Q2 2025 Prospect Capital Corp Earnings Call

Speaker Change: Hello and welcome to the Prospect Capital's second fiscal quarter earnings release and conference call. All participants will be in listen-only mode.

Speaker Change: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad.

Speaker Change: To withdraw from the question queue, you may press star then 2. As a reminder, this conference is being recorded. I would now like to hand the call to John Barry, Chairman and CEO. Please go ahead.

John Barry: Thank you, M.J. Joining me on the call today are Greer Eliasek, our President and Chief Operating Officer, and Kristen Van Dask, our Chief Financial Officer.

Kristin

Speaker Change: Thanks, John. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Future results are highly likely to vary materially.

We do not undertake to update our forward-looking statements.

Speaker Change: For additional disclosure, see our earnings press release and 10-key filed previously and available on our website, ProspectStreet.com. Now, I'll turn the call back over to John.

Thank you, Kristen.

John Barry: And as I told our board, Kristen is absolutely crushing it.

Thank you, Kristen.

Thanks John. Okay.

John Barry: In the December quarter, our net investment income, or NII, was $86.4 million, or $0.20 per common share.

Our NAV was $3.4 billion or $7.84 per common share.

John Barry: At December 31st, our net debt to total assets was 28.1%.

John Barry: Unsecured debt plus unsecured preferred is 91.9% of total debt plus preferred.

John Barry: Since inception over 20 years ago through our April 2025 declared distribution,

2.7 times December 2024 NAV per share.

John Barry: We are announcing monthly common shareholder distributions of 4.5 cents per share for each of February, March, and April. We plan on announcing our next set of shareholder distributions in May.

Our preferred shareholder cash distributions continue at their contractual rate.

John Barry: We continue to rotate assets into first lien senior secured middle market loans sometimes with select equity investments amortize our subordinated structured notes

exit from equity linked assets including real estate.

Enhance portfolio company operating performance and utilize our revolver.

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

Speaker Change: that have earned a 13% unlevered investment level gross cash IRR to Prospect Capital Corporation.

Speaker Change: This more than two decade time period includes the GFC and has been dominated in general by low interest rates.

Speaker Change: As of December, we held 114 portfolio companies across 33 different industries, with an aggregate fair value of $7.1 billion.

Speaker Change: For the December quarter, our portfolio at fair value comprised 64.9% first lien debt. That's up 620 basis points.

Speaker Change: from the prior year. 10.2% second lien debt, that's down 530 basis points in the prior year.

Speaker Change: 5.8% subordinated structured notes with underlying secured first-link collateral. That's down 210 basis points in the prior year. And 19.1% unsecured debt in equity investments.

Speaker Change: resulting in 81% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral.

Speaker Change: In our middle market lending strategy, we recently provided a first lien senior secured term loan.

a First Lien Senior Secured Convertible Term Loan.

Speaker Change: and a preferred equity investment to Taos Footwear aggregating $65 million in collaboration with Taos's founder and leadership team.

Speaker Change: Taos is a leading, innovative footwear brand providing customers with stylish and supportive footwear products over the last 20 years.

Speaker Change: examples of similar recent investments in our middle market lending strategy with both first lien senior secured debt

Speaker Change: and selected equity-linked investments include Druid City Infusion and Discovery Point Retreat.

Speaker Change: DruidCity is an infusion therapy services company with multiple locations across the South and Mountain West regions of the United States.

Speaker Change: Since closing, Druid has made an add-on acquisition, expanding the reach of the company into Louisiana. We have worked with Druid's management team to evaluate improved market penetration and enhanced collection recovery strategies, which Druid Management believes will lead to continued growth.

Speaker Change: Discovery Point Retreat is a rapidly growing detox and rehabilitation provider in North Texas.

Speaker Change: Recent EBITDA has increased by approximately 37% from under an EBITDA only a few months ago. We've worked with Druid's management team to enter into a new service agreement with a goal of purchasing such facility in the future as an expansion into California.

Speaker Change: Druida has also moved its Dallas outpatient program to a new location that more than doubles capacity and has begun construction at one of its inpatient facilities to expand capacity.

Speaker Change: Discovery Management believes these initiatives each will lead to continued growth.

from 7.9% as of December 2023.

Speaker Change: Since inception of this strategy for Prospect Capital Corp. in 2011 and through December 2024, we have exited 15 subordinated structured notes investments.

Speaker Change: earning an unlevered investment-level gross cash internal rate of return of 12.1% and cash-on-cash multiple of 1.3 times.

Speaker Change: As of December, based on fair value and excluding investments being redeemed,

Speaker Change: The remaining Subordinate Structured Notes portfolio had a trailing 12-month average cash yield of 24.4%.

Speaker Change: and annualized gap yield of 3.9% with a difference between cash and gap yield representing amortization of our cost basis.

Speaker Change: We expect to continue to amortize our subordinated structured notes portfolio and to reinvest primarily into first lien, senior secured, middle market loans.

Speaker Change: In our Real Estate Property Portfolio at National Property Re Corp. or NPRC

Speaker Change: Since the inception of this strategy for Prospect Capital Corp. in 2012 and through December 2024, we have exited 51 property investments.

Speaker Change: earning an unlevered investment level gross cash IRR of 24.3 percent.

and cash-on-cash multiple of 2.5 times.

We exited two additional properties in the December 2024 quarter.

Speaker Change: The remaining real estate property portfolio includes 59 properties that paid us an income yield of 6.9% for the December quarter.

Speaker Change: Prospect's aggregate investments in NPRC had a $522 million unrealized gain as of December.

We expect to continue to redeploy future asset sale proceeds.

Speaker Change: primarily into both property value-added capital expenditures as well as more broadly first lien senior secured middle market loans.

