Prospect Capital Corp (PSEC) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Prospect Capital Corporation first fiscal quarter earnings release and 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, Ashley. Joining me on the call today are Grier Eliasek, our President and COO; and Brian Oswald, our CFO. 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.

Before I dive into our record net investment income results for this quarter, I would like to take the moment to explain the thinking behind our successful equity raise last week. Starting months ago, with a market expectation since confirmed of divided government heading into 2013 and increases in capital gains and other taxes and regulations, counterparties have been approaching us to close transactions by year-end. As a result, we've been seeing a surge in demand for our capital and our investment pipeline continues to build. We wanted to make sure we had enough dry powder to meet these demands and so, last week issued equity on an accretive basis at a premium to net asset value.

Given the collapse in the markets following the election, a collapse we feared would occur, we believe we were fortunate to be able to thread the needle and clear our shelf filing with the SEC just in time to complete an offering before the election, has now made such an offering difficult if not impossible. We now believe that we do have the dry powder necessary to meet all these escalating needs for capital and will be able to fill our nets while the salmon are running. On such a full sea, we're now afloat, we must take the current when it serves or lose our ventures.

In the September 2012 quarter, we achieved record net investment income and record year-over-year growth. We also delivered $0.47 and $0.05 of growth in net asset value per share for the year-over-year and sequential-quarter periods. NAV stood at $10.88 on September 30, 2012.

Net investment income for the quarter was $74 million, up 166% from the prior year. On a per-share basis, net investment income for the quarter was $0.46, up 77% from the prior year. We've delivered strong net investment income growth while keeping leverage low.

Net of cash and equivalents, our debt-to-equity ratio was less than 35% in September. We have substantial debt capacity and liquidity to drive future earnings. We estimate our net investment income per share in the December quarter will be $0.41 to $0.46.

We just announced more shareholder distributions through January, which will be our 54th shareholder distribution and 31st consecutive per-share monthly increase. Our net investment income has exceeded distributions, demonstrating substantial distribution coverage for the current fiscal year, the prior fiscal year, the last four quarters and for the cumulative history of the Company. We've now paid out nearly $11 per share and almost $600 million in distributions over the life of the Company.

I'll now turn the call over to Grier.

Thanks, John. Our business continues to grow at a prudent pace. As of today, we've now reached more than $3.5 billion of assets in undrawn credit. Our team has increased to more than 60 professionals, representing one of the largest dedicated middle-market credit groups in the industry.

With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that includes third-party private equity sponsor-related lending, direct non-sponsored lending, Prospect-sponsored transactions, and structured credit. Our team typically originates thousands of opportunities annually and invests in a disciplined manner in a single-digit percentage of such opportunities.

Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. Our approach is one that generates attractive risk-adjusted yields and our debt investments were generating an annualized yield of 13.3% as of September 30. We also hold equity positions in many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions.

Originations in the September 2012 quarter were $748 million, up 30% from the June quarter. We also experienced $158 million of repayments as a nice validation of our capital preservation objective. As of September, we were up to 96 portfolio companies, a 13% increase from the June quarter and demonstrating both an increase in diversity as well as a migration toward both larger positions and large portfolio companies.

We also continued to invest in a diversified fashion across many different portfolio company industries, with no significant industry concentration. In the September quarter, we enjoyed exits for Pinnacle and U.S. HealthWorks, and generated realized IRRs of 15% for each, plus exited other investments profitably. Our First Tower portfolio company is performing well, with annualized cash yields in excess of 18% and our ramped CLOs are currently yielding more than 20% annualized.

ESHI paid us $33 million in dividends in the September quarter as a significant income contributor. We don't know precisely what dividends ESHI will pay us in the future, where we have to see solid dividends again in the current December quarter. The current December quarter is off to a strong start, with $143 million of originations and a rapidly building pipeline. This quarter we've already enjoyed exits for Northwestern, Blue Coat, Hi-Tech, Wilson, Mood Media and Shearer's, and generated realized IRRs of 23%, 23%, 16%, 13% and 19% respectively.

Our credit quality continues to be robust. None of our loans originated in approximately five years has gone to non-accrual status. Non-accruals as a percentage of total assets stood at only 1.5% in September, down from 1.9% in June 2012 and 3.5% in June 2011. Our advanced investment pipeline aggregates more than $800 million of potential opportunities, building well for the coming months.

Thank you. I'll now turn the call over to Brian.

