SOURCE: Prospect Capital Corporation

Prospect Capital Corporation

August 29, 2011 16:07 ET

Prospect Capital Announces 40.2% Year-Over-Year Increase in Net Investment Income for Fiscal Year Ended June 30, 2011, Plus a $0.06 per Share Annual Increase in Net Asset Value

NEW YORK, NY--(Marketwire - Aug 29, 2011) - Prospect Capital Corporation (NASDAQ: PSEC) ("Company" or "Prospect") today announced financial results for our fourth fiscal quarter and fiscal year ended June 30, 2011.

For the year ended June 30, 2011, our net investment income was $94.2 million, an increase of 40.2% from the prior year on a dollars basis. On a weighted average share basis, net investment income declined from $1.13 for the year ended June 30, 2010 to $1.10 for the year ended June 30, 2011.

Our net asset value per share on June 30, 2011 stood at $10.36 per share, an increase of $0.06 per share from June 30, 2010, and an increase of $0.03 per share from March 31, 2011.

For the quarter ended June 30, 2011, our net investment income was $30.2 million or $0.31 per weighted average number of shares for the quarter. Two loans acquired with the prior acquisition of Patriot Capital Funding, Inc. repaid during the quarter, generating $10.75 million of accelerated accretion. Offsetting this additional income was the income impact relating to placing H&M on non-accrual status, which we hope to reverse in the future with a potential sale of our position. We estimate that our net investment income for the current first fiscal quarter ended September 30, 2011 will be $0.25 to $0.30 per share.

We have previously announced upcoming cash distributions, our 37th, 38th, and 39th consecutive cash distributions to shareholders, as follows:

10.1300 cents per share for August 2011 (record date of August 31, 2011 and payment date of September 23, 2011); and

10.1325 cents per share for September 2011 (record date of September 30, 2011 and payment date of October 25, 2011); and

10.1350 cents per share for October 2011 (record date of October 31, 2011 and payment date of November 22, 2011).

HIGHLIGHTS

Equity Values:
Net assets as of June 30, 2011: $1.114 billion
Net asset value per share as of June 30, 2011: $10.36

Fiscal Year Operating Results:
Net investment income: $94.22 million
Net investment income per share: $1.10
Dividends to shareholders per share: $1.211125

Fourth Fiscal Quarter Operating Results:
Net investment income: $30.19 million
Net investment income per share: $0.31
Dividends to shareholders per share: $0.303675

Fourth Fiscal Quarter Portfolio and Portfolio Activity:
Portfolio investments in quarter: $312.30 million
Total Portfolio investments at cost at June 30, 2011: $1.436 billion
Number of portfolio companies at June 30, 2011: 72

PORTFOLIO AND INVESTMENT ACTIVITY

Our origination efforts during the fiscal year ended June 30, 2011 have focused primarily on secured lending, including a higher percentage of first-lien loans than in previous years, though we also continue to close selected junior debt and equity investments. Our investment portfolio consisted of 54.5% first-lien loans and 85.2% total secured loans at June 30, 2011, up from 39.1% first-lien loans and 81.0% total secured loans at June 30, 2010.

In addition to targeting investments senior in corporate capital structures with our new originations, we have also increased our new investments in third party private equity sponsor owned companies, which tend to have more third party equity capital supporting our debt investments than in non-sponsor transactions, while still maintaining flexibility to pursue attractive non-sponsor lending, one-stop buyouts, and secondary acquisitions. With our scale team of more than 40 professionals, one of the largest dedicated middle-market credit groups in the industry and focused on Prospect Capital Corporation, we are well positioned to select in a disciplined manner a small number of investments out of thousands of investment opportunities sourced per annum.

As a result of these credit risk management initiatives, our portfolio's annualized current yield stood at 12.8% across all long-term debt and certain equity investments as of June 30, 2011. Non-recurring distributions of other equity positions that we hold are not included in this yield calculation. In many of our portfolio companies, we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns.

At June 30, 2011, our portfolio consisted of 72 long-term investments with a fair value of $1.463 billion, compared to 64 long-term investments with a fair value of $1.214 billion at March 31, 2011, and compared to 58 long-term investments with a fair value of $748.5 million at June 30, 2010.

Our asset base has continued to grow and diversify over the past year. Our cyclical energy-related industry mix of gas gathering and processing, oil and gas production, and oilfield fabrication businesses declined, as a percentage of the investment portfolio, to 13.1% at June 30, 2011 from 27.0% at June 30, 2010, reflecting a significant increase in our industry diversity as part of our strategy to control risk.

In the June 2011 fiscal year, we completed new and follow-on investments aggregating $953.3 million, a significant increase from $364.8 million in the June 2010 fiscal year. Our repayments in the June 2011 fiscal year were $269.4 million, compared to $136.2 million in the June 2010 fiscal year. As a result, our investments net of repayments were $683.9 million in the June 2011 fiscal year, compared to $228.6 million in the June 2010 fiscal year.

