SOURCE: Prospect Capital Corporation

Prospect Capital Corporation

November 09, 2011 16:05 ET

Prospect Capital Reports Operating Results of $0.37 per Share for Quarter Ended September 2011, an Increase of 32% From the Prior Sequential Quarter, Driving a $0.05 per Share Increase in Net Asset Value

NEW YORK, NY--(Marketwire - Nov 9, 2011) - Prospect Capital Corporation (NASDAQ: PSEC) ("Company" or "Prospect") today announced financial results for our first fiscal quarter ended September 30, 2011.

For the three months ended September 30, 2011, the increase in net assets resulting from operations was $39.9 million, or $0.37 per share. For the three months ended June 30, 2011, the increase in net assets resulting from operations was $27.0 million or $0.28 per share.

Our operating results increased 48.0%, and our operating results per share were up 32.1%, from the quarter ended June 30, 2011 to the quarter ended September 30, 2011. This increase is primarily due to investment income from new investments made during the June and September 2011 quarters, along with significant unrealized gains recognized in connection with several equity investments that have shown significant improvement in operating results.

Our net investment income ("NII") was $27.9 million and $21.0 million for the three months ended September 30, 2011 and September 30, 2010, respectively, or $0.26 per share and $0.28 per share, respectively. NII increased $6.9 million year over year due to a $20.1 million increase in investment income offset by a $13.2 million increase in operating expenses. Investment income was up primarily due to increases of $13.0 million and $5.4 million in interest income and dividend income, respectively, due to the larger size of our portfolio and an enhanced level of dividends received primarily from our investments in Gas Solutions Holdings, Inc. and NRG Manufacturing, Inc.

We are targeting growth in NII per share as we utilize prudent leverage to finance our growth through new originations, given our debt to equity ratio stood at less than 49% as of September 30, 2011. We estimate that our net investment income for the current second fiscal quarter ended December 31, 2011 will be $0.26 to $0.30 per share.

Our net asset value per share on September 30, 2011 stood at $10.41 per share, an increase of $0.05 per share from June 30, 2011. While market credit spreads widened during the September 2011 quarter, offering opportunities for enhanced profit from new originations, our portfolio continued to perform strongly, with no new loans on non-accrual and with increases in the value of our equity positions.

We recently declared our 40th, 41st, and 42nd consecutive cash distributions to shareholders, as follows:

  • 10.1375 cents per share for November 2011 to holders of record on November 30, 2011 with a payment date of December 22, 2011;
  • 10.1400 cents per share for December 2011 to holders of record on December 30, 2011 with a payment date of January 25, 2012; and
  • 10.1425 cents per share for January 2012 to holders of record on January 31, 2012 with a payment date of February 17, 2012.

HIGHLIGHTS

Equity Values:
Net assets as of September 30, 2011: $1.139 billion
Net asset value per share as of September 30, 2011: $10.41

First Fiscal Quarter Operating Results:
Net investment income: $27.88 million
Net investment income per share: $0.26
Net increase in net assets resulting from operations: $39.90 million
Net increase in net assets per share resulting from operations: $0.37
Dividends to shareholders per share: $0.303900

First Fiscal Quarter Portfolio and Portfolio Activity:
New portfolio investments in quarter: $222.58 million
Total Portfolio investments at cost at September 30, 2011: $1.599 billion
Total Portfolio investments at fair value at September 30, 2011: $1.652 billion
Number of portfolio companies at September 30, 2011: 76

PORTFOLIO AND INVESTMENT ACTIVITY

Our origination efforts during the three months ended September 30, 2011 have focused primarily on secured lending, continuing to prioritize first-lien loans, though we also continue to close selected junior debt and equity investments. 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 45 professionals, one of the largest dedicated middle-market credit groups in the industry and focused on the Company, 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 12.4% across all long-term debt and certain equity investments as of September 30, 2011. Non-recurring distributions from 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 September 30, 2011, our portfolio consisted of 76 long-term investments with a fair value of $1.652 billion, compared to 72 long-term investments with a fair value of $1.463 billion at June 30, 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 12.1% at September 30, 2011, from 13.6% at June 30, 2011 and 29.5% at June 30, 2010, reflecting a significant increase in our industry diversity as part of our strategy to control risk.

During the September 2011 quarter, we completed new and follow-on investments aggregating approximately $222.6 million and received repayment on one other investment. Our repayments in the September 2011 quarter were $46.1 million, resulting in $176.5 million of investments net of repayments.