Thanks, Grier. As John discussed, we've grown our business with low leverage. Net of cash and investments, our debt-to-equity ratio stood at less than 35% in September. We believe our low leverage in diversified excess to funding demonstrate both balance sheet strength as well as substantial liquidity to capitalize on this attractive opportunities.

We're a leader and innovator in our marketplace. We were the first Company in our industry to issue a convertible bond, conduct an ATM program, develop our retail notes program, and acquire competitor as we did with Patriot Capital. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction at the right hand side of our balance sheet.

As of September, we held approximately $2.2 billion of our nearly $2.9 billion in total assets as unencumbered assets. The remaining assets are pledged to Prospect Capital Funding LLC, which has a AA rated $517.5 million revolver with 16 banks and with a $650 million total size accordion feature at our option. The revolver is priced at LIBOR plus 275 basis points, and revolves for three years followed by two years of amortization with interest distributions allowed.

We started the June quarter with a $410 million revolver in 10 banks, so we've seen significant lender interest as we've grown the revolver. Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation multiple types of BBB rated unsecured debt, including convertible bonds, a baby bond and retail notes -- retail program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions and no-cost defaults with our revolver. We've now tapped the five-year, seven-year, 10-year and greater unsecured term debt market to extend our liability duration. We have no debt maturities until December, 2015, with debt maturities extending through 2022. With so many banks and debt investors across so many debt tranches, we substantially reduced our counter party risk over the years.

As of today, we have issued four tranches of convertible bonds with staggered maturities that aggregate $647.5 million at interest rates ranging from 5.375% to 6.25% and have conversion prices ranging from $11.35 to $12.76 per share. We have also issued $100 million, 6.95% baby bond due in 2022 and traded on the New York Stock Exchange with the ticker PRY. We have issued $95.7 million of retail program notes, with staggered maturities between 2019 and 2022 and a weighted average interest rate of 6.2%.

From March 31 to today, in addition to our revolver expansion, retail notes -- retail program notes issuance and two convertible bond issuances, one in April and one recently in August. We have issued equity four times each at a premium to net asset value. In two ATM programs, we raised $153.8 million and in an unwritten offering in July, we raised $269.3 million and in our recent underwritten offering in November, we raised $383.6 million.

We currently have $10 million in borrowings under our revolver. Assuming sufficient assets are pledged to the revolver and that we are in compliance with all our revolver terms, and taking into account our cash balances on hand, we have approximately $800 million of new investment capacity.

Now I'll turn the call back over to John.

Thanks, Brian. I forgot to thank you the last time.

Okay.

So double thanks to Brian Oswald, who's been working very hard for our shareholders. We can now answer any questions.

(Operator Instructions) Robert Dodd, Raymond James.

Hi, guys. Congratulations. Just a couple of questions, one simpler one, I think the first. In the press release this disclosure that since the end of the quarter you've put in another $20 million in equity into First Tower. The question is why equity -- the structure of the deal that I see is, there is a $400 million revolver of which $246 million is drawn. If the [first half] had a need for some seasonal capital, why didn't they just draw the revolver and then repay that after the seasonal demand returns to more normal levels, I mean, what was the motivation for putting equity losses in temporary (technical difficulty)?

Robert, this is Grier. Thanks for your question. Tower, really the -- when we made the tower investment, part of the premise was to benefit from opportunities for growth in the business. So there's really two things going on with Tower, they create a rationale for a capital, additional incremental capital investment [bias] in last two weeks. One is the seasonality aspect, more business gets done in the end of the year, holiday shopping all of that. But the second aspect is Tower is in midst of expanding into multiple other states beyond its existing footprint, all of which are attractive opportunity driven -- opportunity driven for us. And we would hope it expect to have similar returns on net capital that we enjoy off of our existing investment that's yielding close to 20%.

Okay. Great, appreciate it. And second one, just kind of a broader question, when you look at Tower, like you say, 18% or 20% returns, the CLOs north of 20%. Combined those now represent a pretty large piece and your bad assets are now, I mean, a BDC classification not to say that bad per se is now 25% of total assets, which means you don't really have a lot of room to expand within the mix the CLOs or First Tower from this level. So I mean, how are you going -- if those are essentially to a degree within the mix has maxed out, what's the strategy for other high yield assets going forward, I mean, where can you -- what other areas can you add to maintain portfolio of yields given your highest yielding assets are nearing regulatory caps?

Sure. We do have a little bit more capacity in the numbers you were quoting as we've grown the book, with it, our offering recently. But you're right that both CLOs as well as finance businesses follow to the so-called 30% basket and there were caps there and we monitor and manage those quite carefully. We also think we use those baskets wisely and strategically, because there are limitations there. We want to be smart about how we use them on a risk mitigation basis and also try to achieve higher returns in those strategies.

