Prospect Capital Corp (PSEC) 2016 Q2 法說會逐字稿

Good morning and welcome to the Prospect Capital Corporation second fiscal-quarter earnings release and conference call.

(Operator Instructions).

Please note: this event is being recorded. I would now like to turn the conference over to Mr. John Barry, Chairman and CEO of Prospect Capital. Please go ahead, Sir.

Thank you, Carrie. 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 forecasts 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, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab on our website, prospectstreet.com.

Now I will turn the call back over to John.

Thank you, Brian. Our net investment income, or NII, in the December quarter was $100.9 million, or $0.28 per share, up $0.02 up from the prior quarter and $0.03 more than our recently declared dividends. For the first six fiscal months of the year, our net investment income was $192.1 million or $0.54 per share, $0.04 more than our dividends.

While regulated investment companies may utilize spillback dividends in the subsequent tax year to count toward prior year distribution requirements, distributable income consistently in excess of dividends enhances the possibility of future special dividends in order to maintain regulated investment company status. We have previously announced monthly cash dividends to shareholders of $0.08333 per share for February, March and April of 2016 with the latter representing our 93rd consecutive shareholder distribution in our Company's history. We plan on announcing our next series of shareholder distribution in May.

We have generated cumulative distributable income in excess of cumulative dividends to shareholders since Prospect's IPO 12 years ago. Since our IPO 12 years ago, through our April 2016 distribution at the current share count we will have paid out over $14.62 per share to initial continuing shareholders and over $1.85 billion in cumulative distributions to all shareholders.

We have delivered solid returns while keeping leverage prudent. Net of cash and equivalents our debt-to-equity ratio was 77.9% in December, close to 77.6% in June. Our NAV stood at $9.65 per share on December 31, down $0.52 from the prior quarter.

We estimate approximately 74% of the unrealized write-down we experienced this quarter related to macro changes in the capital markets as opposed to specific portfolio credit issues. We estimate 18% related to energy and the remaining 8% related to specific non-energy individual credit matters. Our energy asset concentration at December 31, stood at 3.2%.

Our objective is to drive future earnings through prudent levels of matched book funding. We are currently pursuing initiatives to lower our funding costs, including refinancing of existing liabilities at lower rates, opportunistically harvest certain controlled investments at a gain, optimize our origination strategy mix, including increasing our mix of online loans, repurchase shares at a discount to net asset value, and rotate our portfolio out of lower-yielding assets into higher-yielding assets while maintaining a significant focus on first lien senior secured lending. Our Company has locked in a ladder of fixed-rate liabilities extending nearly for 30 years into the future, while the significant majority of our loans float with LIBOR providing potential upside to shareholders should interest rates rise.

As of December 31, all of our portfolio companies are Level 3 assets. Meaning such assets are illiquid with a requirement to use estimation techniques. When we went public in 2004, our Board instituted best practice in the BDC history by employing third-party valuation firms to provide to value 100% of our assets for each fiscal quarter using a positive assurance methodology. Prior to our leading by example, other companies in the industry used self valuations, sampling, and other less robust methods for valuations.

When determining the fair value of portfolio investments, the Audit Committee and Board, including our independent directors, considered not just recommendations from management but also a range of valuations from three independent valuation firms. The board looks at several factors in determining where within the range to value each asset, including recent operating and financial trends for the asset. Independent ratings obtained from third parties, comparable multiples for recent sales of companies within the industry, and discounted cash flow models. Final, selected valuations have never been outside the range provided by third party valuation firms.

In the past several days, we have seen not only people spreading lies about our company, but also people who should know better, repeating those lies without a shred of evidence, without a single identified source, without any diligent checking or any corroboration at all. We know of no current or pending SEC investigation, inquiries or whatever you want to call it. Period. That is not sell side research or journalism as each should be practiced in America, but rather fear driven rumor mongering without any checking. And it is plain wrong. Plain and simple wrong.

We are amazed how many of the things we have seen written ever passed muster for editorial and quantity control with the management of a Wall Street research department, or a quality publication. This appears to be nothing short of a smear campaign to use lies as a campaign to try to hurt our company, and our shareholders. We are not interested in seeing that campaign succeed.

Now we would like to get back to the important business of our Company. Thank you. I will now turn the call over to Grier.

Thank you, John. Our scaled business with over $7 billion of assets and undrawn credit continues to deliver solid performance. Our team has reached approximately 100 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 covers third party private equity sponsor related and direct non-sponsor lending, Prospect sponsored operating and financial buyouts, structured credit, real estate yield investing and online lending.

At December 31, our controlled investments at fair value stood at 33% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities, then select in a disciplined bottoms-up manner the opportunities we deem to be most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually, and invests in a disciplined manner in a low single-digit percentage of such opportunities.

Prospect's originations in recent months have been well diversified across our multiple origination strategies. Prospect closed approximately $1.8 billion of investments during the 2015 calendar year. Our non- bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference secured lending and senior loans.

At December 31, our portfolio at fair value comprised 51.9% first lien, 18.8% second lien, 17.5% structured credit, with underlying first lien assets, 0.5% small business whole loan, 1.1% unsecured debts, and 10.2% equity investments resulting in 89% of our investments being access with underlying secured debt benefiting from borrower pledged collateral. Prospect's approach is one that generates attractive risk-adjusted yields, and our debt investments were generating an annualized yield of 13.3% as of December 2015, an increase of 1 percentage point over December 2014. An increase of 0.6% over June 2015, and an increase of 0.3% over September 2015.

