Q4 2019 Earnings Call
Good day and welcome to the process the prospect capital fiscal year earnings release and conference call. All participants will be on listen only mode. So you need assistance. Please signal conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions to ask that question. You May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note that this event is being recorded I would now like to turn the conference over to John Barry Chairman and CEO . Please go ahead Sir.
Thank you Chuck.
Joining me on the call today, our grille Isaac.
Our president and Chief operating Officer, and Christian Vanda ask our Chief Financial Officer Kristen.
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 material 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.
Our earnings press release, and our 10-K filed previously and available on the Investor Relations tab on our website prospect Street Dot com.
Now I'll turn the call back over to John .
Thank you Kristen.
For the June 2019 corridor.
Our net investment income or Eni is $69.6 million or 19 cents per share down two cents from the prior quarter and exceeding our current dividend rate of 18 cents per share by one cents.
Our ratio of Eni to distributions is 105%.
In the June 2019 corridor.
Our net debt to equity ratio is 70% up 29% from the prior quarter.
Our net income for the quarter is $89.2 million or 24 cents per share.
An increase of 42 cents from the prior quarter, primarily due to realized and unrealized gains from our portfolio.
We are announcing monthly cash distributions to shareholders of six cents per share for each of September and October .
Representing 135 consecutive shareholder distributions.
We plan on announcing our next series of shareholder distributions in November .
Since our IPO over 15 years ago through our October 2019 distribution at our current share count.
We will have paid out $17.52 per share to original shareholders.
Aggregating approximately $3 billion in cumulative distributions to all shareholders.
Our Navy stood at $9.01 per share in June down seven cents from the prior quarter.
Our balance sheet as of June 2019.
Consists of 87.4% floating rate interest, earning assets and 93% fixed rate liabilities.
In recent weeks, we've trimmed our cost of term debt issuance commensurate with reductions in treasuries.
Our percentage of total investment income from interest income.
Is 92.2% in the June 2019 corridor.
An increase of 1.6% from the prior quarter.
I'll now turn the call over to Grier.
[noise]. Thank you John .
Our scaled business with over 6 billion of assets and Undrawn credit continues to deliver solid performance.
Our experienced team consists of approximately 100 professionals, which represents 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.
Structured credit.
Real estate yield investing.
And online lending.
As of June 2019, our controlled investments at fair value.
Stood at 43.8% 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 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 June our portfolio at fair value comprised 43.9% secured first lien.
23.5% secured second lien.
15.1% subordinated structured notes with underlying secured first lien collateral.
0.8% rated secured structured notes.
0.6% unsecured debt.
And 16.1% equity investments, resulting in 83%.
All 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 13.1% as of June .
Up 8.3% from 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 have 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 June we held 135 portfolio companies.
Down two from the prior quarter with a fair value of 5.65 billion.
We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration the largest is 14.6%.
As of June our asset concentration in the energy industry stood at 2.7%.
And our concentration in the retail industry stood at zero percent.
Non accruals as a percentage of total assets stood at approximately 2.9%.
In June down 0.4% from the prior quarter, our weighted average portfolio net leverage stood at 4.67 times EBITDA up <unk> 0.1 from the prior quarter. After four straight quarterly decreases are weighted average EBITDA per portfolio company.
Stood at 60.7 million in March.
Up from I'm, sorry in June up from 59.8 million in the prior quarter.
Originations in June aggregated 188 million, we also experienced 213 million of repayments and exits.
As a validation of our capital preservation objective and sell down of larger credit exposures, resulting in net repayments of 25 million.
During the June quarter originations comprised 79% non agented debt.
Including early look anchoring in club investments, 19% agent its sponsor debt and 2% corporate deal buyouts.
Today, we have made multiple investments in the real estate arena through our private REIT strategy largely focused on multifamily workforce stabilized yield acquisitions with attractive 10 year plus financing.
NPR C or private rate.
Has a real estate portfolio that has benefited from rising rents.
So your occupancy is.
Hi, returning value added renovation programs at attractive financing recapitalisations.
Resulting in an increase in cash yield as a validation of this income growth business.
Alongside our corporate credit businesses.
MPC has exited completely over a dozen properties with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. We expect our exits to continue and have identified multiple additional properties for potential exit.
In calendar year 2019 and beyond.
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 June we held 851 million.
Across 43, non recourse subordinated structured notes investments.
These underlying structured credit portfolios comprised around 1800 loans.
And a total asset base of over $18 billion.
