Q3 2022 Prospect Capital Corp Earnings Call
Good afternoon, and welcome to prospect Capitals third fiscal quarter earnings release and conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions.
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To withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the conference over to the Chairman and Chief Executive Officer, John Berry. Please go ahead.
Thank you Joe I hope everyone can hear me joining on the call today I realize it our president and Chief operating officer.
And Kristin van to ask our Chief Financial Officer Christian.
Thanks, John .
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 press release, and 10-Q filed previously and available on our website Prospect Street Dot Com now I'll turn the call back over to John .
Thank you Christian welcome everyone.
In the March quarter.
Our net investment income or NII was $87 million or 22 cents per common share exceeding our distribution rate per common share by four cents.
Our basic net income attributable to common shareholders was $157.2 million.
Or 40 cents per common share.
As the overall value of our investment portfolio increased for the eighth consecutive quarter due to a combination of positive company specific.
And macro factors.
Our N a V stood at $10.81 per common share in March up 21 cents and 2% from the prior quarter.
And representing our eighth quarter in a row, we then a V growth.
Our NAV per.
For common share is now at the highest level since September 2015.
Over six years ago.
Over the eight quarters when the pre pandemic December 2019 quarter.
To the December 2021 quarter prospect has delivered.
The highest growth in the business development company industry and.
Net asset value per common share.
With N a V per common share increasing by 25%.
Over that time period.
Yeah.
Since inception in 2004.
Prospect has invested $18.7 billion across 394 investments exiting 270.
Those investments.
We have outperformed our peers during the past multiple quarters of macro volatility.
As a direct result of our previous Derisking, not chasing leverage as well as other risks management controls.
We are staying true to that strategy.
That has served us well since.
1988, controlling and reducing portfolio and balance sheet risk both to protect the capital.
[noise] entrusted to us.
And to protect the ability of such capital to generate earnings for our shareholders.
In the March quarter, our net debt to equity ratio was 53, 9%.
Down 20.2 percentage points.
From March 2020 and up.
2.6 percentage points.
From the December quarter.
As we continue to run.
And under leveraged balance sheet.
Which has been the case for us for multiple quarters.
Over the past four years.
They're listed Bdcs overall have increased leverage with the typical with the BTC now at Aha at around 114%.
<unk> to total equity.
Or approximately 60 percentage points higher than four prospect.
Running at half the debt leverage of the rest of the industry.
Prospect has not increased that leverage instead, electing lower risk from lower debt leverage with a cautious approach given macro dynamics.
In May 2020.
We moved our minimum 1940 act regulatory asset coverage to 150%.
Equivalent to 200%.
<unk> to equity.
Which not only increased our cushion.
But it also gave us flexibility to pursue our subsequently announced junior capital.
Actual 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 who average yeah.
And our historical target of 0.7, a 2.85 debt to equity.
And we are currently significantly below such target range.
Prospects balance sheet is highly differentiated from peers.
With 100%.
Prospects funding coming from unsecured and nonrecourse debt.
Which has been the case for a prospect for more than 14 years.
Unsecured debt.
It was 73, 3%.
Prospects total debt in March.
'twenty 'twenty.
We're about 22 percentage points higher than at around 50% for the typical listed.
P D C.
IRA unsecured and diversified funding.
<unk> provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers.
Turning to the cash distribution front.
We are pleased to report the boards.
Yeah coloration.
Of four more steady monthly distributions.
We are announcing monthly cash common shareholder distributions of six cents per share for each of May.
June .
July and August .
These four months represent the 50 750.
<unk> 58.
59.
And sixth year.
Consecutive six cent per share distributions.
Continuing five years of stable monthly cash shareholder distributions.
Consistent with past practice.
We plan on.
And our next set of shareholder distribution or announcements in August .
Our goal over the long term is to maintain and.
And ideally grow this steady monthly cash shareholder distribution.
We seek to provide low volatility stability to our shareholders.
Amidst a macro market backdrop.
Rivers greater volatility elsewhere.