We also hold equity positions and many transactions that can act as yield enhancer or capital gains contributors as such positions generate distributions. We've continued to prioritize first lien senior and secured debts with our originations to protect against downside risk, while also, still achieving above market yields through credit selection discipline and a differentiated originated approach. We're seeking to enhance our yields by capitalizing on recent higher market spreads compared to prior year's.

As of December 31, we held 130 portfolio companies with the fair value of $6.18 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is 9.3%.

As of December 31, our asset concentration in the energy industry stood at 3.2%, including our first lien senior secured loans where third parties bear first loss capital risk. Our credit quality continues to be solid. Non-accruals as a percentage of total assets stood at approximately 0.5% at December 31.

Our weighted average portfolio net leverage stood at 4.19 times EBITDA, down from 4.36 times in September. And our weighted average EBITDA for portfolio company stood at $48.6 million, up from $44.6 million in September.

The majority are of our portfolio consists of sole agent and self-originated middle-market loans. In recent years we perceive the risk-adjusted reward to be superior for agented, self-originated and anchor investor opportunities compared to the broadly syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business.

Originations in the December quarter were $692 million across five new and several follow-on investments. We also experienced $731 million of repayments and exits from several other investments as a validation of our capital preservation objective resulting in net investment exits of $39 million. During the December quarter, our originations comprised 45% third party sponsor deals, 40% online lending, 7% syndicated debt, 3% operating buyouts and 5% real estate.

Our financial services controlled investments are performing well with annualized cash yields ranging from 18% to 30%. Because of declining unemployment rates and declining commodity prices, we believe the outlook for consumer credit continues to be positive for 2016 boding well for such companies. To date, we have made multiple investments in the real estate arena with our private reach, largely focused on multi-family stabilized yield acquisitions with attractive 10-year financing.

Our real estate portfolio is benefiting from rising rents and strong occupancies and our cash yields have an increase with each passing quarter. In December, our APRC rates exited the Vista transaction with a 35% cash realized IRR and 2.1 times cash on cash multiple. Over the past few years we have grown our online lending portfolio directly, as well as within NPRC, with the focus on super prime, prime, and near prime consumer and small business powers.

This portfolio stands at approximately $694 million today, including third-party financing across multiple third-party and captive origination and underwriting platforms. Our online business, which includes attractive advance rate financing for certain assets is currently delivering a levered yield of approximately 17% net of all costs and expected losses. In past year, we've closed and upsized four bank credit facilities and one securitization to support this business with more credit facilities and securitizations expected in the future.

Our structured credit business performance has exceeded our underwriting expectations demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on the most attractive risk-adjusted opportunities. As of December 31, we held $1.1 billion across 40 non-recourse structured credit investments. Our underlying structured credit portfolio consisted of over 3,179 loans and a total asset base of over $18.8 billion.

As of December 31, our structured credit portfolio experienced a trailing 12 month default rate of 60 basis points, or 94 basis points less than the broadly syndicated market default rate of 154 basis points. In the December 2015 quarter, this portfolio generated an annualized cash yield of 25.8% and a gap yield of 17.8%, up from 20.6% and 15.4% respectively in the June 2015 quarter.

Our structured credit portfolio consists entirely of majority owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases we received fee rebates and other special economics because of our majority position.

As a majority holder, we control the ability to call a transaction in our sole discretion in the future, and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low. We as majority investor can refinance liabilities on more advantageous terms, as we have done four times in the past year and negotiate better terms to remove bond baskets in exchange for better terms from the debt investors in the deal as we have done five times over the past year.

Recently we sold two structured credit positions at 97% and 94% of par. Above those are September 30 and December 31 valuations and at a 13% cash realized IRR, which we believe validates the quality of our structured credit portfolio.

As a yield enhancement for our business, in the past year we launched an initiative to divest lower yielding loans from our balance sheet, thereby allowing us to rotate into higher-yielding assets and to expand our ability to close scale one-stop investment opportunities with efficient pricing. So far in FY16, we have made three sales of such lower yielding investments totaling $74 million with the weighted average coupon of 6%.

We receive recurring servicing fees paid by multiple loan purchasers in conjunction with many of these divested loans. We expect similar sales in the future as a potential earnings contributor for the June 2016 fiscal year and beyond. We booked $10 million in originations and received exits of $40 million so far in the current March quarter.

Thank you. I will now turn the call over to Brian.

Thank you, Grier. We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets and weighting towards unsecured fixed rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our Company has locked in a ladder of fixed-rate liabilities extending nearly 30 years into the future, while the significant majority of our loans float with LIBOR providing potential upside to shareholders as interest rates rise.

We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond, acquire another BDC and many other firsts. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry which we have taken toward construction on the right-hand of our balance sheet.

As of December 2015, we held approximately $4.7 billion of our assets as unencumbered assets representing approximately 76% of our portfolio. The remaining assets are pledged to Prospect Capital Funding LLC, which has a AA rated $885 million revolver with 22 banks and with a $1.5 billion total size accordion feature at our option. The revolver is priced at LIBOR plus 225 basis points and revolves until March 2019 followed by one year of amortization with interest distributions continuing to be allowed to us.

Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation, multiple types of investment grade unsecured debt including convertible bonds, institutional bonds and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross defaults with our revolver.

