Prospect Capital Announces 37% Increase in Net Investment Income


NEW YORK, NY--(Marketwire - February 9, 2010) - Prospect Capital Corporation (NASDAQ: PSEC) ("Company," "Prospect" or "we") today announced financial results for its second fiscal quarter ended December 31, 2009.

For the three and six months ended December 31, 2009, our net investment income was $16.9 million and $29.2 million, respectively, or 29 cents and 54 cents, respectively, per weighted average share outstanding for the period presented. Our net investment income increased 37%, and our net investment income per share increased 19%, from the quarter ended September 30, 2009 to the quarter ended December 31, 2009.

We closed our acquisition of Patriot Capital Funding, Inc. (NASDAQ: PCAP) ("Patriot") on December 2, 2009. While the full quarterly benefits of the Patriot acquisition are not expected to be reflected until the March 31, 2010 quarterly financial results, we did recognize a gain on the Patriot acquisition of $5.7 million. We also recognized $7.5 million of interest income during the period from the acquisition through the end of the quarter, including $4.6 million of interest income from the acceleration of purchase discounts upon early repayments of three loans, repayments of three revolving lines of credit and the sale of one investment position. These early repayments have been full par repayments, comparing favorably to the discount on our purchase of the Patriot portfolio.

We have additional liquidity available that can be deployed into other accretive investments beyond the Patriot acquisition and are currently moving forward a pipeline of potential additional portfolio and individual investment opportunities that aggregate more than $3 billion of assets.

We estimate that our net investment income for the current third fiscal quarter ended March 31, 2010 will be 24 to 32 cents per share. We expect to announce our third fiscal quarter distribution in March.

The December 31, 2009 quarter, because of a desire to eliminate excise taxes for the 2009 calendar year, included two dividend record dates, thereby causing a second dividend payable and a second associated deduction from our net asset value deduction during the quarter.

OPERATING RESULTS

HIGHLIGHTS

Equity Values:
  Net assets as of December 31, 2009: $637.48 million
  Net asset value per share as of December 31, 2009: $10.06

Second Fiscal Quarter Operating Results:
  Net investment income: $16.93 million
  Net investment income per share: $0.29
  Dividends declared to shareholders per share: $0.40875

Year-to-date Operating Results:
  Net investment income: $29.24 million
  Net investment income per share: $0.54
  Dividends declared to shareholders per share: $0.81625

PORTFOLIO AND INVESTMENT ACTIVITY

At December 31, 2009, our portfolio grew to 55 long-term investments with a fair value of approximately $648.1 million compared to 29 long-term investments with a fair value of $510.8 million at September 30, 2009. This increase in investments was driven by the acquisition of Patriot net of post-closing monetizations from the Patriot portfolio.

On December 2, 2009, we acquired the outstanding shares of Patriot common stock for $201.1 million. Under the terms of the merger agreement, Patriot common shareholders received 0.363992 shares of our common stock for each share of Patriot common stock, resulting in 8,444,068 shares of common stock being issued by us. In connection with the transaction, we repaid all the outstanding borrowings of Patriot, in compliance with the merger agreement.

On December 2, 2009, Patriot made a final dividend equal to its undistributed net ordinary income and capital gains of $0.38 per share. In accordance with a recent IRS revenue procedure, the dividend was paid 10% in cash and 90% in newly issued shares of Patriot's common stock. The exchange ratio was adjusted to give effect to the tax distribution so that our purchase consideration for Patriot was not affected by this distribution.

The merger has been accounted for as an acquisition of Patriot by Prospect in accordance with the acquisition method of accounting as detailed in ASC 805, Business Combinations ("ASC 805"). The fair value of the consideration paid was allocated to the assets acquired and liabilities assumed based on their fair values as the date of acquisition. As of the acquisition date, the fair value of the identifiable net assets acquired exceeded the fair value of the consideration transferred, and we recognized the excess as a gain. A gain of $5.7 million was recorded by Prospect in the quarter ended December 31, 2009 related to the acquisition of Patriot.

