Prospect Capital Corp (PSEC) 2022 Q2 法說會逐字稿

Hello, and welcome to today's Prospect Capital Second Fiscal Quarter Earnings Release and Conference Call. My name is Elliot, and I will be coordinating your call today. (Operator Instructions)

I would now like to hand over to our host, Mr. John Barry, Chairman and CEO of Prospect Capital. Please go ahead.

Thank you, Elliot. Good morning, everyone. Joining on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

Thank you, John. This call is the property of Prospect. Unauthorized use is prohibited. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Actual developments and results are highly likely to vary materially, and we do not undertake to update our forward-looking statements unless required by law. For additional disclosure, please see our earnings press and 10-Q filed previously and available on our website, prospectstreet.com.

Now I will turn the call back over to John.

Thank you, Kristin. In the December quarter, our net investment income, or NII, was $85.6 million or $0.22 per common share, exceeding our distribution rate per common share by $0.04. Our basic net income attributable to common shareholders was $246.4 million or $0.63 per common share as the overall value of our investment portfolio increased for the seventh consecutive quarter due to a combination of positive company-specific and macro factors.

Our net asset value stood at $10.60 per common share in December, up $0.48 and 4.7% from the prior quarter and representing our seventh quarter in a row with NAV growth. Our NAV per common share is now at the highest level since September 2015 over 6 years ago. We have outperformed our peers during the past multiple quarters of macro volatility as a direct result of our previous derisking, not chasing leverage as well as other risk management controls.

We are staying true to the strategy that has served us well since 1988, controlling and reducing portfolio and balance sheet risk, both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders.

In the December quarter, our net debt-to-equity ratio was 51.3%, down 22.8 percentage points from March 2020 and up 3.1 percentage points from the September quarter as we continue to run and underleverage the balance sheet, which has been the case for us for multiple quarters.

In May 2020, we moved our minimum 1940 Act regulatory asset coverage to 150%, equivalent to 200% debt to equity, which not only increased our cushion but also gave us flexibility to pursue our subsequently announced junior capital perpetual preferred equity issuance, which counts toward '40 Act asset coverage but which gets significant equity treatment by our rating agencies.

We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.70 to 0.85 debt to equity, and we are currently significantly below that target range.

Prospect's balance sheet is highly differentiated from peers with 100% of Prospect's funding coming from unsecured and nonrecourse debt, which has been the case for a prospect for over 14 years. Unsecured debt was 80.3% of Prospect's total debt in December 2021 or about 30 percentage points higher than around 50% for the typical listed BDC.

Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers.

On the cash shareholder distribution front, we are pleased to report the Board's declaration of continued steady monthly distribution. We are announcing monthly cash common shareholder distributions of $0.06 per share for each of February, March and April. These 3 months represent the 54th, 55th and 56th in a row consecutive, stable per share rate, continuing nearly 5 years of stable monthly cash shareholder distribution. Consistent with past practice, we plan on our next set of shareholder distribution announcements in May.

Our goal over the long term is to maintain and ideally grow the steady monthly cash shareholder distribution as we seek to provide low volatility stability to our shareholders amidst a macro market backdrop that delivers greater volatility elsewhere.

Shareholders participating in our common stock DRIP for the 12 months ended December 31, 2021, received a return 4.5% greater than nonparticipating shareholders for a total return of more than 73% for the 12 months ended December 31, 2021. Both returns, 4.5% greater than non-DRIP 73% in all, are greater than the same period returns on the S&P 500 and on more glamorous names that do not pay dividends, including well-known tech stocks and so many other highflyers.

Since our IPO nearly 18 years ago through our April 2022 distribution at the current share count, we will have paid out $19.32 per common share to original shareholders, aggregating approximately $3.6 billion in cumulative distributions to all common shareholders.

Since October 2017, more than 4 years ago, our net investment income per common share has aggregated $3.37, while our common and preferred shareholder distributions per common share have aggregated $3.09, resulting in our net investment income exceeding distributions during this period by $0.28 per share.

Our net investment income covered distributions to common and preferred shareholders in the June 2021 fiscal year and have exceeded common and preferred shareholder distributions in the 2021 fiscal year to date by $0.04 per share. We are also pleased to announce continued preferred shareholder distributions on the heels of successful launches of our $1.25 billion, 5.5% preferred programs; and $150 million, 5.35% listed preferred.

We have raised over $515 million in preferred stock to date with strong support from institutional investors, RIAs and broker-dealers, including the recent addition of 2 top 5 sized independent broker-dealer systems as well as top wirehouse and regional broker-dealer systems.