We are enjoying an investment grade rating of BBB+ from Kroll and an investment grade BBB minus rating from S&P with stable outlooks for each. We've now tapped the unsecured debt market on multiple occasions to latter our maturities and to extend our liability duration up to nearly 30 years with debt maturities extending through 2043. With so many banks and debt investors across so many tranches we substantially reduced our counter party risk over the years.

We have refinanced two debt maturities in the past year including our $150 million convertible note in December 2015, and our $100 million baby bond in May 2015. Our only significant maturity during the next 19 months is a $167 million convertible note due in August 2016, which we anticipate refinancing through our lower-cost $885 million revolver that is currently undrawn. If the need should arise to decrease our leverage ratio, we believe we could slow originations and allow repayments and exits to come in during the ordinary course.

In calendar year 2015, we enjoyed over $1.8 billion of repayment which we view as a validation of our strong underwriting and credit processes. On December 10, 2015, we issued $160 million of 6.25% senior unsecured notes through June 2014. As of December 31, 2015, we have $894 million of program notes outstanding with staggered maturities between October 16, 2016, and October 2043, and a weighted average interest rate of 5.19%.

On July 28, 2015, we began repurchasing our shares of common stock as they were trading under significant discount to NAV. Since that time we have purchased 4.7 million shares of common stock at an average price of $7.27 per share. We purchased this total approximately $34 million to date.

We believe there is no greater alignment between management and shareholders than from management to own a significant amount of stock, particularly when such stock is purchased on the open market as with Prospect. Management is the largest shareholder in Prospect and has never sold a share. Management on a combined basis has purchased at cost over $110 million of stock in Prospect, including over $50 million in December 2015 alone.

We currently have no money drawn on our revolver. Assuming significant assets are pledged to the revolver and that we are in compliance with our revolver terms and taking into account our cash balances on hand, we have over 707 million of new facility-based investment capacity.

Now I will turn the call back over to John.

Thanks, Brian. We can now answer any questions.

(Operator Instructions).

Merrill Ross, Wunderlich.

In reading your 10-Q, in the six months ended 12-31, the CLO residuals experience about 11% unrealized depreciation and the dollar amount was $119 million, which is the highest dollar amount of deterioration investment type. Given that credit losses as you discussed, remain well below trend, would you characterize this deterioration or depreciation as related mostly, maybe not 100%, but to spread widening and market conditions?

Yes. That is correct. Obviously, and thank you for your question, Merrill. Obviously it's no secret out there that there is a tremendous amount of volatility. We really started ramping up in the December quarter and continues significantly in the current quarter. And we're seeing a lot of that decoupled from actual credit and fundamental performance in our portfolio, not just within the structured credit, but really the entire rest of the portfolio. (multiple speakers)

Merrill, this is John. I have a couple things that are perhaps larger issues to point out. While our default rate in the CLOs has picked up a bit it is still below the market average, I'm proud to say, for other CLOs in the industry.

When we started building our CLO book we focused very carefully on the concept of investing in the cash flows of the CLOs, doing careful credit analysis, careful choice of managers, because our investment thesis has been that if we do our diligence on the manager, on the portfolio, on the individual credits, and keep our defaults current, past, projected low, the cash flows will come in over time and our investment thesis will be vindicated. That markets churn in the meantime in our view is not going to be changing the cash flows that form the foundation for our investment thesis.

I hear you. And the follow-up is many times deterioration in market conditions and widening credit spreads is a precursor to a recession or times of stress. In talking with your portfolio Company, as well as your CLO managers, I just want to confirm that they're not seeing fundamental credit deterioration or expectation of facing headwinds in 2016, but that the market and the economy is in fact expanding.

Well, Merrill, when we do our valuations, we have a reality check as we go through carefully the financials of each Company and talk to the valuation agents. And I remember the reading was about half of our companies were doing better and about half were doing worse. I think slightly more than half were doing better and slightly more than half were doing worse. So less than half, Grier says.

So when we hear out in the wild blue yonder, rumors of an impending recession, we do not see that in our portfolio, yet. No one can predict the future. Now, with respect to energy it's a completely different story. The pain in the energy sector is well understood by everyone and we have 3.2% of our portfolio is in energy.

We are working with those Company's hoping to be able to come out the other side of the commodity cycle. We have been through these commodity cycles before. We have come out every time before. This one and the energy sector is clearly one of the worst that we have seen. That is an area of high concern.

Elsewhere in the portfolio, as I said, more than half are doing better and less than half are doing worse. So we are unable to infer an imminent recession at least in our portfolio.

Just to add to that, Merrill, it really is a tail of two cities, as John mentioned, energy and non-energy. And you are always going to have idiosyncratic things going on with credit. In general we are seeing a solid performance in the non-energy book and even less take away from John's comments about the decline.

If a credit goes down by a dollar in EBITDA that is a decline. That is not necessarily worrisome from a credit standpoint. We are not in general taking equity risks, while certainly in our straight non-controlled lending book and small declines are not of great concern.

We also have predominantly a first lien secured debt portfolio and our first lien book has scheduled amortization and access cash flow sweeps that typically start at 50%, and in many cases and in some cases are greater than that. So they're really deleveraging structures as well. So far there seems to be a lot more fear than reality, but we will of course continue to monitor that very closely as we do in the coming weeks and months in our portfolio.

Say, Brian, since you spend so much time on the valuations and the individual companies at valuation time, do you have any additional color to add.