The purchase price has been allocated to the assets acquired and the liabilities assumed based on their estimated fair values as summarized in the following table (in thousands):

Cash (to repay Patriot debt)                                $      107,313
Cash (to fund purchase of restricted stock from former
 Patriot employees)                                                    970
Common stock issued (1)                                             92,800
                                                            --------------
Total purchase price                                               201,083
                                                            --------------
Assets acquired:
Investments (2)                                                    207,126
Cash and cash equivalents                                            1,697
Other assets                                                         3,859
                                                            --------------
Assets acquired                                                    212,682
Other liabilities assumed                                           (5,885)
                                                            --------------
Net assets acquired                                                206,797
                                                            --------------
Preliminary gain on Patriot acquisition (3)                 $        5,714
                                                            ==============

(1) The value of the shares of common stock exchanged with the Patriot
    common shareholders was based upon the closing price of our common
    stock on December 2, 2009, the price immediately prior to the closing
    of the transaction.
(2) The fair value of Patriot's investments was determined by our Board of
    Directors in conjunction with an independent valuation agent.  This
    valuation resulted in a purchase price which was $98,150 below the
    amortized cost of such investments. For those assets which are
    performing, Prospect will record the accretion to par value in interest
    income over the remaining term of the investment.
(3) The preliminary gain has been determined based upon the estimated value
    of certain liabilities which are not yet settled.  Any changes to such
    accruals will be recorded in future periods as an adjustment to such
    gain. We do not believe such adjustments will be material.

During the period from the acquisition of Patriot on December 2, 2009 to December 31, 2009, we recognized $7.5 million of interest income from the assets acquired from Patriot. Included in this amount is $4.6 million resulting from the acceleration of purchase discounts from the early repayments of three loans, three revolving lines of credit and the sale of one investment position.

During the quarter ended December 31, 2009, one additional investment, Resco Products Inc. ("Resco"), has repaid its outstanding debt to us. Earlier in the quarter, we had purchased additional debt in Resco at a 40% discount to par and subsequently received a full par repayment of all our debt at the closing, generating a 16% cash-on-cash internal rate of return on our overall investment.

Primary investment activity in the marketplace has increased recently, and we are currently evaluating a robust pipeline of potential investments, some of which have the potential to close this quarter. These investments are primarily secured investments with double digit coupons, sometimes coupled with equity upside through co-investments or warrants, and diversified by sector.

Gas Solutions continues to generate free cash flows, with no third party debt. We are discussing opportunities for potential monetization of our position, and we recently hired a new senior executive to help drive further revenue and profit growth.

LIQUIDITY AND FINANCIAL RESULTS

On June 25, 2009, we completed a first closing on an expanded syndicated revolving credit facility (the "Facility"). The Facility includes an accordion feature which allows the Facility to accept up to an aggregate total of $250 million of commitments. Since that initial closing with two lenders, we have added four additional lenders to the Facility and currently have commitments totaling $210 million. We continue to solicit additional commitments from other lenders to grow the Facility, and multiple lenders are performing due diligence toward committing to our Facility, and potentially additional independent facilities. The Facility has an investment grade Moody's rating of A2. We are also working with our lenders to reduce our cost of debt financing and extend the duration of the Facility.

As of December 31, 2009, we had $10 million of borrowings under our Facility. With the pledging of additional assets from the Patriot acquisition, we have significant credit availability in excess of $100 million, not including further leveragability of additional collateral that we could add to our Facility with additional transaction activity.

Our virtually unleveraged balance sheet is a source of significant strength in comparison with many overleveraged competitors. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently grow our existing revolving credit facility, add additional secured facilities, and evaluate term debt solutions driven by our investment grade facility ratings at both the corporate and Facility levels. We are pleased with the increase in desire of counterparties to provide us additional credit at significantly more attractive pricing as compared to what the capital markets offered a year ago.

CONFERENCE CALL

The Company will host a conference call on Wednesday, February 10, 2010, at 11:00 a.m. Eastern Time. The conference call dial-in number will be 800-860-2442. A recording of the conference call will be available for approximately 30 days. To hear a replay, call 877-344-7529 and use passcode 437757.

               PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
            CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
                  December 31, 2009 and June 30, 2009
             (in thousands, except share and per share data)


                                                  December 31,  June 30,
                                                     2009         2009
                                                  (Unaudited)  (Audited)
                                                 ------------ ------------
Assets
Investments at fair value (cost of $633,636 and
 $531,424, respectively)
     Control investments (cost of $165,867 and
      $187,105, respectively)                    $    191,898 $    206,332
     Affiliate investments (cost of $68,052 and
      $33,544, respectively)                           66,479       32,254
     Non-control/Non-affiliate investments (cost
      of $399,717 and $310,775, respectively)         389,758      308,582
                                                 ------------ ------------
          Total investments at fair value             648,135      547,168
                                                 ------------ ------------

Investments in money market funds                      23,418       98,735
Cash                                                    3,844        9,942
Receivables for:
     Interest, net                                      5,723        3,562
     Dividends                                              2           28
     Other                                                359          571
Prepaid expenses                                          175           68
Due from Prospect Administration                          998           --
Deferred financing costs, net                           5,891        6,951
Other assets                                              535           --
                                                 ------------ ------------
          Total Assets                           $    689,080 $    667,025
                                                 ------------ ------------

Liabilities
Credit facility payable                                10,000      124,800
Dividend payable                                       25,894           --
Due to Prospect Administration                             --          842
Due to Prospect Capital Management                      7,412        5,871
Accrued expenses                                        8,039        2,381
Other liabilities                                         258          535
                                                 ------------ ------------
          Total Liabilities                            51,603      134,429
                                                 ------------ ------------

Net Assets                                       $    637,477 $    532,596
                                                 ------------ ------------

Components of Net Assets
Common stock, par value $0.001 per share
 (100,000,000 and 100,000,000 common shares
 authorized, respectively; 63,349,746 and
 42,943,084 issued and outstanding,
 respectively)                                   $         63 $         43
Paid-in capital in excess of par                      741,520      545,707
Under/(over) distributed net investment income        (14,326)      24,152
Accumulated realized losses on investments           (104,279)     (53,050)
Unrealized appreciation on investments                 14,499       15,744
                                                 ------------ ------------
Net Assets                                       $    637,477 $    532,596
                                                 ------------ ------------

Net Asset Value Per Share                        $      10.06 $      12.40
                                                 ------------ ------------





               PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF OPERATIONS
       For The Three and Six Months Ended December 31, 2009 and 2008
             (in thousands, except share and per share data)
                               (Unaudited)


                                For The Three Months   For The Six Months
                                  Ended December 31,   Ended December 31,
                                --------------------  --------------------
                                  2009       2008       2009       2008
                                ---------  ---------  ---------  ---------

Investment Income
Interest Income
    Control investments (Net of
     foreign withholding tax of
     ($52), $62, ($19), and
     $109, respectively)        $   5,052  $   5,075  $   9,643  $  11,797
    Affiliate investments (Net
     of foreign withholding tax
     of $0, $0, $0, and $0,
     respectively)                  1,539      1,075      2,388      1,635
    Non-control/non-affiliate
     investments                   11,948     11,091     21,343     21,365
                                ---------  ---------  ---------  ---------
      Total interest income        18,539     17,241     33,374     34,797
                                ---------  ---------  ---------  ---------

Dividend income
    Control investments             4,160      4,584     10,360      9,168
    Money market funds                 10         81         28        220
                                ---------  ---------  ---------  ---------
      Total dividend income         4,170      4,665     10,388      9,388
                                ---------  ---------  ---------  ---------

Other income:
    Control/affiliate
     investments                       75         87         75        831
    Gain on Patriot acquisition     5,714         --      5,714         --
    Non-control/non-affiliate
     investments                      385        220        849     12,996
                                ---------  ---------  ---------  ---------
      Total other income            6,174        307      6,638     13,827
                                ---------  ---------  ---------  ---------

                                ---------  ---------  ---------  ---------
    Total Investment Income        28,883     22,213     50,400     58,012
                                ---------  ---------  ---------  ---------

Operating Expenses
Investment advisory fees:
    Base management fee             3,176      2,940      6,385      5,763
    Income incentive fee            4,231      2,990      7,311      8,865
                                ---------  ---------  ---------  ---------
      Total investment advisory
       fees                         7,407      5,930     13,696     14,628