  • On July 1, 2011, we made a senior secured follow-on investment of $2.3 million in Boxercraft Incorporated to support the acquisition of Jones & Mitchell, a supplier of college-licensed apparel.
  • On July 8, 2011, we made a secured senior lien investment of $39.0 million to support the recapitalization of Totes Isotoner Corporation.
  • On August 5, 2011 and September 7, 2011, we made senior secured follow-on investments of $3.9 million and $11.8 million, respectively, in ROM Acquisition Corporation to support the acquisition of Havis Lighting Solutions, a supplier of products used primarily by emergency response and police vehicles, and the acquisition of a leading manufacturer of personal safety products for the transportation and industrial markets.
  • On August 9, 2011, we provided a $15.0 million term loan to support the acquisition of Nobel Learning Communities, Inc., a leading national operator of private schools.
  • On August 9, 2011, we made an investment of $32.1 million to purchase 66% of the subordinated notes in Babson CLO Ltd. 2011-I.
  • On September 16, 2011, we acted as the facility agent and lead lender of a syndicate of lenders that collectively provided $132.0 million in senior secured financing to support the financing of Capstone Logistics, LLC., a leading logistics company. This company provides a broad array of logistics services to a diverse group of blue chip customers in the grocery, food service, retail, and specialty automotive industries. As of September 30, 2011 our investment is $90.5 million structured as $41.5 million of Term Loan A and $49.0 million of Term Loan B first lien notes.
  • On September 30, 2011, we provided a $23.0 million senior secured loan to support the recapitalization of Anchor Hocking, LLC, a leading designer, manufacturer, and marketer of high quality glass products for the retail, food service, and OEM channels.

Since September 30, 2011 in the current December 2011 quarter, we have completed three new investments and two add-on investments aggregating approximately $40 million.

  • On October 13, 2011 and October 19, 2011, we made investments of $9.3 million and $1.4 million, respectively, to purchase 32.9% of the subordinated notes in Apidos CLO VIII.
  • On October 24, 2011, we made a senior secured investment of $6.0 million in Renaissance Learning, Inc., a leading provider of technology based school improvement and student assessment programs.
  • On October 28, 2011, we made a follow-on investment of $8.2 million in Empire Today, LLC.
  • On November 4, 2011, we made a secured second-lien investment of $15.0 million to support the acquisition of a specialty pharmacy services company in a private equity backed transaction.

On October 31, 2011, one investment, IEC-Systems, LP and Advanced Rig Services, LLC, repaid our $20.9 million loan.

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. None of our new loans originated in the past four years has gone on non-accrual status. The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 3.0% on September 30, 2011, down from 3.5% on June 30, 2011. Approximately 2.2% of that 3.0% related to one investment that we anticipate, but cannot guarantee, exiting in the current quarter to reduce our non-accruals even further.

Because of the strong results of multiple controlled positions in our portfolio, we may look to selectively monetize certain such companies if we identify attractive opportunities for exit. If such exits were to occur, we would look to reinvest such proceeds into new income-producing opportunities. We are pleased with the performance of our controlled portfolio companies, and are actively exploring other new investment opportunities at attractive multiples of cash flow.

Our advanced investment pipeline aggregates nearly $250 million of potential opportunities. Primary investment activity has continued to be robust in calendar year 2011. These investments are primarily senior secured investments with double digit coupons, sometimes coupled with equity upside through additional investments, and diversified across multiple sectors.

LIQUIDITY AND FINANCIAL RESULTS

Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio stood at 49% at September 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 as well as potentially add additional secured or 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. With this enhanced asset liability matching, we have been more willing to add additional leverage to the balance sheet.

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 ("2015 Notes"). The 2015 Notes are convertible into shares of common stock at a September 30, 2011 conversion rate of 88.0984 shares of common stock per $1,000 principal amount of 2015 Notes, 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. The 2016 Notes are convertible into shares of common stock at a September 30, 2011 conversion rate of 78.3757 shares 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 ("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. Since the closing on June 11, 2010 we have been obtaining additional commitments to the facility and on September 1, 2011, we closed on the final $25 million upsizing in the Facility to reach our $400 million accordion target.

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 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 $14.9 million of net proceeds.