You know, the one other component that I don't think is really indicative of the actual results for the Company is in our consumer debt companies. With multiples on the comparables have driven down and that has driven the values of our valuation agent support on those asset, which is not indicative of the operating results of those companies which are doing fantastic. But other than that, I think the portfolio remains stable.

Terry Ma, Barclays.

Can you talk about what happened with CP Energy Services? It looks like you converted both the term loans into convertible preferred stock this quarter and only marked it down a couple of points?

I will comment on what is happening with CP and I will ask Brian to comment on the valuation component, question. Other than Energy Services Company, part of the 3.2% energy exposure within our portfolio and, like virtually all companies in the oil patch, whether E&P companies or Oilfield Service Company, as the case with CP.

Even the best management teams and the best basins or the best equipment, and customer relationships and people have challenges overcoming a sharp precipitous supply and demand, such as what we have seen in the last year. So that's the simple backdrop. We are all aware of what is going on there.

As we put in our Press Release, we think it's a mistake to have a company unable to service its debt with a large debt balance, outstanding and highly unrealistic, and also demotivating to the existing management team that we want focused on operations. So equitizing that deal is plain old common sense as far as we are concerned and disclosed fully. It does mean lesser income for that asset, but I think that was already the case in the September quarter.

It was already written down in September quarters substantially.

But also from an income standpoint. That's old news from an income standpoint, you have to reach all the way back to June and we already were impacted in September and no change really in December from an income standpoint. And Brian, you want to comment on the valuation part of Terry's question?

Yes, that's what I was talking about. Most of the hurt on this was taken in the September quarter and it had already been written down. This is a Company that is valued at a relatively low multiple of earnings and it's written down, about almost $40 million from our cost basis. So like I said, the pain was taken in September and the Company continues to stay positive should the energy cycle turnaround.

Got it. We're those loans cash loans

I believe so.

They were serviced until the middle part of 2015, a bit later. I thought we already had them on nonaccrual as of September 30, if I'm not mistaken. They might have had an interest payment in the middle of the quarter, but I think of as of September 3, CP was on non-accrual.

Non-accrual means that you only recognize it as income when an interest payment is made and you don't accrue for accounting purposes into a period.

Got it. And then with Freedom Marine, that's the same story there?

Yes, pretty much. It's part of the 3.2%, this is a company that has offshore supply vessels that service drilling and also made its environmental activities in the Gulf of Mexico, and strong operators and a strong team. Demand has been like crickets in that business. Widely reported elsewhere for a long period of time.

We've got pretty nice collateral there in the ships that we own and this is a cyclical industry. And much like folks make the mistake of saying hired for longer or hire forever when prices are high. Sometimes you can see the opposite effect occur when depression sets in we say, lower for longer, lower forever. Either statement is probably an overstatement and incorrect and we subscribe more to reversion to the mean.

Got it. This is just an observation. I'm just surprised those converted positions were not marked down a little for a lot of the [BDC] that reported so far. Some of their non-accruals in energy investments have been marked down a lot more than what you guys marked in your book.

As Brian just mentioned, we took some pretty significant write-downs in September in our energy book. One difference might be substantial collateral that we hold. It's hard to compare to the vagueness of others, but if others are holding term loans that don't have a first lien on accounts receivables, don't have a first lien on the equipment and they don't give a first lien on vessels as we do, perhaps the recoveries would be substantially less. We have no bank revolver ABL ahead of us in this deal.

I think it bears repeating as well that the valuation agent is independent, has no self-interest to be anything other than accurate and we start with the valuation agents estimated value and sometimes there's a range. We can talk about where in the range we think we should come out. Many times there is a single point. So we just have to take that. As managers, we are recipients of the workflow from the valuation agent as is our Board of Directors. Bryan, do you have anything to add to that

Not really. The valuations are all within the range that is provided by our valuation agent and has been since 2004.

Right.

Great. That's it for me. Thanks.

Thanks, Terry.

Christopher Nolan, FBR & Company.

Could you give a little detail in terms of what is driving the dividends from the control book this quarter?

I am guessing Brian's APRC and the Vista sale, where I mentioned before NPRC one of our controlled investments sold the multi-family property and we booked. So we made over two times cash on cash in 35% IRR, as I said in the prepared remarks. And it allowed for substantial buildup in tax based earnings and profits and a distribution as dividend income up to PSEC. So we are happy with that monetization.

There are parts of the economy doing quite well and multi-family residential we think stands out as somewhat of a shining star there with continued period after period increases in net operating income. We are going through a process right now of looking at recapitalizing some of those investments with advantageous financing. In general, that industry the most advantageous is GSC financing which we hope and expect will add to our yields and distributions in the weeks and months to come as well. It is a great time to rate lock on a recap when you look at 10-year treasuries now well below 2%.

Okay.

While from time to time people complain about the complexity of our book and the complexity of nine business lines and the complexity of understanding how these things are valued and accounted for, we believe that running nine somewhat less than 100% correlated investment strategies arouse our Company to move steadily, more steadily than otherwise through the ups and downs of the credit, the economics, the energy cycles.

So here we have an example, real estate was not pulling the sled as the strongest horse two years ago and in this last quarter where we see rents do not decline when economic activity declines. When interest rates go down, rents are not declining, but in fact in our book rents continue to increase and I know people who are renters are very unhappy about that. But in our book as investors that means, as Grier says, the real estate portfolio can stand up and take its turn to move us forward and here we've earned $0.03 more than our dividend. If we did not have nine differentiated less than 100% correlated investment strategies, we probably would not be here with $0.28.

