Prospect Capital Corp (PSEC) 2011 Q3 法說會逐字稿

Good morning and welcome to the Prospect Capital third fiscal quarter conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

Thank you, Andrew. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer, and Brian Oswald, our Chief Financial Officer. Brian?

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 materially from those forecast due to the impact of many factors.

We do not undertake to update our forward-looking statements unless required by law. For additional disclosure see our earnings press release and our 10-Q filed previously. Now I'll turn the call back over to John.

For the three months ended March -- thank you, Brian. For the three months ended March 31 our increase in net assets resulting from operations was $33.8 million or $0.38 per share. For the nine months ended March 2011 the increase in net assets resulting from operations was $91.3 million or $1.11 per share. For the three months ended December 2010 the increase in net assets resulting from operations was $31.9 million or $0.38 per share.

Our operating results increased 5.7% and our operating results per share were unchanged from the December to the March quarter. This increase is primarily due to investment income from new and follow-on investments of $359.2 million which were closed in the March quarter, a quarter with our highest level of originations since our inception.

Our net investment income was $24 million or $0.27 per share for the March 2011 quarter and $19 million or $0.30 per share for the March 2010 quarter. Our net investment income was $64 million or $0.78 per share for the nine months ended March 31, 2011 and $50.6 million or $0.89 per share for the nine months ended March 31, 2010.

The primary source of the higher net investment income per share in fiscal 2010 compared to fiscal year 2011 is the non-recurrence of the gain recognized in fiscal year 2010 in connection with the acquisition of Patriot Capital.

Also affecting NII per share is a decrease in the accelerated accretion of original purchase discounts from $6.9 million recognized in the March 2010 quarter to $3.4 million recognized during the March 2011 quarter. Accelerated accretion of original purchase discounts decreased from $11.5 million recognized during the nine months ended March 2010 to $6.1 million recognized during the nine months ended March 2011.

If these two sources of adjustment to NII per share were removed and adjustments made for the related effects on advisory fees, NII per share would have been $0.24 per share in the March 2011 quarter and $0.21 per share in the March 2010 quarter, and $0.72 per share for the nine months ended March 2011 versus $0.61 per share for the nine months ended March 2010.

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 42% as of March 31 and 34% today. We estimate that our (technical difficulty) value per share on March 31 stood at $10.33 per share, an increase of $0.08 per share from December 31.

On Monday we declared our 34th, 35th, 36th and 37th consecutive cash distributions to shareholders. We expect to announce the next two distributions in August. Thank you. I'll now turn the call over to Grier.

Thanks, John. For the nine months ended March 31 we originated $641 million of new investments. As we reported last quarter and continuing this quarter, our origination efforts recently have focused primarily on secured lending, including a higher percentage of first lien loans than in recent prior fiscal quarters. Though we also continue to close selected junior debt and equity investments.

In addition to targeting investments, senior and corporate capital structures with our new originations we've 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-sponsored transactions. As a result of these credit risk management initiatives our portfolio's annualized current yield stood 12.9% across all long-term debt and certain equity investments as of March 31.

Nonrecurring distributions of other equity positions that we hold is not included in this yield calculation. In many of our portfolio companies we hold equity positions ranging from minority interest to majority stakes, which we expect over time to contribute to our investment returns.

At March 31 our portfolio consisted of 64 long-term investments with a fair value of (technical difficulty) acquisition of Endeavor House by Pinnacle.

Also on January 10 we sold our remaining shares of Miller Petroleum common stock. As a result we generated an additional gain of $2.6 million bringing our total realized gain to $8 million for this investment.

On January 21 we provided senior secured credit facilities of $28.2 million to support the acquisition of Stauber Performance Ingredients by ICV Partners. Through March 31 we funded $25.7 million of this commitment.

On January 24, Maverick Healthcare repaid our $13.1 million loan in full.

On January 31 we made a senior secured debt investment of $7.5 million to support the recapitalization of Empire Today, a leading independent provider in the residential replacement flooring industry.

On February 3 we made a senior secured debt investment of $22 million to support the recapitalization of a pharmacy services company by a leading private equity firm. Through March 31 we have funded $20.5 million of the commitment.