Shareholders participating in our common stock trip for the 12 months ended March 31st.
2022 weeks.
Received returned 1% greater than non participating shareholders.
For a total return of over 18%.
Both returns are greater than the same period returns on the S&P 500.
And on more glamorous household technology names.
Do not pay dividends.
Since our IPO nearly 18 years ago through August 22 distribution at the at the current share count we will have paid out $19.56 per common share to original shareholders.
Brigading approximately three.
$3 $7 billion in cumulative.
Distributions to our common shareholders.
More than many household name high Flyers combined.
Since October 2017.
Our NII per common share.
Brigade at $3.59, while our common and preferred shareholder distributions.
Per common share.
Irrigated three.
$3 29 sets.
<unk> in our NII exceeding distributions.
During this period.
<unk> 30 cents per share.
Our NII covered distributions to common and preferred shareholders.
In the June 2021 fiscal year.
And has exceeded common and preferred shareholder distributions and the 2022 fiscal year to date.
By 11 cents per.
Sure.
We are also pleased to announce continued preferred shareholder distributions.
On the heels of successful launches of our.
1.25 billion dollar.
5.5% preferred preferred programs.
And $150 million.
5.35% listed preferred.
We have raised approximately 650 million in preferred stock to date.
With strong support from institutional investors Ria's.
Broker dealers, including 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.
Roy.
And N a V.
It accretive fashion.
Including first.
Our 1.25 billion perpetual preferred equity programs, which could potentially be increased and capacity in an accretive fashion.
To a greater utilization of our cost efficient revolving credit facility.
With an incremental cost of approximately 2.19%.
Today's.
One month LIBOR.
Three retirement of higher cost liabilities <unk>.
Including recent.
Successful tender offers and repurchases.
Bore issue in your lower cost notes.
Including recent three to 30 year.
Senior unsecured note issuances.
With coupons of approximately two 5%.
Two 4.625%.
Fifth increase of short term LIBOR rates based on fed tightening.
To exceed floors and boost our asset yields.
And sixth increased originations of senior unsecured debt.
And selected equity investments to deliver.
Targeted risk adjusted yields and total returns as.
As we deploy it.
Favorable dry powder from our current under leveraged balance sheet.
Okay.
We believe there is no greater alignment between management and shareholders than for management to purchase.
Significant amount of stock.
Particularly when management has purchased stock.
On the same basis as the.
Other shareholders.
In the open market.
Prospect management is the largest shareholder in prospect.
And has never sold a share our senior management team.
And employees eat our own cooking currently owning approximately 28% of shares outstanding representing one point too.
Dollars of our common equity.
Measured at N a V.
Thank you I will now turn the call over to Greer.
Thank you John .
Our scaled platform with over 8 billion of assets and Undrawn credit at Prospect Capital Corporation continues to deliver solid performance and the current dynamic environment.
Our experienced team consists of over 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 that.
Fans third party.
Private equity sponsor related lending die.
Direct non sponsor lending.
Prospect sponsored operating and financial buyouts structured credit and real estate yield investing.
Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities coupled with wider spread primary opportunities with a pull back from other investment groups, particularly highly leveraged ones. Unlike many other groups we have maintained.
And continue to maintain significant dry powder that we expect will enable us to capitalize on such attractive opportunities as they arise.
This diversity of origination approaches allows us to source, a broad range and high volume of opportunities.
Then select in a disciplined 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.
Our non bank structure.
Gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans.
As of March 2022, our portfolio at fair value comprised 48.4% first lien debt.
18.5% second lien debt.
9.8% subordinated structured notes with underlying secured first lien collateral <unk>.
And 23, 3%.
Secured debt and equity investments, resulting in 76, 7%.
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 10, 6% as of March 2022 flat with the prior quarter. 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.
We've continued to prioritize senior and secured debt with our originations to protect against downside risk, while also achieving above market yields through credit selection discipline and a differentiated origination approach.
As of March 2022 we held 127 portfolio companies the same as the prior quarter with a fair value of 7.4 billion, an increase of $427 million from the prior quarter. We also continued to invest.