John, as a follow-up to that given that your investment strategy is a little more sophisticated in the BDC industry in general do. Any thoughts in terms of how transparency, particularly for the CLO book could be improved? My thought being is the CLO asset quality performance has been strong, better than I think [Pierce] and I am just trying to get some clarification in terms of what is driving that and how would be helpful in terms of investors better understanding the story.

Let me comment first with a truism, unfortunately. When something is obvious to everybody, it's probably when an investment thesis is obvious and available and transparent and easily understood by everyone, it is less, not more likely that we can earn alpha investing in that strategy. That is a truism, right?

So when I look at aircraft leasing, which we have a book of and I have done very well with. When I look at real estate which we have done well with. When I look at CLO's which we have done very well and I notice that people don't understand the complexity. It's too complicated and I don't get it. I'm not sure what's happening here. What that does is it removes competition from the playing field for us. And here in the case of CLO's we take a majority stake, meaning we have more influence over the course of the CLO's, when it will be called, when it will be volkerized than your average hedge fund that is buying small pieces.

So while we endeavor to be transparent, we are required to be transparent by law. I think we are one of the most transparent companies that I can think of. The fact that there is some level of, how would I call it, irreducible complexity in our book we think is a source of strength and a reason why our portfolio has out-performed that of other BDCs. I am sure you have seen the slides on our website. All audited numbers showing that outperformance.

And, Chris, I think a couple of things. One, we have not benchmark the pagination of 10-Q's and K's of ourselves versus our peers, but we have to have some of the thickest disclosure package already out there. Having said that, if you have specific ideas off-line on additional information and tables and other information you think would be helpful for us to publish in the future to the investor community, we would more than welcome that feedback and we're happy to disclose as much is reasonable and feasible. Anything you want to add to that, Brian?

Yes, Brian

No. There is ways to get at every one of these CLOs. They are all on Intex. Any firm that has Intex can see the cash flows on these at any time. This is not something that we are trying to hide and I look forward to hearing your feedback on what you think we could add to the disclosures.

Great. Thanks for taking my questions, guys.

Thanks, Chris.

David Chiaverini, Cantor Fitzgerald.

I just wanted to follow-up on the CLO discussion. As of December 31, you had $32 million of CLO debt and over $1 billion of CLO equity. Now the $32 million of CLO debt, that's what you sold and you got a great price for it, so I was happy to see that. But given that over a $1 billion is CLO equity, could you comment on marketing conditions for CLO equity and if there is any transactions that you would see in post quarter end of similar securities of that which you won't?

Sure, David. They are just limited liquidity and I think it is important to point out these are Level 3 assets. These are not Level 2 assets, these are not Level 1 assets certainly. And the Level 3 assets where you have to use estimation's of value, but in general because of the volatility of the capital markets, the equity markets and the credit markets you see not surprisingly a significant slowdown in primary issuance and any type of secondary activity, and not surprising at all. If you see a drop in equity markets or credit markets people sometimes pause and they say let me wait another day and it will be a little bit cheaper. This is a typical dynamic.

We have not typically grown our portfolio to where it is today in the structured credit business on a secondary basis. It is always been highly illiquid even during their fit market conditions. And we have also have insisted almost all the time to be in a controlled seat because of the many benefits that we talked about during our prepared remarks and have talked about for quite some time now. And you don't see that much transaction activity in general especially for larger controlled stakes that have the benefits that we talked about. So I hope that helps answer your question, David.

I have something to add David, as well. Investing in Level 3 assets is only prudent for well capitalized companies, in my judgment because if you are hedge fund suffering redemptions, if your are a Third Avenue or the analog to Third Avenue in the hedge funds or perhaps other mutual fund space, and you must sell, you will be deemed to be selling from some type of desperation. In liquid markets, the smart people step aside and they wait for the volume and the liquidity to return.

We are in the fortunate position of not needing to sell anything. When we do sell, we can wait for the price that we want and that's why we were able to sell these two debt pieces above our most recent marks. Now people will say those were debt pieces those were not equity pieces. One of the discussions we have here is CLO people often talk about all pieces being bonds or being notes or being debt, because the absolute last penny in the waterfall is typically a piece of equity held by a came in charitable trust or some other entity like that.

So the entire CLO structure is a waterfall of debt and accordingly, while the notes that we sold above our most recent marks, mind you, in a horrible market, mind you, were debt and no more debt than the equity that we hold, except that they are higher up in the latter. And so, they are not 100% all fours with what we call equity and we think we are proper calling them equity positions.

They're not 100% all fours, but we believe they are indicative. And they are also indicative of the propriety of the strategy where we don't sell things unless we believe we are going to get a good price. Ideally above our marks as we just did. We are not under any compulsion to sell, nor are we under any compulsion to buy. We are waiting for how would I say, common sense to return to these markets.

Thanks for that and then shifting gears to your online lending. Now that it is north of 10%, the gross exposure of roughly $700 million is north of 10% of the portfolios. I'm curious, how much of that portfolio is near prime versus the super-prime and prime?

Well, first, online is not 10% of our portfolio. Our investment is about $360 million or so of our capital which compared to our total portfolio of just over $6 billion, talking about more in the 5% to 6% range.