In terms of this so-called 70% basket, I think, was your question, what are you doing for yields there? I think we've enjoyed some the highest weighted average yields of any of our peers for years. Our investments -- and really the key aspect of that is driving on originations and having the vast bulk for business being agented modeled, more than 80% plus of our business. We're the agent, we're putting terms on the table and you tend to get paid more for doing so than in the syndicated market.

Particularly in the last couple of months, we've seen frothiness in the participation syndicated type market. That's a small portion of our business and we see opportunities here and there, we haven't seen that many opportunities in that market in the last few months. And because we have such a large footprint of people 60 plus, because we have, I think the -- one of if not the most diversified business models of any of our peers, we can play different markets as they become relatively more attractive.

And our bias is always towards being as high up in the capital structure as we can with the senior secured debt. We have intended to have as much unsecured paper as assets on our balance sheet. We do have some so-called unsecured mezz. We'd like to have a security interest and we like to get paid as much as possible for it and you've see the history of our Company, we've been in the kind of 13% to 15% yield range for quite some time.

Okay. Appreciate it.

Thank you, Robert.

Greg Mason, Stifel Nicolaus.

Could you just discuss the capital deployment over the last two quarters has been about $600 million a quarter. And previously you're averaging $200 million to $250 million per quarter. Can you give us some comfort? I know you talked about the pipeline is extremely robust, but just some comfort on what you're seeing that we'll continue to see as good credit quality in this new basket of assets that you've had in the past? What are you seeing on leverage and underwriting characteristics on the new investments that you've been making?

Sure. This is a general question across all opportunities, Greg.

Sure. Yes, yes.

Okay. Well, in general, what we've seen is, let's define middle market, people define middle-market in different ways. So it's helpful to start with the definition. We would define it as call it $500 million to $100 million EBITDA size companies that's composed of the lower-middle market sub-10, traditional middle market of $10 million to say $40 million of EBITDA and then the upper middle market (inaudible) syndicated situations $40 million to $100 million. Those aren't clean designations, but work reasonably well. We've seen in the upper range of that the quasi-syndicated market, little bit more frothiness in the last couple of months and a little bit of yield compression, but much more so, some leverage popping up and covenant [line] entering that market. Both of which should make us very uncomfortable as credit people and it's very, very hard to get a deal done around here that may be hard for folks to appreciate, when you see $0.75 billion of originations. But when you realize that, we worked on many multiples of that that we decline to invest or went another direction, then you can appreciate more that discipline. In the traditional middle market and the lower-middle market, we've seen much greater stability of returns and called first-lien, the unitranche type of lending in the 10% to 11% coupon range and higher RS through points and prepayment premier.

Second-liens without subordination of call it 11% to 12%, with subordination 12% to 13%, 12% to 14% and unsecured paper north of that. Those are the returns we've seen in the kind of Asian to lending business, and of course, we look at pricing in our selection as well as risk. And as we talked about earlier, in the other businesses like our structured credit business and our [thick buyer] business, we're enjoying closer to 20% return.

So we think the higher alpha opportunities, the barriers to entry of those businesses and how we approach those markets. And you just take (inaudible) for example, you need a lot more bodies and relationships and expertise to manage that type of business. Then a purely long and strong sponsor finance business and most of our peers, I think, 100% of the business is just long and strong sponsor finance in some cases just a participation side. That's a good business for us, but is not our only business and allows us to be very disciplined. As John likes to say, when you're working on 10 different things and you feel like you're not comfortable with the [letter] in front of you, no problem, say no to that and move on to the other nine. It's the folks that don't have much deal flow and as many people that they're in closing the mediocre deals.

And can you talk about -- you've put quite a bit in CLO equity -- can you talk about what you're seeing in that market and why you've really decided to build out that part of your balance sheet on the asset side?

Yes. I don't know if there are quite a bit, it's about 10% to 13% of our asset base. And again, we're using our 30% basket strategically as others do with unitranche funds and doing middle market CLOs with others and that often get applause meters out there. We continue to have a very differentiated strategy there that's analogous to our control equity business, in which we take controlling interests in deals, all primary issuance, in which we co-underwrite credits in conjunction with the third-party collateral manager and we get special terms on such deals as well.

And there are only a few collateral managers that pass muster, I think we have eight or nine or so platforms that we've approved and now done in many cases repeat business with. And there's probably three to four times that, that don't pass muster with and we've really steered clear a lot of the secondary market there and we're subject to pricing prosiness and volatility then on the primary issuance side.