Speaker Change: Prospect's approach is one that generates attractive risk-adjusted yields and our performing interest-bearing investments were generating an annualized yield of 11.2% as of December.

Speaker Change: Our interest income in the December quarter was 91% of total investment income, reflecting a strong recurring revenue profile to our business.

Speaker Change: Non-accruals as a percentage of total assets stood at approximately 0.4% in December. Weighted average EBITDA per portfolio company stood at $102 million.

Speaker Change: Investment originations in the December quarter aggregated $135 million and were comprised of $120 million of first lien senior secured loans or close to 90% of total originations.

Speaker Change: We also experienced $383 million of repayments and exits as a validation of our capital preservation objective.

resulting in net repayments of $248 million.

Speaker Change: During the December quarter, our originations comprised 67.7% middle market lending.

14.5% middle market lending and buyouts.

17.8% real estate and zero in subordinated structured notes.

Speaker Change: So far in the current March 2025 quarter, we have booked $111 million in originations and experienced $19 million of repayments.

Our originations have consisted of 86.4% middle market lending.

Speaker Change: and 13.6% real estate. Thank you. I'll now turn the call over to Kristen. Kristen?

Thanks, Greer.

Kristen: We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets,

Kristen: waiting toward unsecured fixed-rate debt and avoidance of unfunded asset commitments demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities.

Kristen: Our company has locked in a ladder of liabilities extending 27 years into the future.

Kristen: Our unfunded eligible commitments to portfolio companies totals approximately $62 million, of which $29 million are considered at our sole discretion.

Kristen: representing approximately 0.9% and 0.4% of our assets as of December 2024, respectively.

Kristen: A combined balance sheet cash and undrawn revolving credit facility commitments stood at $1.9 billion as of December, and we held $4.8 billion of our assets as unencumbered assets, representing approximately 66% of our portfolio.

Kristen: The remaining assets are pledged to Prospect Capital Funding, a non-recourse SPV.

Kristen: We currently have 2.12 billion of commitments from 48 banks Demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry

Kristen: The facility does not mature until June 2029 and revolves until June 2028.

Our drawn pricing continues to be SOFR plus 2.05%.

Kristen: Outside of our revolver, we have access to diversified funding sources across multiple investor bases and have successfully issued securities in an array of markets.

Kristen: Prospect has issued multiple types of unsecured debt, institutional non-convertible bonds, institutional convertible bonds, retail baby bonds, and retail program notes.

Kristen: All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross defaults with our revolver.

Kristen: As of December, unsecured term debt represents 85% of all of prospects' indebtedness.

Kristen: We've tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 27 years, with our debt maturities extending through 2052.

Kristen: With so many banks and debt investors across so many unsecured and non-recourse debt tranches, we have substantially reduced our counterparty risk.

Kristen: At December 31, 2024, our weighted average cost of unsecured debt financing was 4.49%. Now I'll turn the call back over to John.

Thank you, Kristen.

I think we can take questions now.

Kristen: Thank you, John. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys.

Speaker Change: Today's first question comes from Finian O'Shea with Wells Fargo. Please go ahead.

Speaker Change: Hey everyone, good morning. Question on the debt, specifically the unsecured.

Can you talk about how the the rating changes?

Speaker Change: will impact how you shape that going forward. If you intend to replace the, over the next year or two, the public maturities in similar channels, or might you lean more on the revolver there? Thank you.

Thanks, Finny, for that question.

Speaker Change: We don't anticipate significant changes in our financing strategy. Recall Prospect was the pioneer that basically introduced to the BDC industry. We've been doing this for over two decades.

Speaker Change: first to issue a convertible bond, first to issue an institutional bond, first to issue program notes, preferreds, many many types of financing that the rest of the industry enjoys today as a result of our leadership.

Speaker Change: We're big believers in having a diversified array of markets to tap into. We do plan on utilizing our facility that matches on a floating rate basis.

Speaker Change: with our assets that are dominated by floating rate. We have a well-diversified set of strong bank relationships, close to 50.

Speaker Change: in that facility. We plan on continuing to tap the bond markets over time, the program notes markets as well, and our preferred markets.

Speaker Change: Our credit spread versus Treasuries is actually tighter now than where it was in July of 2018.

Speaker Change: 2024, which I think is a reflection of our strong credit profile as a company.

Thank you.

Speaker Change: I know it's just a few days in, but if you could talk about how that's going.

Sure, I'll take those two questions in turn.

In terms of exchanges, we have...

selectively offered for

various convertible

Speaker Change: tranches of older series to exchange their paper into non-convertible but still perpetual.

Speaker Change: for our common equity. We've had strong participation in those exchange offers historically and would expect the same going forward.

Speaker Change: In terms of our new preferred series, yes, you have the coupon correct for that, which is a reflection in balancing decisions across different...

Speaker Change: fixed income markets, short-term rates are down a little bit but

You know, medium.

5 to 10 year olds.

Speaker Change: are up a bit. We had previously had a floater with a floor based on short-term that had declined to the floor level and we saw a lot of demand at the prior level where we're issuing

Speaker Change: sort of last summer on more of a fixed basis decided to move away from using a floater with a floor. It turns out people like floaters and rates are going up, big surprise and not so much when rates are going down.

Thank you.

Did that help, Finian?

Pardon me, it looks like we have lost

Okay.

Hello?

I think we can wrap up.

Speaker Change: In that case, this concludes our question and answer session. I'd like to turn the call back to Mr. Barry for closing remarks.

Okay, here are my closing remarks.

Thank you very much. Bye now.

Speaker Change: The conference is now concluded. Thank you for your participation. You may now disconnect your lines.