We believe there is no greater alignment between management and shareholders than for management to purchase and own a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market. Prospect management is the largest shareholder in Prospect and has never sold a single share. Our senior management team and employees happily eat our own cooking, currently owning approximately 28% of shares outstanding, representing over $1.1 billion of our common equity.

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

Thank you, John. Our scale platform with nearly $8 billion of assets and undrawn credit at Prospect Capital Corporation continues to deliver solid performance in the current dynamic environment. Our experienced team consists of over 100 professionals, representing one of the largest middle market investment groups in the industry.

With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that spans third-party private equity sponsor-related lending, direct nonsponsor lending, Prospect sponsored operating and financial buyouts, structured credit and real estate yield investing.

Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities, coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged ones. Unlike many other groups, we have maintained and continue to maintain significant dry powder that we expect will enable us to capitalize on such attractive opportunities as they arise.

This diversity of origination approaches 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 the 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.

Our nonbank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. As of December 2021, our portfolio at fair value comprised 46.7% secured first lien debt, 19.5% other senior secured debt, 10.6% subordinated structured notes with underlying secured first lien collateral and 23.2% unsecured debt, other debt and equity investments, resulting in 76.8% of our investments being assets with underlying secured debt benefiting from borrower-pledged collateral.

Prospect's approach is one that generates attractive risk-adjusted yields. In our performing interest-bearing investments, we're generating an annualized yield of 10.6% as of December, down 1% from the prior quarter. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secured debt with our originations to protect against downside risk, while still achieving above-market yields through credit selection discipline and a differentiated origination approach.

As of December, we held 127 portfolio companies, up 3 for the prior quarter, with a fair value of $7.0 billion, an increase of $572 million from the prior quarter. We also continue to invest in a diversified fashion across many different portfolio company industries, with a preference for avoiding cyclicality and with no significant industry concentration. The largest is 15.8%.

As of December, our asset concentration in the energy industry stood at 1.3%; our concentration in the hotel, restaurant and leisure sector stood at 0.3%; and our concentration in the retail industry stood at 0%. Nonaccruals as a percentage of total assets stood at approximately 0.4% in December, down 0.1% from the prior quarter and down 0.5% from June of 2020.

Our weighted average middle market portfolio net leverage stood at 5.2x EBITDA, substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at $99.5 million in December, an increase of $4.2 million and 4% from September 2021 as we continue to achieve solid profit growth with our portfolio companies.

Originations in December aggregated $855 million for the quarter. We also experienced $444 million of repayments and exits as a validation of our capital preservation objective, resulting in net originations of $411 million. During the December quarter, our originations comprised 85.6% middle market lending, 9.4% real estate, 3.3% subordinated structured notes, 1% middle market lending buyouts and 0.7% other.

To date, we deployed significant capital in the real estate arena through our private REIT strategy, largely focused on multifamily workforce, stabilized yield acquisitions with attractive 7- to 12-year financing.

NPRC, our private REIT, has real estate properties that have benefited over the last several years and more recently from rising rents, showing the inflation hedge nature of this business segment, strong occupancies, high collections, suburban work-from-home dynamics, high-returning value-added renovation programs and attractive financing recapitalizations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses.

NPRC as of December has exited completely 43 properties at an average IRR of 25.5% and average realized cash multiple of invested capital of 2.5x, with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships.

Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on favorable risk-adjusted opportunities. As of December, we held $744 million across 39 nonrecourse subordinated structured notes investments. These underlying structured credit portfolios comprised around 1,800 loans and a total asset base of around $16 billion.

As of December 2021, the structured credit portfolio experienced a trailing 12-month default rate of 19 basis points, down 7 basis points from the prior quarter and representing 10 basis points less than the broadly syndicated market default rate of 29 basis points. In the December quarter, this portfolio generated an annual cash yield of 20.5% and GAAP yield of 9.8% with the difference representing a significant amortization of our cost basis.

As of December, our subordinated structured credit portfolio has generated $1.41 billion in cumulative cash distributions to us, representing around 99% of our original investment. Through December, we've also exited 10 investments, totaling $286 million with an average realized IRR of 15.7% and cash-on-cash multiple of 1.55x (sic) [1.45x]. Our subordinated 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 receive fee rebates 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 prices and loan asset valuations might be temporarily low. We, as a majority investor, can refinance liabilities on more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal and extend or reset the investment period to enhance value. We completed 32 refinancings and resets since December of 2017.

So far in the current March 2022 quarter, we have booked $284 million in originations and experienced $108 million of repayments for $176 million of net originations. Our originations have consisted of 81.9% middle market lending, 12.3% subordinated structured notes, 4.3% real estate and 1.5% other.