During the June 2011 quarter, we completed new and follow-on investments aggregating approximately $312.3 million, sold one investment, and received repayment on three other investments. Our repayments in the June 2011 quarter were $62.4 million, resulting in $249.9 million of investments net of repayments.

  • On April 18, 2011, we made a $13.0 million secured debt investment to support the acquisition of Meatco, a leading food distributor, by Annex Capital.

  • On April 18, 2011, Unitek repaid our $11.5 million loan.

  • On April 26, 2011, we made a senior secured follow-on investment of $11.0 million in ICON Health & Fitness.

  • On May 2, 2011, we sold our membership interests in Fischbein, realizing a gain of $9.9 million on the sale, and Fischbein repaid our loan. We subsequently made a $3.3 million secured loan and invested $0.9 million in the common equity of Fischbein with the new ownership group.

  • On May 3, 2011, we made a secured debt investment of $25.0 million to support the acquisition of J.D. Byrider, a leading used car sales and finance business, by Altamont Capital.

  • On May 6, 2011, we made a $34.5 million investment in re:fuel, an advertising media buying business, of which $31.8 million was funded at closing. $24.3 million is structured as senior secured debt, $2.8 million as subordinated debt, and $4.4 million as controlling equity.

  • On May 6, 2011, we provided $15.0 million in secured acquisition financing for Mood Media, a company in the in-store media industry.

  • On May 6, 2011, we provided $15.0 million in secured financing for the recapitalization of Potters, a leading company in the engineered glass materials industry.

  • On May 25, 2011, we provided $24.0 million in secured first-lien financing to Targus, the leading global supplier of notebook carrying cases and accessories.

  • On May 31, 2011, we provided $35.0 million in secured financing to Springs Window Fashions, a leading designer and manufacturer of high-quality window treatments.

  • On May 31, 2011, Label Corp repaid our $5.8 million loan.

  • On June 3, 2011, Prince Mineral repaid our $23.5 million loan, and we recognized $10.5 million of accelerated purchase discount accretion.

  • On June 16, 2011, we made a senior secured debt investment of $26.5 million to support the acquisition of ST Products, a leading North American producer of precision-redrawn, small-diameter, thin-wall-copper, and specialty-alloy tubes.

  • On June 21, 2011, we provided $25.0 million in secured financing for the recapitalization of U.S. HealthWorks, a leading company in the occupational medical services industry.

  • On June 30, 2011, we made a senior secured first-lien debt investment of $82.5 million in CRT, a market-leading specialty media buying business, of which $75.0 million was funded at closing.

  • On June 30, 2011, we provided $5.0 million in secured financing for the acquisition of Pre-Paid Legal, a top company in the professional services subscription market.

Since June 30, 2011 in the current September 2011 quarter, we have completed three new investments and two add-on investments aggregating more than $92 million.

  • On July 1, 2011, we made a senior secured follow-on investment of $2.5 million in Boxercraft to support the acquisition of Jones & Mitchell, a supplier of college-licensed apparel.

  • On July 8, 2011, we made a secured investment of $39.0 million to support the recapitalization of Totes Isotoner.

  • On August 5, 2011, we made a senior secured follow-on investment of $3.9 million in ROM to support the acquisition of Havis Lighting Solutions, a supplier of products primarily used by emergency response and police vehicles.

  • On August 9, 2011, we provided a $15.0 million term loan to support the acquisition of Nobel Learning, a leading national operator of private schools.

  • On August 9, 2011, we made an investment of $32.1 million to purchase 66.2% of the subordinated notes in Babson CLO Ltd. 2011-I.

Our advanced investment pipeline aggregates nearly $300 million of potential opportunities. Primary investment activity in the marketplace increased during the second half of calendar year 2010 and has continued to be robust in calendar year 2011. These investments are primarily secured investments with double digit coupons, sometimes coupled with equity upside through additional investments, and diversified across multiple sectors.

We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits.

LIQUIDITY AND FINANCIAL RESULTS

Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio stood at 36% at June 30, 2011. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility and add additional secured and unsecured term facilities, made more attractive by our investment-grade ratings at corporate, revolving facility, and term debt levels.

In addition, our repeat issuance in the past year in the five-year and greater unsecured term debt market has extended our liability duration, thereby better matching our assets and liabilities for balance sheet risk management.

We also have significantly diversified our counterparty risk. We currently have 11 institutional lenders in our revolving facility, up from five lenders at June 30, 2010, two lenders at June 30, 2009, and one lender at June 30, 2008.