And then pertaining to your question about wristbands. What we have not focused on is the sub-prime area, the sub 600 FICA arena, and have really focused on super-prime, prime and near-prime. Most of our, the vast bulk of our prosper book is super-prime and prime, and our lending club book is prime and near-prime. I don't know what the precise percentages is each category in the FICA bands at my fingertips, David. But the lending club book, is about 60% of our book and the Prospect book is about 40%. I'm talking about our consumer book which is the vast bulk of our investments to date. Small business is relatively small, in part because it is more difficult to ramp a portfolio there because the loans pay off so quickly. There's a lot of earnest activity to get assets on the books and then they repay quickly. Which of course is a big credit plus as well. But it means it is harder to grow.

David, back to your point about transparency. I'm surprised I left out of the equation this online book. If you talk to Brian, I think he will tell you half of our accounting staff is working on the online business.

We have eight people as a dedicated team. We, to our knowledge are one of the largest purchasers of these online assets and they are also very difficult to analyze, to understand and to diligence. But we have been happy to see that our results have been to certain metrics, I hesitate to say every single metric, but as to certain metrics the results have been coming in above our expectations. Yet when we talk to other investors they are often deterred from investing in the space because we don't understand it and we don't have the back office, this is a new asset class. And as a result that is another area of our business where we think we can generate alpha and that again was a big contributor to the three cent beat of our dividend this quarter.

Thanks, guys.

Thanks, David.

Christopher Testa, National Securities Corporation.

Just with regard to the lower yielding assets that you are disposing of. How much more of those do you have to dispose of and what is the liquidity there? And what should we see as yield differential between those and your proprietary investments?

Sure. Average yield is in the range of 6% to 7%, call that 6.5%. These are Level 3 assets that are assisting with agented one-stop lending positions that we own. We have got some of the assets pledged to our facility which we may not be interested in selling but other assets that are unpledged, I want to say it's in the $400 million range approximately of those assets and we are very careful and are taking our time there. We don't need to sell. We would sell only opportunistically as part of a yield enhancement approach. If market conditions slow that from time to time, fine, we will wait for buyers that are interested at the appropriate time.

There are some pretty attractive positions for someone to purchase as a part of a one-stop if you figure we do an overall loan at four or five turns of EBITDA, really on the lower sides of that. We have one of the lowest debt to EBITDA positions of any BDC that reports that stat that we have seen. Others are much closer to 5 or 5.5 that report out there. But you figure you takes 4.5 and you have an A piece and a B piece and the A piece is 2.25 and the B piece is the remaining 2.25, it's a pretty attractive piece of paper to earn 6% or 7% on for some bank or insurance company or some other type of investor. So we think that is nicely added.

We have also been successful in charging servicing fees and revenues and additional yield enhancement and selling to certain investors as well. So we would like to do more of that. We also like to do more to look to potentially boosting syndication revenue for our business. We have to interface with a lot of people in the industry. We have been in this industry for a long time and with a lot of relationships to leverage. And I think owners of businesses are looking for more and more help given the volatility of the market and given the pullbacks, job cutting, et cetera of many of the Wall Street banks in this arena. It creates an opportunity for companies like ours.

Okay. That's good color. And just as you're rotating out of these loans, with higher yielding, are these simply lower yielding because they are the larger borrowers or would you be taking on, you know more, I guess structural risk per se when you're going into the higher yield loans?

We don't think we would be taking on structural risk because our bias is towards first lien secured lending anyway. And I mentioned where our leverage point tends to attach. We are on the lower end anyway, so you're talking about rotating to some type of first lien position potentially. It is unlikely to see us grow our structured credit book from where it is given the 30% basket and other constraints. You did not see us add to that position in the quarter.

You may see us look to continue to grow our online business. We think we can enhance our returns there through appropriate securitization at the right point in time, maybe the second market volatile. As they settled down that will be a very nice approach for us as well. And in which in many cases, we recap and get a substantial portion of our capital back quickly on the front end.

We are not looking to in general to increase our risk in the portfolio. And for new originations, for some time now we've been including in our base cases the assumption of the recession hitting as opposed to many lenders that will kind of extrapolate some kind of flat line and run their underwriting off of that. We have been careful on the origination front and are not looking to enhance structural risk.

Okay. Got it. That's helpful. Just with, I know the multi-family rate had a great disposition and great return. Are there plans for more of these dispositions going forward given that multi-family cap rates are historically very low right now? Is that something where you see an opportunity to harvest more gains like the when you just had?

Potentially, but in many cases we see additional upside ahead of us with these assets. And so the best way to harvest partial gains is to recapitalized those businesses, which I talked about a few minutes ago with financing from the GSE and financing costs are quite attractive right now given their peg to treasuries, and treasuries have dropped pretty sharply. We have rate locked on some deals in recent days and feel quite happy about those financing costs.

Okay. And just with the commentary on consumer credit, I just wanted to hear your thoughts on consumer credit given a lot of the issues that the companies (inaudible) I know [London] Club recently had a pretty big uptick with their write-offs. Can you comment on that and how that impacts your outlook on that sector?

Sure. Our consumer credit book has exceeded our underwriting expectations. We are very happy. We are not seeing an uptick in losses or expected cumulative losses. In fact the opposite. The consumer wallet which is what we are talking about from a macro standpoint looks relatively healthy right now when you look at deleveraging. You look at declining unemployment. You have not seen massive wage growth. You have seen a little bit. You've seen huge gasoline dividend with lower fuel prices. So we are very happy overall with the consumer picture and having exposure on the consumer side has been a net plus in the economy or for any credit book arguably in the last quarter in year compared to say energy which is been on the extreme opposite end.