First in a diversified fashion across many different portfolio company industries with a preference for avoiding cyclicality and with no significant industry concentrations. The largest is 18, 2%.
As of March 'twenty, 'twenty, two our asset concentration in the energy industry stood.
One 8%.
Our concentration in the hotel restaurant and leisure sector stood at <unk>, 3%.
And our concentration in the retail industry stood at zero percent.
Non accruals as a percentage of total assets stood at approximately 0.4%.
In March 2022 remaining static from the prior quarter.
And down 5% from June of 'twenty 'twenty.
Our weighted average middle market portfolio net leverage stood at 5.3 times EBITDA substantially below our reporting peers.
Our weighted average EBITDA.
Per portfolio company.
Stood at 101.1 million in March of 2022.
An increase of $4 6 million and 2% from December 2021, as we continued to achieve solid profit growth with our portfolio companies.
Originations in the March 2022 quarter aggregated 565 million, we also experienced a $185 million of repayments.
And exits as a validation of our capital preservation objective, resulting in net originations of 380 million.
During the March quarter, our originations comprised 56, 3% middle market lending, 19.5% real estate.
14.5% middle market lending and buyouts.
Five 7% subordinated structured notes and 4% other.
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 seven to 12 year financing.
N P. R C. Our private REIT has real estate properties that have benefited over the last 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 March has exited completely 45 properties at an average IRR of 25, 1% and average realized cash multiple of invested capital of 2.5 times with an objective to redeploy capital into new property App.
Acquisitions, including with repeat property manager relationships.
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 favorable risk adjusted.
<unk> opportunities.
As of March we held $729 million across 37, nonrecourse subordinated structured notes investments.
We've maintained a static size for our subordinated structured notes portfolio on a dollar basis electing to grow our other investment strategies and resulting in the structured notes portfolio now comprising less than 10% of our investment.
Portfolio.
These underlying structured credit portfolios comprised around 1700 loans and a total asset base of around 16 billion.
As of March the structured credit portfolio.
Experienced a trailing 12 month default rate of eight basis points down 11 basis points from the prior quarter, and representing 11 basis points less than the broadly syndicated market default rate of 19 basis points in the March quarter.
This portfolio generated an annualized cash yield of 20.7% and GAAP yield of nine 7% with the difference representing a significant amortization of our cost basis.
As of March our subordinated structured credit portfolio has generated 1.42 billion in cumulative cash distributions to us.
Representing around 102% of our original investment.
Through March we've also realized 29 investments totaling 1.003 billion.
With an average realized IRR of 13, 9% and cash on cash multiple of 1.62 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 the majority holder we.
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 than from debt investors in the deal.
And extend or reset the investment period to enhance value.
We completed 32, Refis and resets since December of 2017 so.
So far in the current June 2022 quarter, we have booked $124 million and originations and experienced $115 million of repayments for $9 million of net originations. Our originations have consisted of 82, 8%.
Middle market lending, 11.6% real estate, four 8% middle market lending and buyouts and 0.8% other.
Thank you.
I will now turn the call over to Kristin Kristin.
Thanks, Greg.
We believe our prudent leverage diversified access to matched book funding.
Substantial majority of unencumbered assets weighting toward unsecured fixed rate debt.
Avoidance of unfunded asset commitments and lack of near term maturities demonstrate both balance sheet strength as 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, our sell maturity at $60 5 million is our only debt maturing for all of calendar year 2022.
Our total unfunded eligible commitments to non controlled portfolio companies totaled approximately 42 million representing approximately 0.6% of our assets.
Our combined balance sheet cash and Undrawn revolving credit facility commitments currently stand at approximately $850 million.
We're a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond develop a notes program issue under a bond and equity ATM.
Another BDC and many other lists of first.
In 2020, we also added our programmatic perpetual preferred issuance to that Lisa first followed in 2021 by our unlisted 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 March 2022, we held approximately $4 90 billion of our assets as unencumbered assets, representing approximately 66% of our portfolio.