On February 4 we made a secured second lien debt investment of $45 million to support the refinancing of Clearwater Seafoods, a leading premium seafood company based in Nova Scotia Canada.

On February 9 we made a senior secured debt investment of $22.5 million to support the recapitalization of Copernicus and to repay our prior loan in full.

On March 2 we made a senior secured first lien debt investment of $12.5 million to support the acquisition of Out Rage, a market leader in the bow hunting equipment industry.

On March 4 we made a $27 million secured second lien term loan to support the recapitalization of Arrowhead and to repay our prior loan in full.

On March 11 EXL repaid our $23 million loan in full and we sold our remaining shares of EXL common stock.

On March 18 we closed a $60 million first lien senior secured facility for Safe-Guard, the leading third-party administrator of ancillary finance and insurance products for new, used and leased motor vehicles.

On March 31 we funded a $53 million first lien senior secured credit facility, funded $1.4 million of a $5 million commitment on a revolving line of credit and invested $1.5 million in common equity to support the acquisition of Cargo Airport Services by ICV Partners.

We also provided on March 31 a net $32.8 million in first lien senior secured financing for the recapitalization of Progrexion, an existing portfolio company focused on the consumer credit information sector.

Also on March 31, KTPS repaid our prior $8.4 million loan. A portion of the loan receivable was repaid at a discount for which we realized a loss of $0.5 million.

Since March 31 we have closed on seven additional investments aggregating more than $115 million and received repayment on one investment.

On April 18 we made a $13 million secured debt investment to support the acquisition of a leading food distributor by Annex Capital.

On April 26 we made a senior secured follow-on investment of $11 million in ICON's Health & Fitness.

On May 2 we sold our membership interest in Fischbein for $13.3 million of gross proceeds, $1.5 million of which is deferred revenue held in escrow realizing a gain of $9.9 million and received a full repayment on the loan that was outstanding.

We subsequently made a $3.3 million senior secured second lien term loan and invested $0.9 million in the common equity of Fischbein with the new ownership. Compared to our original cost on the Patriot acquisition, Fischbein has delivered for us a cash-on-cash return of approximately 3.3 times and an internal rate of returned of approximately 150%.

On May 3 we made a debt investment of $25 million to support the acquisition of J.D. Byrider, a being used car sales and finance business by Altamont Capital.

On May 6 we made three additional investments, the first was a $32 million investment in an advertising media buying business with $24 million structured as senior secured debt, $3 million of subordinated debt, and $4 million as controlling equity.

In a second investment we provided $15 million in senior secured second lien acquisition financing for a top company in the in-store media industry. And in the third investment we provided $15 million in secured second lien financing for the recapitalization of a leading company in the engineered glass materials industry.

Our investment pipeline continues to aggregate more than $1 billion of potential opportunity. 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 stability of the 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. Thank you. I'll now turn the call over to Brian.

Thanks, Greer. As we reported last quarter on December 21, 2010 we issued $150 million in aggregate principal amount of five-year unsecured 6.25% senior convertible notes due in December of 2015 which we refer to as the 2010 notes.

On February 18, 2011 we followed up on the success of that issuance with a $172.5 million in aggregate principal amount of five and a half year unsecured 5.5% senior convertible notes. The net proceeds from this issue was approximately $167.3 million. Interest on the 2011 the 2011 note is paid semiannually in arrears on February 15 and August 15 at a rate of 5.5% per year commencing August 15, 2011.

The 2011 notes mature on August 15, 2016 unless converted earlier. The 2011 notes are convertible into shares of common stock at an initial conversion rate and the conversion rate at March 31 of approximately 78.37 shares of common stock per $1000 of principal amount, which is equivalent to a conversion price of approximately $12.76 per share of common stock.

The conversion rate for the 2011 notes will be increased when monthly cash dividends paid through common shares exceed the rate of $0.10115 per share. The 2010 and 2011 notes are general unsecured obligations of prospect with no financial covenants, no technical cross default provisions, no payment cross default provisions with respect to our revolving credit facility.

The 2010 and 2011 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 2010 and 2011 notes have an investment-grade S&P rating of BBB.