That book now has about 500 discrete loans in it, extremely well diversified. We have about a 12, 13 or so different deal structures. So that compares well if you -- when compares to say a peer that might have a 100% wrapped up in $1 billion vehicle. We're very well diversified from that standpoint. And most importantly, zero defaults, not a single default which I think speaks well as to the credit quality of how we're underwriting on the front end and our collateral manager partners. Does that help, Greg?

Yes. Thanks. Thanks much and I'll hop back in the queue for more questions.

One thing Grier left out, because he ran out of time is that the team that we have that manage the CLO business for us has become well known in the industry, and as a result -- and they are well, like they're viewed as people who get it and are easy to work with and as a result, we've discovered that we have the pick of really the best managers to work within this strategy. We've turned down some very well-known managers, hopefully we'll be able to work with them as they improve their track records. But meanwhile, we are able to limit the people we work with to a fairly small group, which I think you can identify by looking at our financials.

Thank you, John.

Jonathan Bock, Wells Fargo.

Good morning, and thank you for taking my question. Just trying to focus in, Grier, on a comment, I think, you made on focusing on senior, maybe, secured lending in this environment. As one of the many businesses you're looking at that I do understand, but as I look at your schedule of investments and particularly the new ones made this quarter, I notice the $80 million sub-debt investment in Arctic Glacier, which I think was a formally bankrupt ice maker. Could you tell us what the overall leverage is through your sub-debt security?

I can't disclose that for confidentiality reasons, but I can tell you that we're very excited about the Arctic investment working with the sponsor, we've done multiple deals with. And yes, there was a part bankruptcy of the company that obviously created a clean situation going forward in our attachment point through our capital that's way lower than historical averages.

The Company is performing quite well, we're very pleased with the performance. I can also tell you that we got calls on no fewer than half a dozen of our peers wanting in on the deal and wanting a piece of it. And our philosophy is that sometimes it makes sense, sometimes -- we did the underwriting, we originated it. We've got a very attractive pricing, we think, on that particular investment as you see in our Q, and we'll stick with the paper.

Okay. Well --

One of the things I would point out beyond that is that that is a blue-chip sponsor, I guess, we're not allowed to give names, it's like advertising, but it's a blue-chip sponsor. You could look it up in our papers that has given us a significant amount of their business in large part, because of the attention of Jason Wilson on our staff to that company. As a result, we get the first call. Very important to get the first call, not just from that sponsor, but from others.

That's helpful. And again, just as I was looking around, I do think there may be $225 million of debt ahead of you. I guess the question is, whether that was levered at 4.5 times, which should put you in the 4.5 to 6, which is fine. I guess the question is, are you comfortable taking leverage on good companies H.I.G. obviously being the sponsor here taking leverage on companies in the 5 to 6 times if you believe this is a good credit and are getting an outsized deal?

Right. (inaudible) comment on confidential situations, where we don't own companies. But, I'll say is about this credit, you're quoting some numbers, perhaps on a trailing basis, in some cases you've got things happening in the Company, where run rate situations are significantly higher profitability and much lower leverage levels than you're quoting. You're quoting one unsecured mezzanine type investment on our balance sheet. We actually don't have that many, and we became comfortable on underwriting with this particular credit. That's (multiple speakers) --

But I'll comment on general multiples, just speaking for myself, when I look at the multiple on a company, I'm not taking into account current market euphoria, applause meters, bubble economies, competition, we need to get this deal, put this money to work. I look at these transactions and I take a look at whether I believe it's extremely highly likely the Company can service the debt on a conservative revolver that were too many times set of projections. Rarely would we be able to get up beyond, say, at [3.75 or 4] without some very important circumstances causing us to believe that there is some special stability, which is why the syndicated market often is more difficult. If you look at those transactions, they are at higher multiples. We have to very careful in pick and choose.

Go ahead.

Because, I think, there's some more things very helpful, EBITDA leverage is -- it's a term (inaudible) junk bond salesman in the 1980s, right. EBITDA is not cash flow and we look at that -- but our credit templates, which have been well honed of many years of doing it, look much more fixed-charge coverage ratios as well as operating leverage of a business and your fixed variable cost making a big difference.

So, we look at it, for example, breakeven revenue decline is something we look at, what percent does the revenue have to decline before you [bus through] a 1.0x fixed-charge coverage? Such coverage being an output of not just EBITDA leverage, but also taxation on a company, capital expenditures, which is the two-thirds and pay for and many other items. So that's how we think about underwriting.