As of June this structured credit portfolio experienced a trailing 12 month default rate of 39 basis points.
95 basis points less than the broadly syndicated market default rate of 134 basis points.
And an increase in our outperformance of 31 basis points.
In the June quarter, this portfolio generated an annualized GAAP yield of 15.6%.
As of June our subordinated structured credit portfolio has generated 1.3 billion in cumulative cash distributions to us representing around 85% of our original investment.
Through June we've also exited nine investments totaling 263 million with an average realized IR of 16.8% and cash on cash multiple of 1.49 times.
Our subordinate 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 received fee rebates because of our majority position.
As a 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.
Weve completed 23 refineries and reset since December 2017.
So far the current September 2019 quarter, we booked 33 million in originations and received repayments of $169 million, resulting in net repayments of 135 million.
Our originations have comprised 74% non agented debt.
And 26% Agented sponsored debt. Thank you I'll now turn the call over to Krista.
Thanks, Greg we believe our prudent leverage diversified access to matched book funding substantial majority of unencumbered assets.
And weighting toward unsecured fixed rate debt 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 24 years into the future.
We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond.
Develop a notes program.
Thank you and our bond ATM acquire another BDC and many other lift the first.
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 June 2019, we held approximately 4.12 billion other assets as unencumbered assets.
Representing approximately 71% of our portfolio.
The remaining assets are pledged to prospect capital funding, where in the past year, we completed an extension of our revolver by 5.7 years, reducing the interest rate on drawn amounts to one month, LIBOR plus 220 basis points.
We currently have 1.13 to 5 billion of commitments from 30 Bank with a 1.5 billion total size accordion feature at our option.
The facility revolves until March 2022, followed by two years of amortization with interest interest distributions continuing to be allowed to ask.
Outside of our revolver and benefiting from our unencumbered assets Weve 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 have no financial covenants, no asset restrictions and no cross defaults with our revolver.
We enjoy an investment grade triple B rating from Kroll and investment grade Triple B rating from Egan Jones.
And investment grade Triple B negative rating from S&P.
And an investment grade.
BW Athree rating from Moodys.
So a total of four investment grade rating.
We have now tapped the unsecured term debt market on multiple occasions to ladder, our maturities and to extend our liability duration out 24 years.
Our debt maturities extend through 2043.
With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the June 2019 quarter, we repurchased 25 million of our April 2020 notes.
As well as 156 million of our program that.
We also issued 4 million of baby bonds through our ATM program and continued our weekly Internet's program with $112 million of issuance.
If the need should arise to decrease our leverage ratio. We believe we could slow originations and allow repayments and exits to come in during the ordinary course as we demonstrated in the first half of calendar year 2016 during market volatility.
We now have eight separate unsecured debt issuances, aggregating 1.5 billion not including our program notes with maturities extending to June 2029.
As of June 2019, we had 708 million of program notes outstanding with staggered maturities through October 2043, now I'll turn the call back over to John .
[noise].
[noise].
Thank you we can now answer any questions.
We will now begin the question and answer session to act to ask that question. You May Press Star then one on your Touchtone phone. If you are not giving a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press to please press Star then two at this time, we'll pause momentarily to assemble our roster.
Thank you.
The first question will come from Robert Dodd with Raymond James. Please go ahead.
Oh, just looking at the Covenant late outlook environment, Obviously, you got a primarily floating rate book and fixed rate.
Liabilities, but so if if the libel curve is correct currently and we draw from what was something like two and a half in the June quarter to something more like one and a half by the end of next year.
What.
Plans can you put into place to kind of mitigate that that impact obviously you.
One of the options is leveling up.
War and can you give us any color on how much of your liability structure still has a one to one covenant embedded in it.
Versus versus just 40 Act compliance and then what you can do on on the asset side as well.
Sure go ahead grier okay.
Thank you Robert.
For for your question.
Obviously a.
An environment in which a LIBOR is decreasing can also signal concerns on an economic basis. So it starts with principal protection and credit protection from an underwriting standpoint, so thats.
That's always going to be our prioritization on the asset.
Side of the ledger on the left hand side of the balance sheet.
I wouldn't be surprised me a little bit of a spread give back.
Because you had spreads dropping as as LIBOR was increasing so a little bit of the opposite dynamic occurring in the inverse I think it's reasonable to assume to offset.
And we do have LIBOR floors in number of deals where we act as agent we've attempted to set lie bore at.
Close to prevailing rates, so new originations on an agent basis.