On June 11 of 2010 we held the first closing of our -- of an extension expansion of our revolving credit 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 June 30 we have closed an additional $115 million of commitments with existing and new lenders raising the total commitments under this facility to $325 million. We seek to add additional lenders to the facility in order to reach the maximum size. While we are optimistic about these planned facility size increases we can I guarantee them. The amendment signed in January also allows for larger loans to be placed in the facility and provides a mechanism for pledging loans on an expedited basis.

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 for the facility extends through June 2012 with an additional one-year amortization period during which distributions are allowed after the completion of the revolving period.

Interest on borrowings under the facility is one-month LIBOR plus 325 basis point subject to a minimum LIBOR floor of 100 basis points, representing a significant decrease in the financing cost for us compared to our prior facility. 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.

On April 7, 2011 we completed a public stock offering for 9 million shares of our common stock at a net price of $11.40 per share raising $102.6 million of net proceeds. With the issuance of the 2010 and 2011 notes in December and February and the common stock issuance in April we repaid the revolving facility balance in full. As of today we have deployed all of the proceeds from the notes and equity issuances and we today have borrowed $22.9 million under the facility.

Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio currently stands at approximately 34%. 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 facility and notes level. Now I'll turn the call back over to John.

Thanks, Brian. We can now answer any questions. Let's hope we don't get the usual softballs, right, Grier?

(Operator Instructions). Joel Houck, Wells Fargo.

Thanks and good morning, guys. The first question has to do with the increased level of origination activity in the quarter. And also I guess related to your pipeline, you say you're seeing double-digit yield on senior paper. That seems to be -- that doesn't seem, it is at odds with what we heard out of most of the BDCs this quarter in that the pricing in the market is around 7.5, 8.25 for senior paper. Given the size of your company, can you kind of talk about that incongruity?

Joel, to answer question about yields, what we're seeing in terms of first lien unit tranche type structures is some of the range of returns in the 10% to 11%, 10% to 11.5% range. Second lien is a couple hundred basis points to several hundred basis points higher than that.

And we did increase our first lien mix in the last quarter, we like sitting at that part of the capital structure, being first in line so to speak if there's ever an issue. And all other things being equal, like to be as high up in the capital structure as possible. We do anticipate going forward to be doing a blend of both first lien and second lien and junior debt solutions.

Okay, good color. And next question is, on the first convert you guys issued it's in the money. Is there anything to stop the large bond owner from converting? I mean why wouldn't they take the dividend yield as opposed to the coupon interest?

That's certainly an option held by the convert holder and they would have to make that determination.

Okay. And a couple more housekeeping. How much of the OID is left from PCap acquisition?

$20.7 million.

$20.7 million, okay. And then have you guys stopped your aftermarket program or is there any likely that that might be turned back on? We didn't notice an increase in the share count this quarter.

We stopped the program in December.

Okay, is there any thoughts on that going forward?

Well, our philosophy is one as having diversified access to capital to secured financing, to unsecured term debt, to equity capital. And we want to be judicious and prudent about further equity issuance. Our immediate priority is to utilize our secured financing, it's our lowest cost financing. We just recently gave our revolver an increase to $325 million.

Our intention is to continue growing our secured revolver. We have an accordion feature option at our option to take that up to $400 million and we'd like to do so. We now have 10 banks in our facility which we're very pleased with to have that diversity up from one lender about three years ago.

We think that sets us up very well for the future both to help finance our growth as well as for business diversity reasons. And that gives us -- given about the $20-ish-or-so-million we've drawn about $300 million of running room on the revolver before you get to another $75 million of potential increases.

Okay. And then last thing I have is on the capital structuring fees in the other income line. Can you talk about what drove that in your revenue recognition policy on capital structuring fees?

Sure. When we act as active structure in a transaction, typically meaning we are the facility agent, putting terms on the table, actively negotiating the capital structure in many cases which can include ranging and negotiating a structure that can include a third-party component such as a third-party revolving credit facility (technical difficulty) deals bringing in our own deals as the vast majority of what we do as opposed to just quote-unquote buying paper from the Street. We do tend to generate higher returns through structuring fees.

All right, thanks a lot, guys.

Thank you.

Troy Ward, Stifel Nicolaus.

Great, thank you and good morning. A follow-up on Joel's question about what you're seeing in the market. Can you also comment on the size of the platform? Clearly with the amount of originations that you did this quarter, it really dwarfs most of the years before last year. Can you talk about how your platform has grown and how you're capable of doing $350 million in a quarter?