I'll give you some other data though to be helpful. System-wide across our portfolio, through the attachment point of our debt, weighted average leverage is about four times. I think there is one other peer, which discloses their weighted average leverage, if you factor in there, sort of off balance sheet stuff in there, at about 4.5, [peer of this scale] and more appropriate to us.

So we think we're earning, toward the higher end on the yield side and with the lower end of the leverage side and also the higher-end on our percent senior secured out of the group. So I -- we think we're doing a pretty good job as it pertains to leverage risk, as well as what we're getting paid for every unit of risk.

I totally agree, and I just say, I mean, that's one investment of many and I appreciate the color. Now, I guess, also focusing in on CLO equity in this environment, obviously that's been a very attractive business for you as the structure in the primary market. My question is, though as we look at the [DSL] market, to your point people would often characterize that as higher risk to-date and perhaps a few months ago.

And so, maybe understanding, if those market returns in general on a risk adjusted base are worse, it is those same CLOs upon receiving your equity that then go in purchasing the DSL market. And so, I'm trying to understand where the, while the 20% returns are nice just trying to understand the risk element of that equation giving that those CLOs are now being essentially forced to deploy capital in DSL and upper and middle market transactions at a point when perhaps risk adjusted returns are lower than they have been?

Sure. That's fair question. I want to -- first I'll start by clarifying something that may be implied in your question on a passivity that is not there. We create these vehicles, they're not served up to us like some paper off of a debt. We sit down with the collateral manager and create them. There are invention, if you will, along with the collateral manager. And we're underwriting with the collateral manager every single credit in the book. And when you have 60 plus people, you have a lot of bodies and industry expertise in-house, we have our IT experts, our food and beverage experts, our energy experts and so on and so forth. They're reporting through credits, so that's one piece. We're getting comfortable with that in conjunction with our collateral manager.

Secondly, we're focusing on primary issuance. So what's important about that is CLOs are sometimes called arbitrage vehicles, I don't necessarily love that term arbitrage as much. But the point is that when you're pricing CLO, it's a spread vehicle and you're locking in your liabilities at that point in time and you also know what the initial composition of the assets look like.

And then really your two major risks to monitor are number one, loss risk, which is function of defaults and loss given defaults. And number two, reinvestment risk. So we mitigate I guess the first by constructing the portfolio in conjunction with the collateral (inaudible) vendor partners ourselves and working with top quality people and screening out those that we don't think pass muster.

And we deal with the second by purchasing equity as opposed to junior tranches and by having a controlling interest in that equity because we control the [call right]. And what's great about the call right is, if the world gets worse, if spreads increase we make more money. Spreads go up your liability is the same. The world gets more frothy and spreads decline and your spread start to come a little in a little bit and that's the reinvestment risk standpoint, you just call the deal, sell the assets into improving market, bank your 20%, 25% return to-date and maybe you put capital into a new deal maybe you put into something else entirely.

So we try to be very thoughtful about micro risk and macro risk. I think the credit quality speaks for itself a couple of years of focusing very hard on this. And of course, being a CLO manager ourselves, our middle market CLO, which is a rated vehicle is in itself an on balance sheet CLO. We have zero defaults, zero defaults and then the yields speak for themselves as well, if you're writing a larger check, you can throw your weight around and demand attractive returns from collateral managers and arrange [also] these deals. So we've been doing just that.

That is very unique and that is an excellent color. Maybe one additional question, just as it relates to dividend income.

Hold on, before we leave, Arctic Glacier. I did want to point out with the fundamental investment premise behind the deal was, which I'm sure we'll all agree with.

That would be great, yeah.

Yes, global warming.

Well, I would say that's pretty good, that's -- I appreciate that. Now, diving into dividend income, do I understand dividend income as it relates to Gas Solutions, that's a nice supplement to overall NOI. But as we see this -- particularly is the fair value that asset continues to decline, so $125 million in March, $70 million this past quarter and $44 million today. It would seem that the part will eventually come to an end, and so judging by today's valuation perhaps there's two quarters or so left to help supplement dividend income, maybe gives us a sense of where NOI settles and maybe kind of your view NOI dividend, post the great investment that was Gas Solutions?

Well, absolutely, and that has been terrific investment for us. We'll continue to get income from that investment in calendar year 2013 as well it will be not as much as we've been enjoying. And look we've been banking substantial amount of dividends on a spillback basis. And as we disclosed, we have delivered significantly greater income in the (inaudible) of our Company and certainly over the last year. And so we'll have those benefits going into 2013.