Okay. And are there any specific industries where you're seeing backup and yields were you get an attractive underwriting, things that have fallen out of favor just kind of the backwater with energy, metals and mining. Is there another industry that seems to be priced in an unnecessary risk where you are seeing an opportunity.

You mentioned energy, metals and mining. That is the giant phase right now where some capital has been raised to take advantage of the opportunity but mainly earmarked towards secondary trading and those types of distress situations for private middle-market companies that need capital to pursue various things. There is not a lot of capital available and in some cases it's warranted and justified. Oilfield Services, for example, It's hard to see a business case for a lot of new capital coming into that sector until you see some type of uptick in demand.

A&P companies are a little bit different because you're talking about financing and existed assets. It is all about the price deck that you select. We've got feet on the ground in Houston to help with that. This has been a small percentage of our book about 3.2%, but we have a lot of expertise in house.

We have said I think in this format in prior calls that things would get worse in energy before they get better and that has been proven to be correct. As we sit here right now things could get a little bit worse, but you start to approach the cash costs of producers for new drilling. And so it seems difficult to imagine just mathematically the commodity going significantly south from here and staying there for the same period of time. So we are not prognosticator of commodity and macro markets and saying this is when the bottom will occur. But I think there will be some interesting opportunities to emerge in the coming months in that sector and I'm not sure today but in the coming months.

Outside of that, I mean the underwriting is the same process that we have well honed and have done over our almost 30-year history as an asset manager. The fundamentals of credit don't change and we focused on diligent underwriting and I'm not sure there is anything macro industry by industry to point out at this point beyond energy.

Okay. And how are you weighing, I guess doing the new originations versus buybacks given that your harvesting gains? You have these lower yields and loans rotating out. Your stock is at such a significant discount for net asset value right now even with the balance today. How are you looking at the buybacks and just your thoughts on that and the appetite for your Company doing that in the coming quarter or so?

Sure. I think the first priority for us is to be very prudent with our leverage ratio. We are showing a strong and disciplined credit profile to the debt community, to the bond community, to the rating institute community. This is a very high priority for our business and we saw in this past quarter with us and many others and I'm sure we will continue to report in the coming days and weeks some nontrivial changes in market valuations and you have volatility in the quarter to date.

So we are being cautious on the new capital deployment front for that reason. We mentioned that the quarter to date we are about five weeks or six weeks into the quarter and that we have only put up about $10 million in the past 40 million of repayment. Last quarter we had a net repayment situation as well. So we are very cautious about that and we are going to protect our credit profile first. And you don't want to make universal decisions that could erode that or eat away at it in any fashion.

So we are cautious on the buyback front for that reason in December when volatility started to pick up. But we are interested in buybacks and have bought back and pretty significant amount of stock, about $34 million or $35 million or so to date. We have authorization up to $100 million. We are interested in that in the future, but for right now protecting the leverage and credit profile is the most responsible thing that a non-bank financial services company can do.

We feel very fortunate to have a very well laddered maturity profile. There are others out there that have pretty significant maturities coming do. We do not. We only have about $167 million of discrete term debt coming due next in the next 19 months and then we have it laddered with no more than one maturity in any given year. But you have seen that withdrawal of confidence and you've seen it on the debt side as well is on the equity side.

Ours is a business that has developed many of the liability structures you see in the industry. We pioneered the first convertible bond. We pioneered the one of the first institutional bonds. We are the only company that issues program notes out there. We issued a baby bond. We saw that excellent timing in December and many of those markets are currently closed to folks.

We're very cautious about that and we are going to take care of job number one which is the credit profile and liquidity and defending the business. And then, once you have played good defense you then consider the next step of going on offense for some of the areas we mentioned in looking at risk reward of primary originations and share repurchases in a balanced fashion. Hopefully that helps Chris, to see some of the things that we contemplate on a daily basis.

This is John. I just have a couple of points here to add. Measured by aggregate dollar purchases, Prospect Capital Corporation has purchase more stock than any other BDC. Measured by aggregate dollar purchases Prospect management has purchased more stock than any other BDC management team. All such purchases were made in the market, at market prices from each manager or employees after-tax savings, without the benefit of stock option grants. No Prospect manager or employee has ever sold a single share of Prospect stock. That is alignment.

Yes. No. I absolutely respect that and I have seen insider purchases. I was just asking in terms of doing the repurchases from the Company itself would lower your share count significantly and help to get a NAV per share a significant boost and be very creative on an NAV per share basis.

John I do appreciate you guys always putting your money where your mouth is and believing in your own company. It is of course respected and definitely notice. Just the last question for me just on the CLO equity, again I know it's an excellent asset class. You guys have had one of the best and lowest default rates in the markets. I completely respect the asset class.

However it seems to be kind of a recurring theme that the BDCs that have a significant amount of CLO equity as part of their 30% bucket are always hit with a substantial NAV discount. And whenever anybody announces they were going to get out of there, even if it was a small portion of their portfolio, the stock immediately reacted to that.

What would be your thoughts on potentially letting the CLO equity portfolio just runoff and using the cash proceeds and just reinvesting and making proprietary originations? You know, I know that you had mentioned that the market doesn't understand it and I agree it is very frustrating because it is a great asset class. But it just seems to be the case that the market just does not want this in the 30% basket. Any of your thoughts on that would be appreciated.