Thank you, Troy. Our business and our team has grown significantly over the last several years and including the last year. We now have in excess of 40 professionals on our team, approaching 50. That puts us as one of the largest middle-market finance groups in the industry in terms of staffing and professionals. And it means that we can parallel process many different deal activities on the origination front as well as take care of the existing book.

We want to see as many deals on the front end as possible and that's because this is a disciplined low hit rate business. We put a lot of deals on the books in the past quarter, but our book to look ratio remains to be disciplined and extremely low in the range of low-single-digit of close rate. And we continue to hire more talented people; we've done so more recently as well.

The larger staffing also gives us the ability to cover a landscape which is more diversified and broader than many of our peers. The vast bulk of our peers solely do sponsored financing, which is a good business, we do a lot of business there as well. But we also do business in the non-sponsor channel and the one-stop control arena. And that gives us a broader purview of deals that can be applicable to us for a yield plus total return investment objective.

Great, Grier. And actually that kind of leads into my second question about sourcing. What -- first of all, how much of the non-sponsored did you do in this quarter? And where are you able to source that where some of the peers maybe aren't able to see it? Because we also hear that quite honestly across the BDC sector everyone talks about, they get to see a high percentage of the deals that are out there. How are you able to source these deals that others aren't?

Well, I think in part it's proactive focus, in part it's desire. Non-sponsored deals require a lot more work because you're the primary institution on the front lines to be doing the quality of earning scrub down, to be doing background checks on management and we have a proactive outreach effort to about 2,000 intermediaries as a source of deals in the non-sponsored channel.

We also have a portfolio that's approaching 70 companies now, a number of which we control, and we have management teams that source deals for us, lawyers, accounting firms, other types of intermediaries. The sponsor segment is a repeat business we call on about 800 companies by comparison. We have a database of about 40,000 individuals that we send deal announcements to, that drives flow. So it's not a proactive outreach.

In terms of the dollars in the non-sponsored arena in the March quarter, we'll have to calculate that and give you a more precise number. I know off the top of my head that Clearwater was a non-sponsored deal; Empire was a non-sponsored deal just to pick a couple. There's also deals that are kind of following between, they used to be called fundless sponsor, now they're called independent sponsor deals, outreach falls into that category. For example, we're working with a third party that takes a more active role than a typical intermediary.

Great. And then also on the deal activity, what -- how much of the dividend recap are you seeing out there? And how do you guys view participating in those with some equity sponsors?

On dividend recap, we like to take the leverage off a bit versus a change of control in which money is going in at the same time with this. Obviously there's a little bit greater alignment. But our philosophy on capital at risk is it's nice to have capital underneath you in a deal and certainly a mitigant. But most equity providers are going to be making a pure incremental investment decision on further capital to go into a deal.

And so we always -- we recognize that, that was the pattern during the last cycle and you can't necessarily expect to further check just because ex-dollars have been invested. Recaps were more active the last few months, A, because of tax drivers of needing to get recaps done by 12/31 when people were terrified that the tax rates would go shooting up.

And then B, in the past quarter as M&A was starting to get restarted in the marketplace my prediction is that M&A will be a greater mix, change of control deals in the coming months as sale processes have continued to unfold out there as sellers are feeling more comfortable with selling off of a higher trailing 12-month profitability as we sit here today in May of 2011 than where they sat six months ago, nine months ago. Obviously any seller wants to maximize value. So we're certainly seeing a lot of change of control deals.

And then just one more quick one before I'll hop back into queue. As we saw the amount of volume, the vast majority of that seems to have gone in the senior secured debt bucket. How should we be thinking about you aggregating that much? Do you think the securitization market is open and do you think these types of assets are available for securitization?

The answer -- our thought on the securitization market is the market is reopening. You've seen a significant uptick in securitization issuance year to date -- well, the activity the prior year was virtually zero, so anything would be an uptick. But you've seen a significant increase, particularly for flow name securitizations. We know there are groups out there examining middle-market securitizations as well and potential deals that could get printed.