In the last year. So we're in the 200, plus LIBOR or category I'm also in our controlled investments were somewhat insulated from that.
Because.
We've got the ability to to sustain yields on the right hand side of our balance sheet as John mentioned in her opening remarks, we have been trimming our.
Cost of capital.
And while respecting and maintaining diversity of access.
In multiple debt capital markets, we have been prioritizing those that we deem to be more.
Efficient and appropriate from a risk management standpoint, so that means our programmatic issuance has been prioritized and we've trimmed the cost of that capital by.
Leased a 150 basis points in the last.
Six weeks alone.
We also expect to be prioritizing in already are.
Usage of our revolver, which we just extended and amended.
And in the past year.
Which gives us a longevity from a maturity standpoint, that's obviously floating rate so we'll benefit.
By increasing usage and we've been.
Retiring debt in our near term maturities, especially more expensive cost of capital. The convert market is a good example of that.
Which just a flat up more expensive place to issue just even if you assume it's close to pretty much of a debt instrument with significant out of the money.
Equity option embedded just the coupon demanded by a finite set of investors is much higher than.
In other markets.
That's also true of the more Wirehouse centric baby bond market, which you've seen us de prioritizing just institutional.
Paper in general.
So we have been aggressively calling.
Our program notes that mature in the next.
Two years, you'll see us extending that and Thats a significant benefit we don't like getting stuck with non call life for significant may call paper in the institutional market. So it's both more expensive and in Flexibles is folks that they're getting paid above market rates without much. We can do about it as we rotate more of the book to programmatic notes issuance, we've actually migrated.
That issuance from being able to.
Call It only twice a year and specific dates to in the not too distant future the ability to call it pretty much a continuous fashion, so significant flexibility from that standpoint, as well so we're constantly shaping.
The right hand side of the balance sheet, while still respecting counterparty diversity as well as type of issuance.
Diversity.
So any other point I'd make about LIBOR.
Our real estate business is a significant beneficiary of.
A reduction in.
Treasuries.
Medium to longer term treasuries is a lot of pegged off of the 10 year treasuries for GNC spreads and buyer expectations et cetera. So it's not just about short term LIBOR as you referenced but also the rest of the curve and that shows up both as a seller as well as.
As well as a buyer.
We talked about monetization we've had to date, we've got others pending including ones under contract and buyers of those assets to layer on new financing I get the benefit and can pay up in essence for our assets and we've generated in north of 25% higher ourself for those deals and then on the new deployment front.
We get attractive financing terms as well and of course try to purchase.
Outside of the mainstream and smaller deals in tier two tier three tier four markets that are less picked over ideally in an off market fashion. So.
Interest rates cut their way different parts of the curve across our whole business and we try to make.
Intelligent optimization decisions that it all points along the way.
I think John you would add to that answer.
Okay.
Oh is that helpful. Robert Yes, that's helpful. If I can to two quick follow ups to that to your point I agree with you. We can see spreads give back and they do tend to widen when rates come down.
The ability to kind of capture that depends on how fast a portfolio turns over for the most part.
And so you know over the last year, we've seen relatively low turnover in your portfolio and about 600 million in repayments about 10% of the portfolio 19 versus a much higher than eight in 18 and 17, so that turnover slowed down asset life stretch that that reduces potentially the ability to capture that spread widening. So is that he should we expect that youre your turnover.
Within the portfolio would excel is should be accelerating all you know and all the kind of the asset life shrinking.
To take advantage of those widening spreads.
Yes.
Portfolio portfolio turnover is a little bit tricky measure I think the way you're describing it.
Robert because there are two two important pieces to that one is you NPR C. As a controlled investment looks like it never turns over but.
In reality on an underlying individual asset basis.
We are exiting up to seven.
Assets per annum, that's the tax return.
Maximum that's allowed as per the rules that we have been coming coming close to that so we actually have been turning over that particular book also in our structured credit.
Business when we do an extension we actually maintain.
The same the same CUSIP and so it looks like it's not.
Turning over and it isn't but but this that the asset is actually changing in a positive way.
By extending tenor of the deal which allows us to.
I do want to 11, and ideally two things simultaneously one.
By extending the deal purchase a wider spread longer dated assets as per individual indenture weighted average life life tests and number two.
Reduce our cost of.
Our cost of liability financing, so and as turnover that happens also in the individual deals and where you are seeing.
Spread widening finally on the asset front I mean 2018 was the year of of asset compression and now we've had three straight quarters of of asset spread widening.