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

Thank you, Grier. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed rate debt, avoidance of unfunded asset commitments and lack of near-term maturities demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 30 years into the future.

Today, we have 0 debt maturing until July 2022 with a sole maturity of $60.5 million then for all of calendar year 2022. Our total unfunded eligible commitments to noncontrolled portfolio companies totals approximately $38 million, representing approximately 0.5% of our assets.

Our combined balance sheet cash and undrawn revolving credit facility commitments currently stand at approximately $960 million. 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 under a bond and equity ATM, acquire another BDC and many other lists of firsts.

In 2020, we also added our programmatic perpetual preferred issuance to that list of first, followed in 2021 by our listed perpetual preferred as another first in the industry.

Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of December 2021, we held approximately $4.99 billion of our assets as unencumbered assets, representing approximately 71% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, a nonrecourse SPV where in April 2021, we completed an upsizing and extension of our revolver to a refreshed 5-year maturity.

After another recently completed upsizing, we currently have $1.5 billion of commitments from 43 banks, an increase of 13 lenders from March 2021 and demonstrating strong support of our company from the lender community with the diversity unmatched by any other company in our industry. The facility revolves until April 2025, followed by a year of amortization with interest distributions continuing to be allowed to us. Our drawn pricing is now LIBOR plus 2.05%, a decrease of 15 basis points from before. Our undrawn pricing between 35% and 60% utilization has been reduced by 30 basis points.

We also now have an improvement in our borrowing base due to a change in concentration baskets, which we estimate increased our borrowing base by approximately $150 million. Of our floating rate assets, 95.2% had LIBOR floors with a weighted average LIBOR floor of 1.35%. Outside of our revolver and benefiting from our unencumbered assets that we have issued at Prospect Capital Corporation, including in the past few years, multiple types of investment-grade unsecured debt, including convertible bonds, institutional bonds, baby 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 enjoy an investment-grade BBB rating from S&P, an investment-grade Baa3 rating from Moody's, an investment-grade BBB negative rating from Kroll, an investment-grade BBB rating from Egan-Jones and an investment-grade BBB low rating from DBRS. In 2021, we received the latter investment-grade rating, taking us to 5 investment-grade ratings more than any other company in our industry. All of these ratings have stable outlooks.

We've now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration of 30 years. Our debt maturities extend through 2052. With so many banks and debt investors across so many debt tranches, we've substantially reduced our counterparty risk over the years.

In the December 2021 quarter, we completed successful redemptions, tender offerings and repayments, retiring $74 million of our InterNotes and $69 million of our 2029 notes. In the current March quarter, we have retired $16 million of our InterNotes. In the December 2020 quarter, we have continued to substitute more expensive term debt with significantly lower cost revolving credit with an incremental 1.47% cost.

We've also -- we also have continued with our weekly programmatic InterNotes issuance on an efficient funding basis. To date, we have raised over $515 million in aggregate issuance of our perpetual preferred stock across our preferred programs and listed preferred. We now have 7 separate unsecured debt issuances aggregating $1.6 billion, not including our program notes, with maturities extending through October 2028.

As of December 2021, we had $341 million of program notes outstanding with staggered maturities through 2051. At December 31, 2021, our weighted average cost of unsecured debt financing was 4.39%, a decrease of 0.17% from September 30, 2021, and a decrease of 1.11% from December 31, 2020. Including usage of our revolving credit facility at December 31, 2021, our weighted average cost of all debt financing was 3.95%, a decrease of 0.51% from September 30, 2021, and a decrease of 1.13% from December 31, 2020.

In 2020, we added a shareholder loyalty benefit to our dividend reinvestment plan, or DRIP, that allows for a 5% discount to the market price for DRIP participants. As many brokerage firms either do not make DRIPs automatic or have their own synthetic DRIPs with no such 5% discount benefit, we encourage any shareholder interested in DRIP participation to contact your broker. Make sure you specify that you wish to participate in the Prospect Capital Corporation DRIP plan through DTC at a 5% discount and obtain confirmation of same from your broker. Our preferred holders can also elect to DRIP at a price per share of $25.

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

Thank you, Kristin. We can now answer any questions.

(Operator Instructions) We have no further questions. I will now hand back to Mr. John Barry for any closing remarks.

Well, thank you very much. Have a wonderful afternoon, and we'll see you in approximately 90 days. Thanks all. Bye now.

Thank you all.

This concludes today's call. Thank you for joining. You may now disconnect your lines.