In our structure, of course, we're limited to one-to-one leverage on the balance sheet. So there's securitization looking at terming out say a AAA piece at a certain attachment point, and then a securitization associated with these middle-market CLOs that tend to have structures we've seen and other groups are trying a 4 to 1 leverage compared to say 9, 10 to 1 on the flow name side of things.

So we monitor those markets to stay current. The AAA attachment point is the most relevant for what we might be able to do on our balance sheet. We're set up very well for that as a potential financing option because, unlike I think all of our -- virtually all of our peers, we already have a rated security facility, a rated revolving structure. And all of our collateral in that facility is rated as well.

So we already have a lot of the warm start essentials you would need if we found an efficient financing mechanism as a partial funding solution. But we do like to examine all the diversified options at any given point in time as well.

Great, thanks.

Thanks, Troy.

Hey, Troy, it's John. I have one thing I wanted to add to what Grier was pointing out, and that is that as a company like this grows and expands the deal funnel and expands the number of people that are processing these -- originating and processing these transactions, we feel that we're constantly able to attract better people with more experience and expertise in the business.

But at the same time we also have to continuously tighten our risk controls. And if you ask anybody who works here you really -- you're not allowed to speak them, so please don't do that. But if you were to ask anybody who works here about the risk controls, they would tell you it is not easy to move a transaction through the process.

We are very mindful of the need to protect and preserve capital and avoid write-offs. And I just was asking Brian about this -- the last time we had a transaction that we funded that later went on nonaccrual is almost four years ago. And that is through virtual micromanagement of risk controls.

Jasper Burch, Macquarie.

Good morning, gentlemen. Just a really quick question. Looking at your outlook for the PCap accrual of the unamortized -- accretion of the unamortized discount, it's going to $0.11 next quarter from about $0.03 this quarter. Have you already experience some repayments in there? What's really driving that?

There's one significant credit where there's a steep discount associated with the purchase price allocation for the Patriot acquisition that we're expecting to be repaid on today -- this quarter rather -- not today but this quarter. And that's what's driving the $0.11; it's a pretty significant number.

Okay. So the normal run rate is going to be back around $0.02 or $0.03 after that?

Well, it will start going down because, Brian, you said the unamortized portion at 3/31 was how much?

Yes, we estimated that the -- we disclosed this in the Q this time that we estimated the amount for next quarter to be a little over $1 million.

So it'll go down in part because this one credit is a significant portion that will be eliminated on a going-forward basis. And the prior Patriot book, a lot of that has repaid at this point. And the former Patriot assets are probably well under 20% of our existing assets, probably well under 15% where we sit today.

Great, thank you. And then just lastly, could you disclose what the taxable income was this quarter?

We have not disclosed that in the past. We'll look at that and think about what our policy might be in the future.

Great, thank you very much.

Dean Choksi, UBS.

Good morning, gentlemen, thanks for taking my question. My understanding of Prospect historically is that you guys excelled in doing deals that potentially had a little bit of hair on them. I guess, one, is that true? Two, with all the new people you've brought on has your origination philosophy changed?

And then three, just kind of looking at some of the deals you announced, they look to be -- and I'm a specialty finance analyst, so you'll have to forgive me -- but either somewhat cyclical or in businesses that have volatile cash flows, you know looking at Empire Today, Clearwater Seafoods or Out Rage. Can you just talk about where you think you are on the risk spectrum on those deals and kind of how you think about managing that risk?

Sure. On the cyclical volatile front, I actually think that we've diversified by industry quite a bit. And in fact when we first broadened our scope as a business going on now four years ago, so we're in our fifth year of that diversification efforts, a lot of the verticals that we added at that point in time were non-cyclicals. So we added deals and business services and education and training and healthcare services, branded food and beverage and we actually stayed away from the cyclicals at that point in the cycle.

Now in a recovering environment you get a little bit more confidence to touch some cyclicals, but always with taking a turn or two off of levers to protect against future downdrafts on the cyclicality front. But prior cyclicality, which I would have characterized more in the energy industrials arena, we've significantly reduced and is now probably under 20%, 25% now in the book. That was one of your questions.

And then you had another question about hair on the deals. Well, I guess you could talk to one of our senior credit folks here who's an old asset-based lender who have used any cash flow term loan as having hair on it automatically if you're not fully collateralized by receivables. And I guess that's what differentiates cash flow lending in our specialty finance sector from what banks do in the deposit world with asset-based revolvers.