We don't provide forward guidance on our net investment income. Beyond the existing quarter, we've provided guidance for the December quarter. But we do as the Board sit down on a quarterly basis and obviously select dividend distributions. And if announced dividends for the next three months. And, we're very comfortable with the dividends that we've announced. And there has been discussion in our last earnings call. There is discussion about potential dividend increases and the like and we discuss that too and we'll keep examining that every quarter. We'll keep examining whether or not we do special dividends. I'm not sure you necessarily get a benefit from a non-recurring dividend like a recurring one. So we've been really focused on making sure we can deliver sustainable recurring dividends into the future.

That's great. Because I guess that that would then beg the question and I appreciate that your comments about EBITDA in the high yield bond market is similar to oftentimes BDCs and NOI coverage of the dividend, because just as EBITDA isn't cash, NOI often isn't cash either, particularly stable cash as fees and dividends are extremely volatile. And so, when I look at kind of stable cash coverage, which is NOI less your fees and (inaudible), NOI is less fees from the dividend. On that basis, it appear that you cover only 50% of your dividend. So perhaps, how do you look at the dividend itself and particularly funding it from stable cash flow sources, because in the event the economy backs up, all of a sudden perhaps fee income isn't what you or more importantly many other BDC managers would realize?

Well, Jon, first on, I think we'll taking issue with that 50% number and maybe you can talk to Brian offline on how you arrive at that. But I would say that and now we're getting to the question of recurring versus non-recurring for our business, which we covered a little bit in our last call. Upfront fees and an exit prepayment premium are a part of the recurring business model and what we do as lenders. We charge them on the front end and we get them almost always on the back end and we generally make five-year loans, plus or minus a year or so.

And they tend to pay off in three, and we're getting a prepayment premium. And in good times they pay off in two, and in slower times, there may be passing four. (inaudible) pass much earlier and that sort of upper middle market quasi syndicated book, we put some assets on the books earlier in 2012. Some of them have already paid off and paying a [$104 million] prepayment premium on the way that's a pretty prepayment premium on the way, that's a pretty attractive one. So if you literally zero out everything good that happens in the Company pertaining to a structuring fee from origination, and a prepayment premium and (inaudible) value. I mean, you can create an ugly model for any business, I suppose, but I would vehemently disagree with that model.

That's fair, and I appreciate your comments, guys. Thank you so much.

Thanks, Jonathan.

Greg Mason, Stifel Nicolaus.

Great. Thank you. I wanted to talk a little bit about the inter notes that you've been issuing. I've just been very surprised that that rate has fallen from 7% down to 5.7% I believe was the October -- first week of October pricing. How much lower do you think that rate can go and you raised $30 million of those in the September month. Is that pay sustainable or can that even grow as we think about these inter notes?

Thanks for the question. The answer is that we continue to see rates dropping on the debt side. I can't announce what the next rate that we'll issue at, but it's even lower than the 5.7% for 7-year debt. I mean, some of that decrease did come from some of it's at 10-year debt and some of its at 7-year debt. But yes, we have taken down the average rate by about almost 100 basis points over the last 6-months. And continue to think that interest rates will decrease. We've seen some baby bond, 30-year bonds that have been in the mid to high 6% rate, so that tends to indicate that our future issuances will be at lower rates even than what we've seen so far.

I'll add to that also, Greg, that our inter notes only have one year of call protection. So should spreads decline much further we can re-finance that debt without penalty, which is different from say the converged market where we know there's player that tend to be non-call life.

And then the pace, $30 million in September, that's been increasing it looks like every month, what do you think is the kind of run rate -- that you can issue on a monthly basis?

I think that's a reasonable -- I think that's where we're looking at as [before]. We've been out of the market for about a month and a half right now, it will take a little time to get the investors back, while we were waiting for the SEC to clear our shelf, we were out of the market. So, I think it'll be a little slower in November, but I think once the investors realize that we're back issuing in this market that's probably a reasonable number and growing from there.

But we'd like to grow it, Greg. I think, it's probably a most attractive and flexible cost of capital business, and it's a debt issuance and as Brian said in his prepared remarks, we focus very hard in having a balance sheet that is flexible in terms of the allowed collateral all of our term debt is unsecured, all of our term debt has no maintenance financial covenants, all of our term debt has no cost defaults with our secured revolver.

These are unique things to our Company among all of our peers, I don't think people always appreciate when they access risk and not just reward. But we have -- about we got about $3 billion of assets just under as of 9/30. And we have $2.2 billion that's completely unencumbered.