On December 21, 2010, we issued $150 million of five-year unsecured 6.25% senior convertible notes due December 2015 (the "2015 Notes"). The 2015 Notes are convertible into shares of common stock at an initial and June 30, 2011 conversion rate of 88.0902 and 88.0932 shares of common stock per $1,000 principal amount of the 2015 Notes, respectively, which is equivalent to a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2015 Notes is increased when monthly cash dividends paid to common shares exceed the rate of $0.101125 cents per share, subject to adjustment.

On February 18, 2011, we issued $172.5 million in aggregate principal amount of 5.5-year unsecured 5.50% senior convertible notes due August 2016 ("2016 Notes") for net proceeds of approximately $167.3 million. Interest on the 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at June 30, 2011 of 78.3699 and 78.3717 shares, respectively, of common stock per $1,000 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances. The conversion rate for the 2016 Notes will be increased when monthly cash dividends paid to common shares exceed the rate of $0.101150 per share.

The 2015 and 2016 Notes are general unsecured obligations of Prospect, with no financial covenants, no technical cross default provisions, and no payment cross default provisions with respect to our revolving credit facility.

The 2015 and 2016 Notes have no restrictions related to the type and security of assets in which Prospect might invest. The issuance of these notes has allowed us to grow our investment program in calendar year 2011 and commit to loans with maturities longer than our existing revolving credit facility maturity. These 2015 and 2016 Notes have an investment-grade S&P rating of BBB.

On June 11, 2010, we held a first closing of an extension and expansion of our revolving credit facility (the "Facility") with a syndicate of lenders who extended commitments of $210 million under the Facility. The Facility includes an accordion feature, which, with the amendment completed on January 13, 2011, allows commitments to increase to up to $400 million without the need for re-approval from the existing lenders. The amendment signed in January also allows for larger loans to be pledged to the facility and provides a mechanism for pledging loans on an expedited basis.

Since June 30, 2010, we have closed on an additional $165 million in commitments with two existing and four additional new lenders, raising the total commitments under the Facility to $375 million. We are currently scheduling a $25 million upsizing in the Facility to reach our $400 million accordion target with existing lenders, and we expect to complete such upsizing in the near future. While we are optimistic about this planned Facility size increase, we cannot guarantee such increase.

As we make additional investments, we generate additional availability to the extent such investments are eligible to be placed into the borrowing base. The revolving period of the Facility extends through June 2012, with an additional one year amortization period, with distributions allowed, after the completion of the revolving period. Interest on borrowings under the Facility is one-month Libor plus 325 basis points, subject to a minimum Libor floor of 100 basis points. The unused portion of the Facility has a fee equal to either 75 basis points (if at least half of the Facility is used) or 100 basis points (if less than half of the Facility is used). The Facility has an investment grade Moody's rating of A2.

We are currently in discussions with our Facility agent regarding an extension of the Facility to a five-year term, comprised of three years for the revolving period followed by two years for the amortization period, with distributions allowed. We anticipate, but cannot guarantee, an increase of the Facility size to at least $500 million with new and existing lenders, a reduction in our spread on borrowings, an increase in our advance rate, and an improvement in covenants.

On April 7, 2011, we completed a public stock offering for 9.0 million shares of our common stock at an average net price of $11.40 per share, raising $102.1 million of net proceeds.

On June 24, 2011, we completed a public stock offering for 10 million shares of our common stock at $10.15 per share, raising $100.2 million of net proceeds. On July 18, 2011, the underwriter exercised its option to purchase an additional 1.5 million shares of our common stock, raising an additional $15.1 million of net proceeds.

With the issuance of the 2015 and 2016 Notes in December and February, we repaid the revolving balance on the Facility in full. We have deployed all of the proceeds from the Notes and equity issuances, and we currently have borrowed $125.0 million under our Facility. Assuming sufficient assets are pledged to the Facility and we are in compliance with all terms, we would have $250 million of new investment capacity based on a $375 million Facility size, $275 million of new investment capacity based on a $400 million Facility size, and $375 million of new investment capacity based on a $500 million Facility size.

CONFERENCE CALL

The Company will host a conference call on Tuesday, August 30, 2011, at 11:00 a.m. Eastern Time. The conference call dial-in number will be 877-317-6789. A recording of the conference call will be available for approximately 30 days. To hear a replay, call 877-344-7529 and use passcode 10003484.

PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
June 30, 2011 and 2010
(in thousands, except share and per share data)
June 30,
2011
(audited)
June 30,
2010
(audited)
Assets
Investments at fair value:
Control investments (net cost of $262,301 and $185,720, respectively) $ 310,072 $ 195,958
Affiliate investments (net cost of $56,833 and $65,082, respectively) 72,337 73,740
Non-control/Non-affiliate investments (net cost of $1,116,601 and $477,957, respectively) 1,080,601 478,785
Total investments at fair value (net cost of $1,435,734 and $728,759, respectively) 1,463,010 748,483
Investments in money market funds 59,903 68,871
Cash 1,492 1,081
Receivables for:
Interest, net 9,269 5,356
Dividends -- 1
Other 267 419
Prepaid expenses 101 371
Deferred financing costs 15,275 7,579
Other assets -- 534
Total Assets 1,549,317 832,695
Liabilities
Credit facility payable 84,200 100,300
Senior convertible notes 322,500 --
Dividends payable 10,895 6,909
Due to Prospect Administration 212 294
Due to Prospect Capital Management 7,706 9,006
Accrued expenses 5,876 4,057
Other liabilities 3,571 705
Total Liabilities 434,960 121,271
Net Assets $ 1,114,357 $ 711,424
Components of Net Assets
Common stock, par value $0.001 per share (200,000,000 and 100,000,000 common shares authorized, respectively; 107,606,690 and 69,086,862 issued and outstanding, respectively) $ 108 $ 69
Paid-in capital in excess of par 1,196,741 805,918
Distributions in excess of net investment income (21,638 ) (9,692 )
Accumulated realized losses on investments (88,130 ) (104,595 )
Unrealized appreciation on investments 27,276 19,724
Net Assets $ 1,114,357 $ 711,424
Net Asset Value Per Share $ 10.36 $ 10.30
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and the Year Ended June 30, 2011 and 2010
(in thousands, except share and per share data)
For the Three Months Ended For the Year Ended
June 30,
2011
(unaudited)
June 30,
2010
(unaudited)
June 30,
2011
(audited)
June 30,
2010
(audited)
Investment Income
Interest income:
Control investments $ 5,949 $ 3,081 $ 21,747 $ 17,218
Affiliate investments 1,784 2,838 11,307 7,957
Non-control/Non-affiliate investments 35,934 19,278 101,400 61,343
Total interest income 43,667 25,197 134,454 86,518
Dividend income
Control investments 6,759 2,200 13,569 14,860
Non-control/Non-affiliate investments -- 474 1,507 474
Money market funds 5 3 16 32
Total dividend income 6,764 2,677 15,092 15,366
Other income:
Control investments 1,042 18 2,829 261
Affiliate investments 14 96 190 169
Non-control/Non-affiliate investments 4,904 1,248 16,911 3,613
Gain on Patriot acquisition -- -- -- 8,632
Total other income 5,960 1,362 19,930 12,675
Total Investment Income 56,391 29,236 169,476 114,559
Operating Expenses
Investment advisory fees:
Base management fee 7,273 3,968 22,496 13,929
Income incentive fee 7,547 4,158 23,555 16,798
Total investment advisory fees 14,820 8,126 46,051 30,727
Interest and credit facility expenses 7,416 2,902 17,598 8,382
Legal fees 299 166 1,062 702
Valuation services 281 230 992 734
Audit, compliance and tax related fees 227 299 876 981
Allocation of overhead from Prospect Administration 1,670 841 4,979 3,361
Insurance expense 68 64 285 254
Directors' fees 64 63 255 255
Potential merger expenses -- (73 ) -- 852
Other general and administrative expenses 1,356 (22 ) 3,157 1,121
Total Operating Expenses 26,201 12,596 75,255 47,369
Net Investment Income 30,190 16,640 94,221 67,190
Net realized (loss) gain on investments 9,371 (314 ) 16,465 (51,545 )
Net change in unrealized appreciation (depreciation) on investments (12,602 ) (1,743 ) 7,552 3,980
Net Increase in Net Assets Resulting from Operations $ 26,959 $ 14,583 $ 118,238 $ 19,625
Net increase in net assets resulting from operations per share: $ 0.28 $ 0.22 $ 1.38 $ 0.33
Weighted average shares of common stock outstanding: 97,620,618 66,900,043 85,978,757 59,429,222
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
ROLLFORWARD OF NET ASSET VALUE PER SHARE
For the Three Months and the Year Ended June 30, 2011 and 2010
(in actual dollars)
For the Three Months Ended For the Year Ended
June 30, 2011
(unaudited)
June 30, 2010
(unaudited)
June 30, 2011
(audited)
June 30, 2010
(audited)
Per Share Data:
Net asset value at beginning of period $ 10.33 $ 10.12 $ 10.30 $ 12.40
Net investment income 0.31 0.25 1.10 1.13
Net realized gain (loss) -- -- 0.19 (0.87 )
Net unrealized (depreciation) appreciation (0.03 ) (0.03 ) 0.09 0.07
Net increase (decrease) in net assets as a result
of public offerings
0.08 0.06 (0.08 ) (0.85 )
Net increase in net assets as a result of shares issued for Patriot acquisition -- -- -- 0.12
Dividends recognized (0.33 ) (0.10 ) (1.24 ) (1.70 )
Net asset value at end of period $ 10.36 $ 10.30 $ 10.36 $ 10.30

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.