Sure. Well it has been a terrific asset class and we didn't read in prepared remarks, but you can look at it our Press Release and we put in some information about the asset class, which I'm guessing a lot of folks reading it did not know about, including how the asset class is delivered 22% annualized return since 2003, how it significant exceeded the higher bond index, significantly exceeded the S&P and pre-dislocation time periods to today and now less than 2% of deals and lifetime in the industry have had a negative return. That is not a wipeout that's just the negative IRR.

Imagine yourself buying 100 stocks one decade ago and how many had a negative total return it would be more than 2%? I would wager. So we let the data guide us as rational actors and we make intelligent decisions. There are capacity limits based on regulatory and ratings driven and other baskets for our Company which we manage on a constant basis. And as I said a few minutes ago, you're unlikely to see us grow the portfolio from where it is today because of those capacity limits.

In terms of valuations and relative valuations, it's an interesting argument. You have folks that are pure CLO equity focused companies that trade higher than average BDC. So, go figure. It kind of eats away a little bit at that argument and one reason we look to spinning off those assets or have looked at that. And of course right now is a time in which our whole industry is trading, I think an average of more than 30% discount.

I guess folks can talk about how you become a slightly less -- how you could go from X% to Y% and it still might be sharp. We just have to make intelligent capital allocation decisions based on investments we think prudent. The street might cheer some company on to go heck bent into energy two years ago. I remember reading things about that was some of our peers. You don't read that now, anymore. So you have to stick to your true North analytics I think sometimes as opposed to fairly fleeting sentiments.

You know, Chris, it's John again. One of the reasons I mentioned how much dollar value of personal after-tax savings is invested by the managers and employees in Prospect stock is to make sure that people understand the people that work here are hyper-focused on the stock price, merit trades, net investment income and the dividend and everything else that falls under the umbrella of shareholder value.

We have a lot to gain and a lot to lose here in the stock price. So we are not distracted. Now it is something that I too have wondered about. Looking at other Company's that have CLO books, other BDCs with CLO books. How do they trade? Is there evidence that having a CLO book impairs the trading of your stock? Well, there is some. But there is also evidence going the other way. So there is a 100% CLO company out there trading at a big premium.

I think that occurs and I'm sorry to interrupt. But I think that more so occurs because if you look at kind of oxford or eagle point, they are all CLO equity with a tiny bit of debt. And the market knows that when there is a share decline they pretty much know that there is no cash flow impairment, this is just for spread widening. These things should not be trading off NAV. Whereas with the BDC, the market is kind of I guess we could say, that most investors are too lazy to differentiate between which NAV decline is coming from spreads widening, which you know your CLO equity book took a hit just because spread widening. And what is actually occurring from deterioration in the underlying portfolio companies. So I think that is why there is that dichotomy that exists between the pure play CLO players and the BDC invest in some of it.

Right, Chris. What I was leading up to is I encourage people to look at the slides on our website that show the performance of our portfolio. That is something that we are paid to manage and cause to perform. We believe over long periods of time the stock price will follow the portfolio performance. So as focused as we are on the stock price, we have to remember the true North which is to run a portfolio that steadily, week after week, month after month, quarter after quarter turns out alpha generating portfolio returns. So I want you to know we have both in mind. Okay, but thank you very much for your questions.

All right. Thank you for taking my questions.

Greg Abella, Investment Partners Asset Management.

First a comment at John. I'm very happy to hear you in your opening remarks attempted at least two stem some of the negative narrative out there, because it has been distressing for those of us who are long-term holders and have been supportive. And I don't know whether what you said is enough to turn the tides but at least it's a step to address some of the things that are out there. And along those lines, it certainly seems to have had an impact on the share price.

In terms of operationally I hope it has not had an impact on the debt side of your balance sheet and attempting to refinance it. Because we are running at $42 million a quarter apparently of interest expense and if you can refinance it every dollar you can save that flows to the bottom line is obviously $0.90 in an extra dividend to us. So maybe you can comment on how you see that and whether or not you can still, in this environment, accrue some savings from refining your debt load at potentially lower rates.

Absolutely, Greg. And thank you for your comments as well. It's a great question because there may be some nice opportunities to retire debt attractively given the volatility of the market and you may see us examining some of those possibilities. And we have our $885 million revolving credit facility is completely undrawn. The incremental cost above the commitment fee we already paid that shows up in the cost you are referencing is only about 1.75% based on today's LIBOR. I know we are expecting surging LIBOR, given recent comments from the fed including today. And that is pretty attractive relative to some of the term debt that is out there on a coupon basis especially if weak holders choose to sell at a discount.

That could be a nice opportunity for us to kill two birds with one stone. One to improve income and profitability and to get a more than one-for-one benefit on the leveraged side as well as a partial mitigant potentially compared to the volatility on the asset side of the ledger which of course is impacting the whole industry. We are spending an untrue amount of time on that, Greg and it's a terrific question.

Do you know roughly if you are successful, how much you can save on an annual basis in interest expense?

It is hard to estimate right now. And you have to look at each deal and where it is trading and how much you can repurchase and how much you have to go the tender roots for et cetera. We would have to evaluate that and it is hard to put out an estimate at this point.

Thanks. Fair enough. We wish you a lot of luck and I am hoping it's onward and upward from here.

Thank you, Greg.

Greg, thanks very much. When we appreciate the luck, what we find the harder we work the luckier we get. That's all the time we have for questions. As always, if you wish to follow up please don't hesitate to contact us directly. Now we are getting back to work. Thanks, all.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.