So if you have another recession hits and who knows we'll have one in 2013, [I'd still] call it double dip or what will be at this point. But we're in a great spot and we're in a great spot by having 16 banks in our facility, so you allocate one panicky often overseas bank that tries to put a bullet in your brain like what happened to folks in the last cycle. So I want to make sure that people leave this call with a sense of how we've constructed the balance sheet.

Yes, I appreciate those comments. And then one final question, I think in the Q, in Energy Solutions you have $82 million of cash there that you say can flow back in as a dividend or repayment of debt. How much, I believe you say, if it's earning and profits, you have to classify it as a dividend. How much of that $82 million could be classified as earning and profits and come into the income statement, just for our modeling purposes, as we think about that ?

I don't see the exact breakdown at our fingertips here, maybe you can talk to Brian offline, but really the bottom-line guidance factors all of that in for the existing quarter of $0.41 to $0.46.

Okay, great. Thank you.

Yes.

[Jerry Luther, Retail].

Yes, congratulations on the numbers fellows. I'm just a private investor and my concern is, the fact that we're trading at less than NAV that we have this huge input in cash from the dilution of the stock and the upcoming tax consequences for a private investor, why you're electing not to issue a special dividend before the end of the year?

Well, I didn't catch your name sir, it's --?

Jerry Luther.

Hi, Jerry, it's John Barry. I should describe to you some in greater detail, some of the thinking that we went through. Starting in June, July and August, really before even. When tax rates go up what tends to happen is that owners of businesses look to restructure or sell them in order to get out of the way of the upcoming tax increases. And that's why when people see these tax increases coming, there's a huge burst of transaction activity.

In June, July and August, well we were concerned to make sure that we had adequate dry powder to take advantage of these opportunities, because when many people were trying to close deals at the same time what you'll find is that we can get better deals. I don't know how many of our competitors are well situated now to participate in the year-end deal flow to the extent that we will be able to.

But in June and July, we were worried that we would not have capital, we would have to perhaps step aside, perhaps tell our deal people, why don't you take it easy on that deal, why don't you lift your foot off the gas pedal, which is never good for any business to tell the people with animal spirits who are supposed to get out there and get deals and close deals and represent the Company to counterparties that we're here, we'll be there, we'll close for you. We'd never had to do it, because we've been careful husbanding our capital and planning capital raises.

So in June, July and August, we were concerned to avert the risk of being caught short, having a great investing season in the last quarter of the year, but not be able to participate. What we did to deal with that problem was, first, we viewed all of our processes for getting our 10-K done, reviewed all of our processes for filing our shelf. We rung out every second of time that we could. The result was that our shelf was cleared really as the Hurricane entered the Northeast. And the SEC was -- actually wasn't even clear until after the Hurricane had hit with full force. And the SEC was closed, many businesses were closed, underwriters were flooded. And we knew, we needed to get this transaction done before the election.

I feel, [we repression] knowing that. We were able to thread the needle getting our shelf cleared in the midst of the Hurricane, speaking to underwriters, while some of them were dysfunctional, some of them were unable to do anything because their infrastructure was flooded. And getting a deal off days before the election and I think, everyone has seen what's happened in the marketplace.

So now we've gone out into the fields, we've harvested our hay. It's in our barn and the doors are shut tight. And so we feel we're in good shape over the next few months. If instead, we declared a special dividend. I don't know what we would be telling people. We're not here for you -- we don't rely on prospect, deal people, how about some time off. I don't think we can run a successful business on a stop and start basis.

What we're looking to provide is a stable dividend that grows steadily. If you look in the Annals of investment research, you will find that, companies that have a stable, steady, reliable dividend, it grows slowly, have the lowest cost of capital. And when you have the lowest cost of capital, you have an advantage on a competitive playing field vis-a-vis your competitors, which Grier and Brian just mentioned how we've been able to work down our cost of capital.

Now, as a major shareholder myself and all the people on this call at our end here at Prospect, are major shareholders. We're not happy when to move stock, we need to price it down 6%, 7%, 7% and change, but that is the cost of raising capital. It's -- we view it as a one-time only cost, the underwriters need to be paid at, they pushed the stock out, they had a discount, why are people -- some they're going to buy our stock in volume unless they get a discount.

It's a one-time sales -- each time we do an offering, we have to put our stock on sale. But the sale doesn't last forever, it's a few days. It might be a few weeks, someone who sits there and just waits. If you look at the stock charts, it's always come back, stock climbs are up, we need more money, it caps down a little bit, then it starts to climb back up again.