The remaining assets are pledged to prospect capital funding.
Non recourse S T V.
We're in April 2021, we completed an upsizing and extension of our revolver to a refreshed five year maturity.
We currently have a 1.5 billion of commitments from 43 banks and increase of 13 lenders from March 'twenty, 'twenty, one and demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry.
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 between 35% and 60% utilization has been reduced by 30 basis points.
We also now have an improvement in our borrowing base due to a change in concentration baskets, which we estimate increased our borrowing base by approximately $150 million.
Of our floating rate assets 93, 9% have LIBOR floors with a weighted average floor of 134%.
Short term rates are now beginning to see these floors, giving us visibility for increased asset yields from fed rate hikes.
Outside of our revolver and benefiting from our unencumbered assets, we've issued at prospect Capital Corporation, including in the past few years.
Multiple types of investment grade unsecured debt.
Including convertible bonds institutional bonds baby bonds and program notes.
All of these types of unsecured debt has no financial covenants, no asset restrictions and no cross defaults with our revolver.
We enjoy an investment grade triple B negative rating from S&P.
And investment grade B double a three rating from Moody's and.
And investment grade Triple B negative rating from Kroll.
And investment grade Triple B rating from Egan Jones.
And in investment grade Triple B low rating from D. B R. S.
In 2021, we received a lot of 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 to ladder, our maturities and to extend our liability duration out 30 years.
Our debt maturities extend through 2050 Tam.
With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the March 2022 quarter, we completed successful redemption tender offerings and repayments retiring 36 million of our internet.
In the March 2022 quarter, we have continued to substitute more expensive term debt with significantly lower cost revolving credit with an incremental $2 one 9% cost.
We also have continued with our weekly programmatic internet issuance on an efficient funding basis.
To date, we have raised approximately $650 million in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred with the ability potentially to upsize such programs based on significant balance sheet capacity.
We now have seven separate unsecured debt issuances aggregating $1 6 billion not including our program notes with maturities extending through October 2028.
As of March 2022, we had 341 million of program notes outstanding with staggered maturities through 2050 Tam.
At March 31st 2022, our weighted average cost of unsecured debt financing with 4.35% a decrease of 0.04% from December 31st.
And a decrease of 0.87% from March 31st.
Including usage of our revolving credit facility at March 31, 2022, our weighted average cost of all debt financing with 3.77% a decrease of 0.18% from December 31, 2021, and a decrease of 0.99% from March 30 <unk>.
First 2021.
In 2020, we added a shareholder Lion my shareholder loyalty benefits to our dividend reinvestment plan or drip that allows for a 5% discount to the market price for jet participants.
As many brokerage firms either do not make jet automatic or they have their own synthetic drips with no such 5% discount.
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 Drip plan through DTC at a 5% discount and obtain confirmation of sand from your broker.
Our preferred holders can also elect to drill at a price per share of $25.
Now I'll turn the call back over to John .
Okay.
Okay. Thank you very much Kristin.
We can now answer any questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre 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 <unk> with Raymond James. Please go ahead.
Hey, all afternoon, and appreciate you taking my questions I wanted to start off on the preferred with a with base rates on the rise. The last couple of months can you talk about any changes you've seen in demand for your fixed rate preferreds.
Sure.
We have seen an increase.
In demand for our preferreds.
We've seen volumes steadily grow.
Since we launched our preferreds.
A year and a half ago.
Including in recent weeks.
And I think the reason for that is a combination of factors.
One factor is that when volatility.
Next up in the market and we've seen that.
Surge out there we've seen it in the bond market another fixed rate largely market, we've seen that of course in stock market in many markets.
The aspect of the preferred significant positive aspect.
Having no volatility.
By its design, but still having uncapped liquidity comes through in and shines it really showcases those significant benefits.
Another reason, which is just starting now and we think we'll continue to build in coming weeks that there are a number of liquidity events occurring in.
In the marketplace, particularly the private.
Private wealth management marketplace, where holders and their representatives and advisers for same of a number of non traded.
Preferred programs as well as other types of programs.