At September 30, 2011, we have deployed the proceeds from the Notes and equity issuances, and currently have borrowed $219.5 million under our Facility. Assuming sufficient assets are pledged to the Facility and we are in compliance with all terms, we would have $180 million of new investment capacity based on a $400 million Facility size, and $280 million of new investment capacity based on a $500 million Facility size. Any principal payments or other monetizations of our assets would further increase our investment capacity.

CONFERENCE CALL

The Company will host a conference call on Thursday, November 10, 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 10006502.


PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2011 and June 30, 2011
(in thousands, except share and per share data)
September 30,
2011
June 30,
2011
Assets (Unaudited) (Audited)
Investments at fair value:
Control investments (net cost of $259,272 and $262,301, respectively) $ 329,536 $ 310,072
Affiliate investments (net cost of $59,321 and $56,833, respectively) 72,410 72,337
Non-control/Non-affiliate investments (net cost of $1,279,983 and $1,116,600, respectively) 1,250,535 1,080,601
Total investments at fair value (net cost of $1,598,576 and $1,435,734, respectively) 1,652,481 1,463,010
Investments in money market funds 48,218 59,903
Cash 1,975 1,492
Receivables for:
Interest, net 10,099 9,269
Other 38 267
Prepaid expenses 118 101
Deferred financing costs 14,618 15,275
Total Assets 1,727,547 1,549,317
Liabilities
Credit facility payable 233,500 84,200
Senior convertible notes 322,500 322,500
Dividends payable 11,087 10,895
Due to Prospect Administration 228 212
Due to Prospect Capital Management 12,109 7,706
Accrued expenses 6,853 5,876
Other liabilities 2,494 3,571
Total Liabilities 588,771 434,960
Net Assets $ 1,138,776 $ 1,114,357
Components of Net Assets
Common stock, par value $0.001 per share (200,000,000 and 100,000,000 common shares authorized, respectively; 109,417,083 and 107,606,690 issued and outstanding, respectively) $ 109 $ 108
Paid-in capital in excess of par 1,214,480 1,196,741
Distributions in excess of net investment income (26,982 ) (21,638 )
Accumulated realized losses on investments (102,737 ) (88,130 )
Unrealized appreciation on investments 53,906 27,276
Net Assets $ 1,138,776 $ 1,114,357
Net Asset Value Per Share $ 10.41 $ 10.36
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended September 30, 2011 and 2010
(in thousands, except share and per share data)
(Unaudited)
For Three Months Ended September 30,
2011 2010
Investment Income
Interest income:
Control investments $ 6,165 $ 5,189
Affiliate investments 2,402 2,950
Non-control/Non-affiliate investments 33,320 20,782
Total interest income 41,887 28,921
Dividend income:
Control investments 6,700 1,750
Non-control/Non-affiliate investments 849 440
Money market funds 1 4
Total dividend income 7,550 2,194
Other income:
Control/affiliate investments 6 1,771
Affiliate investments 61 147
Non-control/Non-affiliate investments 5,838 2,179
Total other income 5,905 4,097
Total Investment Income 55,342 35,212
Operating Expenses
Investment advisory fees:
Base management fee 8,211 4,276
Income incentive fee 6,969 5,249
Total investment advisory fees 15,180 9,525
Interest and credit facility expenses 8,960 2,261
Legal fees 432 310
Valuation services 302 217
Audit, compliance and tax related fees 340 216
Allocation of overhead from Prospect Administration 1,116 800
Insurance expense 79 71
Directors' fees 64 64
Other general and administrative expenses 992 753
Total Operating Expenses 27,465 14,217
Net Investment Income 27,877 20,995
Net realized (loss) gain on investments (14,607 ) 527
Net change in unrealized appreciation on investments 26,630 4,058
Net Increase in Net Assets Resulting from Operations $ 39,900 $ 25,580
Net increase in net assets resulting from operations per share $ 0.37 $ 0.34
Dividends declared per share $ 0.30 $ 0.30
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
ROLLFORWARD OF NET ASSET VALUE PER SHARE
For the Three Months Ended September 30, 2011 and 2010
(in actual dollars)
(Unaudited)
For The Three Months Ended
September 30,
2011 2010
Per Share Data:
Net asset value at beginning of period $ 10.36 $ 10.30
Net investment income 0.26 0.28
Net realized (loss) gain (0.13 ) 0.01
Net unrealized appreciation (depreciation ) 0.24 0.05
Net decrease in net assets as a result of public offerings (0.02 ) (0.09 )
Dividends declared and paid (0.30 ) (0.31 )
Net asset value at end of period $ 10.41 $ 10.24

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.