Interest and credit facility
 expenses                           1,995      1,965      3,369      3,483
Sub-administration fees
 (Including former Chief
 Financial Officer and Chief
 Compliance Officer)                   --        217         --        467
Legal fees                            390        184        390        483
Valuation services                    153        110        273        422
Audit, compliance and tax
 related fees                         239        306        501        629
Allocation of overhead from
 Prospect Administration              840        588      1,680      1,176
Insurance expense                      63         63        126        124
Directors' fees                        64         62        128        143
Other general and
 administrative expenses              807        295        994        462
Tax expense                            --        533         --        533
                                ---------  ---------  ---------  ---------
    Total Operating Expenses       11,958     10,253     21,157     22,550
                                ---------  ---------  ---------  ---------

Net Investment Income              16,925     11,960     29,243     35,462
                                ---------  ---------  ---------  ---------

Net realized (loss) gain on
 investments                      (51,229)        16    (51,229)     1,661
Net change in unrealized
 appreciation/depreciation on
 investments                       17,451     (5,452)    (1,245)   (16,601)
                                ---------  ---------  ---------  ---------

Net (Decrease) Increase in Net
 Assets Resulting from
 Operations                     $ (16,853) $   6,524  $ (23,231) $  20,522
                                ---------  ---------  ---------  ---------

Net (decrease) increase in net
 assets resulting from
 operations per share:          $   (0.29) $    0.22  $   (0.43) $    0.69
                                ---------  ---------  ---------  ---------
Dividends/distributions
 declared per share:            $    0.41  $    0.40  $    0.82  $    0.80
                                ---------  ---------  ---------  ---------





                 PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
                   ROLLFORWARD OF NET ASSET VALUE PER SHARE
          For the Three and Six Months Ended December 31, 2009 and 2008
                             (in actual dollars)
                                 (Unaudited)


                               For The Three Months   For The Six Months
                                       Ended                 Ended
                               --------------------- ---------------------
                                December   December   December   December
                                31, 2009   31, 2008   31, 2009   31, 2008
                               ---------- ---------- ---------- ----------
Per Share Data:
Net asset value at beginning
 of period                     $    11.11 $    14.63 $    12.40 $    14.55
Net investment income                0.29       0.40       0.54       1.20
Net realized (loss) gain            (0.89)        --      (0.95)      0.06
Net unrealized appreciation
 (depreciation)                      0.30      (0.18)     (0.02)     (0.56)
Net decrease in net assets
 as a result of public
 offerings and DRIP issuance        (0.01)        --      (0.79)        --
Net increase in net assets
 as a result of shares
 issued for Patriot
 acquisition                         0.08         --       0.14         --
Dividends declared and paid         (0.82)     (0.42)     (1.26)     (0.82)
                               ---------- ---------- ---------- ----------
Net asset value at end of
 period                        $    10.06 $    14.43 $    10.06 $    14.43
                               ---------- ---------- ---------- ----------

ABOUT PROSPECT CAPITAL CORPORATION

Prospect Capital Corporation (www.prospectstreet.com) is a closed-end investment company that lends to and invests in private and microcap public businesses. Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.

We have elected to be treated as a business development company under the Investment Company Act of 1940 ("1940 Act"). We are required to comply with a series of regulatory requirements under the 1940 Act as well as applicable NASDAQ, federal and state rules and regulations. We have elected to be treated as a regulated investment company under the Internal Revenue Code of 1986. Failure to comply with any of the laws and regulations that apply to us could have an adverse effect on us and our shareholders.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, whose safe harbor for forward-looking statements does not apply to business development companies. Any such statements, other than statements of historical fact, are highly likely to be affected by other unknowable future events and conditions, including elements of the future that are or are not under our control, and that we may or may not have considered; accordingly, such statements cannot be guarantees or assurances of any aspect of future performance. Actual developments and results are highly likely to vary materially from these estimates and projections of the future. Such statements speak only as of the time when made, and we undertake no obligation to update any such statement now or in the future.