So for me, I feel that's a great time to buy stock. How many other investments are out there, where you earn a 12% or 10% or I don't know what's the dividend -- what is it right now?

11.6%.

11.6% dividend with the kind of safety that we're able to present here. I mean that's how we view it. Obviously, we're cheerleaders for what we're doing in for the Company, but for someone who would like to sell stock, I would say that if you sit still, if past patterns reassert themselves or persist, if we've regression to the mean you will see our Company again have the stock price trade at the same premium to net asset value, at the same multiples of dividend that it has in the past, because the Company is less risky and better positioned than it was before the offering.

But if you have a store full of perishable goods, you might need to mark them down to move them out. That doesn't mean that the next day that low price is going to be available. And so if someone thinks it's going to be available as a low price for the indefinite future. Well, I guess we'll see, I would be betting otherwise based on past stock charts. Now is that an inadequate answer, does that address sir, your concern?

Yes, it does. I appreciate your time. And I hope things go the way we want them to. Thanks a lot.

By the way, one thing you can do. Remember a one-time dividend, as Grier mentioned earlier, the Company doesn't get much if any credit for that. That's -- look at Microsoft, look at the companies that have distributed tons of capital, the stock price doesn't trade up, you do get the money, that's true. But you can get the money, the same way by selling some shares without having the share price go down, when we do a special dividend were we to do one. We would never rule it out.

But if we were to do and the share price would trade down for everyone. Now granted you might say oh that's just in the amount of the dividend, that might be true. But some shareholders would rather just see the Company follow the stable dividend policy those who would like to, lighten up and get some capital out of the Company are free to sell their shares.

So we view it as more of a free market, some shareholders like it the way it is some would like some capital, you can make that decision on your own without any direction from on high. And Brian just mentioned to me, why don't you cover that -- these two items, Brian.

Yes, if you did a one-time dividend you're going to immediately knock your NAV down by that amount. And as we trade as a multiple of NAV for the most part, it's just going to bring the stock down further.

Okay. I hope (inaudible).

So really the easiest way to accomplish these objectives we feel system-wide, is for the Company to try to be conservative, stable, steady not jumping around and then individuals making their own choices. Some might want to buy more of the stock at the existing price, I wouldn't discourage them. Some might want to lighten up, some might want to just leave it the way it is and that way, each of our, what is it 60,000 shareholders can make their own --

112,000.

112,000, boy, it keeps going up can make their own individual decisions.

Perfect. Thanks a lot.

[Bob Perotti].

Yes, I just have [sets of] question, have you ever thought of or considered merging with another business development company?

Well, Bob. This is Grier. We have thought about that and we in fact did that. Three years ago next month, we bought another business development company called Patriot Capital during the last dislocation. And it was a wonderful transaction for us, it's a transaction for Patriot shareholders. Just about all that book has been realized at this point, I think our IRRs in that deal are in excess of 40% on an annualized basis. And if you know of any other deals we're happy to talk to you about it, we'd be happy to do that again many times ever.

We do these things always on a friendly basis. And so if you have -- if you know people who would be interested in talking to us we are interested. We're also interested in buying portfolios, we're interested in other investments in the financial services business as you've probably seen with FT.

All right. Thank you.

Thank you very much.

Jeff Singer, Vicasa Limited

Hi, gentlemen, nice quarter. Question for you -- when you put this new capital work, have you guys done any forecasting what kind of increase in dividend we could expect over the next couple of months after next quarter or two when you put this money to work?

Yes. Jeff, I appreciate your question. We don't project or put out guidance for dividends or income beyond the current quarter. I guess, some companies even stopped giving guidance period. We gave guidance on net investment income and then we announced our dividends on a forward basis, generally for next three months. So we've done each of those things, just in the past week that takes us through to on the income side the end of December, and on the dividend side through the end of January. But again, I can tell you that we look at our own internal forecast and models and deliver at this very carefully as a Board, every time we sit down and discuss these things and we're very comfortable with our dividend increase in the past week.

Got it. Okay, good job. I actually thought the timing of your deal was great for the longer-term use.

Thank you, Jeff.

Well, our deal guys are very happy, because they now have a full plate of things and there's no worry -- do you maybe -- we wouldn't be able to get this one done by the end of the year. So, we're hoping for a very strong fourth quarter, we'll see what happens.

Good luck. Thanks guys.

Thanks, Jeff.

This concludes our question-and-answers session. I would now like to turn the conference back over to Mr. John Barry for any closing remarks.

I don't have any. So, but I do appreciate everyone joining the call. Thanks very much.

Thank you all.

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.