in between with the.
Community. So it's been a very successful program.
And yet another innovation that we brought to our industry.
Alongside many others in our history.
Got it that's helpful. Maybe following up again on the preferred so obviously with the dividend flowing below the NII line.
There been any internal discussions regarding a maybe an adjusted NII figure that that takes out the preferred dividend again, given that it's recurring and impacts common shareholder dividend coverage.
Sure. It's a great question I mean, historically, we've been wary of showing a whole lot in the way of our adjusted numbers.
In fact, the regulatory push has been sort of the opposite of that for many years, but it's something we have an active dialogue about it's fairly simple arithmetic to just attract the preferred.
Interest rate, which is another item shown on the income statement.
But something we will keep talking about.
Fair enough last one for me just more of a housekeeping item on the other income line. So obviously a healthy quarter of other income.
It looks like $3 8 million of structuring fees from <unk> holdings.
Correct me, if I'm wrong havent seen that named flow into that line item kind of post COVID-19 is that kind of a recurring level and how should we expect that line item to shake out over over the next couple of quarters.
It's it's not a recurring item.
It's not a controlled investment where we take ongoing.
Tribunal for example, but this pertains to a maturity extension.
And associated fee revenue of same.
Got it that's it for me I appreciate the time.
Sure thing Thank you Matt.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to John Barry for any closing remarks.
Okay.
Thank you everyone have a wonderful afternoon bye now.
Bye now.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.