But in general our desire is to reduce our risk, be as high up in the capital structure and produce as high a return as possible. As I said earlier, all of our collateral that goes into our secured facility needs to be rated and as a result in that rating has to be a better than CCC basket. And as a result -- for a significant portion of it. And as a result we tend to shy away from the really hairy types of credits.

I would say that on the control front, as we've done a deal this past Friday, did a substantial transaction last year, are looking at deals in that arena. We win deals by purchasing steady types of companies that may or may not have significant growth attached to them, but steady companies. And we focus very hard on value where we can pay a low -- as low a purchase multiple as we can against that stream of cash flow. You had a third question as well which I wanted to make sure -- I forgot it at this point.

Oh, I guess has the originations philosophy changed? Kind of the deals that come through the pipeline, the initial screening process of what you're looking for kind of?

I would say that our discipline has only tightened over the years. We eliminated the project finance vertical going back several years ago concluding that was not an attractive risk/reward. So that's a big example of credit tightening. But overall our value driven philosophy has not changed.

We look at metrics in our underwriting areas like recurring cash flow leverage, fixed charge coverage; breakeven revenue declines that take in account the operating leverage of a business. So we try to avoid some of that EBITDA myopia that seems to creep into other groups that we've examined over the years.

Dean, this is John. I would add to what Grier had to say that some of the things that have happened I think are fairly predictable. When a company triples in size the average deal size goes up, the average EBITDA goes up, the quality of the average management team that we're loaning money to goes up. Our ability to get the terms we want goes up because our market presence is greater.

And so, we're in somewhat of a virtuous cycle in that respect. When you're smaller and you have less money, well, you need to make every dollar work harder and the only way I know to do that is to take on more risk and run harder yourself. But you can't do that when you have as much capital to manage as we do now and as many positions. So what happens is the risk comes down, the return also comes down.

But the basic approach that we've had being deep value investors has not changed. And so -- and we use many of the same screens, they have been refined, credit standards have been tightened. But the basic approach that enabled us to manage a smaller pool of capital, well, we're sticking with.

Hey Dean, before we go on I'd like to take just a second to go back to that taxable income question. It's not disclosed in -- but generally there's just one significant adjustment to get from our book -- net investment income to taxable income and that's the accretion that we've generated from the Patriot acquisition. Almost everything else, book and tax are the same.

Thank you for that explanation, that was helpful.

Sure.

I guess the final question would be on the revolver. Kind of when do you think -- how you think about it, what's your cheapest cost of capital to use, timing of using it? And I guess of the recent loans that you originated, how many would have qualified with that CCC rating to have been placed on the revolver?

Well, if a loan is secured and more than 80% of our balance sheet, I think 83% to be exact as of 3/31 -- of our non-cash assets are secured, if our loan is secured then it's generally eligible to go into our facility and we underwrite our loans generally speaking to a B3 or better credit profile.

There are sometimes exceptions to that, but generally speaking that's the case. And as I said earlier in the call, our first stop on the liquidity train, so to speak, is the revolver and that's our close cost of capital solution and we just recently increased it and our intention is to utilize that going forward.

Great, thank you.

Arren Cygnovich, Evercore.

Hi, guys, thanks. My question actually kind of follows up on Dean's last question. You had a decent amount of cash in money market held, but you had $48 million drawn on the credit facility at the end of this quarter. Is part of that term or why do you carry the credit facility drawn whenever you have a decent amount of cash?

That was actually timing associated with closing a transaction that we had drawn for and then we closed right after the -- funded right after the beginning of the quarter.

Okay. And then in terms of what was your thought process on raising the equity capital in April when you still had quite a bit of room under your expanded credit facility?

Sure. We have covenant compliance on a revolver pertaining to permitted indebtedness outside of the secured facility. And we raised the equity capital as we -- basically to expand our range of options for the future to include a potential future term issuance. And we're not -- I'm not sure that would be the right answer for us. It would depend upon a cost of capital and again our priority is on the revolver. But we like setting ourselves up for that optionality for the future.

Okay, thanks. And then lastly, Brian, did you mention how much you had drawn on the facility quarter to date?