Receiving significant cash from M&A, particularly in the REIT space.
And we expect and anticipate to benefit from recycling of that capital into our preferred which our market research shows and the.
The bunch, just completed had about 80% market share prospects at about 80% market share.
Of the non traded preferred market. So we're the logical place to go especially after investors have enjoyed a very positive worked as advertised experience with other programs out there.
And this is a great news for us with a significant demand because.
We think.
Yes, there's been a ton of capital raised in the private credit space folks have they continue to have plenty of capital.
But their ability to leverage that capital is slowing.
Dramatically you've seen ABA.
300 basis point increase in unsecured bond financing costs in our sector.
Over the past four.
Just six months.
We were very proactive in 2021 about going out and availing ourselves of attractive financing completing no fewer than three institutional.
<unk> deals.
In that year, plus our program notes plus the first of its kind.
Perpetual traded preferred program or.
Our offering rather as well so we obtained plenty of inexpensive capital in 2021 we also refreshed.
Extended and Upsized, our revolving credit facility, which as Christian mentioned with 43 banks is more diversified than any other.
Facility of its kind in our industry. So we've loaded up on inexpensive capital and access the same and we're really in a universe of one <unk>.
Of enjoying this access to capital.
On an attractive funding basis.
For our preferred program.
And.
We're seeing nice looks in the market, we had a positive uptick in originations in the March quarter.
We're seeing our pipeline continue to build.
None of us know, if there's going to be.
A significant recessionary downturn in massive gapping out in floating rate asset spreads that tends to accompany same but should that occur.
We're ready and have plenty of capital to <unk>.
On those opportunities, which we really haven't seen in quite some time the 'twenty.
20, a pandemic related sort of financial downturn was quite short lived and there wasn't a lot to buy.
Because of federal stimulus. The next general recessionary downturn, we expect will be quite different and there'll be lots of bargains to scoop up for those that are well capitalized those that have significant access to capital as we do and scale.
And also have a low leverage profile, so others will likely be playing defense.
And scrambling and we will be able to go aggressively and offence and benefit so that preferred program has been a terrific strategic driver for us in the past year, and we expect that to continue going forward.
Got it that's helpful. One more for me if I could again on base rates can you talk about any any rate reset mismatch between your portfolio of assets and your liabilities and if we should expect.
A modest interest drag from any mismatch.
We don't anticipate much of a mismatch because we really have already.
Gone through the quarter, just completed of burning through <unk>.
In a significant fashion LIBOR floor.
Floors.
So we're now starting to exceed those floors are they tend to be three months LIBOR.
LIBOR, driven and three month LIBOR.
Is about 140 basis points right now and.
So youre seeing a reset of our floating rate contracts burning through a significant number of floors already and benefiting us.
So theres no mismatch there and then.
Well our asset side of the ledger is dominated by floating rate on the liability side, it's inverted where more dominated by fixed rate and again are reaping the benefits of locking in and locking down inexpensive cheap financing.
Of issuance over the course of 2021 and that continues as we disclosed in the quarter jus.
And did I suspect this is quite different.
Many of our peers.
Our financing cost.
Dropped.
It dropped on an unsecured.
Basis on its own and that dropped on a mix effect basis as we continued the previously articulated approach.
Routinely using a little bit more of our secured revolving credit facility, which we expanded to $1 5 billion in diversified with more banks.
In the early part of the quarter just completed so our weighted average cost of all debt financings, we disclose went down not up.
18 basis points in the past quarter I get I suspect that is quite different from our peers and not an accident, but a direct reflection of what we've been doing to lay the groundwork to drive profit growth for our business.
Got it Thats it from me I appreciate the time.
Thank you Matt.
There are no further questions at this time and with that we will conclude our question and answer session I would like to turn the conference back over to.
John Barry for any closing remarks.
Well. Thank you everyone have a wonderful afternoon.
And we'll see you in three months.
So much bye now thank you all.
Yeah.
This concludes our <unk>.
The conference. Thank you for attending today's presentation you may now disconnect.