That that benefits us.
And of course, both liabilities.
And and assets are floating rate so you're.
You only have a kind of a stub floating rate exposure for the.
So with the unhedged portion, which is you're you're investment amount essentially so were so we're getting some capture back there in terms of the middle market.
A book and that.
Turnover, we are getting repayments occurring to start increase a little bit.
It's been a very tricky market because every time there is a significant bout of volatility it feel like it impacts.
M&A, that's such a big driver of.
Origination activity of course in our business and you saw things slow down dramatically at the end of last year that started to pick up again in the spring that have slowed again with the card seasonality. The summer and then another about of volatility so and part of it has also been our proactive.
Turnover, because we're doing a lot that we talked about to manage risk and to prepare for the downturn that well some people have been predicting it for five years I guess, if you predict it five years.
I had it on your right eventually, but eventually the cycle turns and we want to have.
The strongest fortress two to handle that and be a net.
Beneficiary of that situation turns the buying other platforms buying assets et cetera, we benefited significantly from that risk management the last.
Downturn I feel like we.
Have made our business, even better, especially with with counterparty.
Risk reduction, but we're also trimming or access concentration exposures. We see you haven't seen us on the new origination front add kind of multi hundred million dollar exposures weve been clubbing more we've been selling down more.
We're very reluctant to take on that risk. So there's an element of turnover happening.
There as well and traditionally the kind of were Agented middle market business was the more attractive place be seeing a migration of covenant light to that book, you've seen some unwieldy and you're not very smart capital structures, because that's really where the influx of capital has occurred its in the middle markets not as much in the syndicated market back you've seen a net withdrawal of capital because so much was pegged to interest rate expectations. So just a long way of saying, we're seeing a lot more often to middle market deals that are smaller credits that need to have.
Lower levered structures, and lower adjustments allowed et cetera, and there's there's a lot of capital has been raised us has to go somewhere so.
So so there's a lot of things that go into the port the portfolio turnover equation Robert got it got I. Appreciate one one quick well maybe quick.
Robert Hey, Robert Robert Robert Hey, John John I just.
I would just I think you got the gist of it which is that.
There are.
There's there's more than one natural hedge in our business right, we were funding ourselves through PCF.
Which is our.
I guess, our incremental swing factor.
Funding source that floating rate so as LIBOR declines that source of funding goes down.
The our company our portfolio companies.
Our funding themselves primarily with LIBOR based paper. So you are lowering interest rates is intended to make their life easier and does.
All things being equal sort of just to mention just those two items are examples of the natural hedge in our business. It is true I think that we would prefer.
Much more inflation and Uh huh.
A much greater spreads, but I think that would erode the real returns to our shareholders.
So.
As far as our shareholders are concerned measuring real returns.
I believe that they are net winners.
When you as interest rates declined.
Back to you about it.
Yeah I appreciate that Joe all I guess, one more I guess on the me in the past you told us that somebody that dividends from the meat correlate with with with exits because it creates a taxable event et cetera, et cetera, and any commentary and John you said that you've got a number you've done a number of exits and got a number that the coming soon so would it be fair to say that there should be more dividend income from the weak or is that any gains within that more likely to be reinvested.
I wanted to take whatever yeah, no I agree.
I I would describe our outlook for for NPR C as a.
A reasonably stable within a band.
Income distribution expectation and based on assets that we have already exited.
As well as ones that are under contract as well as ones, we expect to be under contracts and.
We think we have.
Over two years.
Of kind of a rough run rate.
Income distributions in effect banked, probably more like two and a half years.
And then we would be looking to add to that by exiting other assets as we identify them and essentially what we do is every every quarter re update or cash flows in and run NPV analyses of the individual assets.
Sure we exit should we refinance how should we refinance is what tenants structure should we do a dividend recap so called supplemental financing.
Should we stick with the Gses Fannie and Freddie are the CMBS bid has actually become.
More competitive of of late in part because the Gses.
Are reaching some of their regulatory Maxim months from multifamily. So it's nice to see the private bid come in more strongly so we do all these things and when that.
Spits out of the analysis to to exit.
We do so with an optimal fashion. So so we feel very good about the sustained cash flow income generation power of that business again of multiple years in effect banked and we're looking to add to an extent that center.
Got it thank you.
Thank you Robert.
This concludes our question and answer session I would like to turn the conference back over to John Barry for any closing remarks. Please go ahead Sir.
Yes, I think we're all set thanks, everyone Bye now.
Thank you.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.