As of today we have $22.9 million drawn on it.

Which gives us about $300 million of running room given the $325 million face amount before you get to any potential increases in the revolver.

Thank you.

Mickey Schleien, Ladenburg.

Good morning. I wanted to get a sense of what you're seeing in terms of the directionality of liquidity in the market -- in your market, and how that's affecting, if at all, levels of covenants that you're witnessing in leverage ratios?

There's more capital coming into the market, there's no question about that. And you're seeing that first in the larger (inaudible) in syndicated market, but you're also seeing a bit more capital in the middle-market. We're seeing in our pipelines an expected uptick in M&A activity as the year progresses that could help absorb that.

We always have a low book to look ratio and we lose deals all the time because we think the pricing is too low, because we think the covenant package is loose for various reasons. We're happy to lose deals for reasons where we don't want to take risk that we're not comfortable taking.

And however, we win deals in some cases because of our increased scale in the marketplace we expect to have as we book more originations upwards of $1.5 billion in assets which puts us at the upper range of our peer group and groups like ours in general in the marketplace. And as a result we're able to win transactions with say $50 million holds, $60 million holds.

You saw a pair of those for example in the March quarter that we closed. And when we have the ability to do that, to do a one-stop financing for a counterparty and others have to call around to another group or two groups to get a deal done, we have a significant competitive advantage over others when that is the case. So that's has been a big plus as well.

I want to make sure I understand. So you're seeing more lose deals in terms of covenants, but within the deal flow there are still plenty that meet your criteria, is that a fair --?

Yes, we're seeing some loosening more so in the syndicated or quasi-syndicated market, upper middle-market deals with $30 million, $40 million, $50 million EBITDA and up, that's driven by kind of drive-by capital that puts money in. Maybe (inaudible) the credit agreement, maybe look at the data (inaudible), maybe not. That's not us, we're the ones who are reading all the documents and commenting vigorously.

But in deals where we're agencying a transaction, which again is the vast bulk of what we do, we're putting our own term sheet on the table, our own credit document on the table. We do not close covenant light, covenant not transactions on that basis. And so we've not really loosening -- we're not necessarily seeing loosening in that traditional middle-market or lower middle-market category either by competitors, it's more in the larger borrower size where you see some of that dynamic happening.

Have you seen this increased liquidity impacting spreads yet or is that to come?

It has started to impact spreads in the past quarter. I would say that spreads have come down 100 basis points, give or take, in first lien and second lien deals in our core market. And to compensate, one of the things we're going to be looking at doing is figure out ways to continue to drive down our cost of capital as we look, for example, for a future revolver extension and examine the cost of that in working with our bank group. It's very important for us to remain and stay competitive from that standpoint.

Lastly, what are you thinking or how are you thinking about potential changes in the yield curve with the Fed potentially acting later this year going into next year? How are you positioning the Company for that?

Well, most of our loans are floating rate and as a result we benefit from increases in LIBOR. So as the economy picks up steam, as the Fed starts tightening again and starts increasing Fed funds rate bringing LIBOR with it, we expect to benefit from that on the asset side of the ledger.

On the liability side we of course run with low leverage. But one of the benefits of having issued our fixed rate debt earlier this year in the two tranches where we did sell is we'll benefit from having issued fixed-rate debt by five and a half year debt should rates increase.

Okay, thank you for your time.

Thank you.

(Operator Instructions). [Sims Olifant], Stephens.

Hey, guys, thanks so much for all the information. When you say you've issued fixed-rate debt, isn't the majority of that likely to convert if the stock keeps staying pretty much at these levels and kind of obviating that longer-term fixed rate issuance in that scenario?

That is definitely a possibility of early conversion for sure. But there is also optionality of course embedded in what that holder or holders enjoy that have those converts. And they may for other reasons rather hold that instrument or if they want liquidity just sell those bonds to a third party. So there are different outcomes that could occur, but you're right, early conversion is a possibility.

All right. Thanks so much for your time, guys.

Thank you.

(Operator Instructions). At this time I would like to turn the conference back over to Prospect Capital management for any closing comments.

Well, we'd like to comment on upcoming liquidity, but we'll leave that to the Fed. Thank you very much, have an nice lunch, everyone.

Thanks, all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.