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Prospect Capital Corporation Message Board

  • riskprof1 riskprof1 Mar 19, 2013 5:00 AM Flag

    PSEC and Interest Rates

    I've been following this stock off and on for awhile and wondered if any serious investor had thoughts on the relationship between PSEC and interest rates when they eventually start rising. Thanks in advance.

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    • Thanks for all the input. This is very helpful. I think rates will stay (artificially) low for awhile, but I also remember during my time as a stockbroker in the 1980s, selling Insured Municipal Income Trusts (IMIT) that paid 12.27% tax-free.

    • Most of the REITs have hedging contracts in place to protect them from interest rate swings that go out over a 2-3 year time period.

    • There are positives and negatives. Overall, it would be a negative for the reason that pennyone stated. From the 10K,

      "Changes in interest rates may affect our cost of capital and net investment income.

      A significant portion of the debt investments we make bears interest at fixed rates and the value of these investments could be negatively affected by increases in market interest rates. In addition, as the interest rate on our revolving credit facility is at a variable rate based on an index, an increase in interest rates would make it more expensive to use debt to finance our investments. As a result, a significant increase in market interest rates could both reduce the value of our portfolio investments and increase our cost of capital, which would reduce our net investment income."

      I don't have time right now to look it up but I think PSECs leverage is roughly 1.3x. That means PSEC only about 23% of the portfolio is funded by debt. Someone can feel free to correct me if I'm wrong about that statement (1-(1/1.3). So the reduced spread would only affect a quarter of the portfolio. PSEC has a lot of debt that is long term. Quite a bit of it is a ten year note, but I think some of it goes all the way out to 30 years. Borrowing long at historically low interest rates can't be all that bad.

      Sentiment: Buy

      • 1 Reply to packerfan4life8512
      • in addition to their borrowing costs rise 9lowering the spread they receive on their fixed lan rates), as interest rates rise (and thus yields on bonds- which compete for investor cash with PSEC) then PSEC's yield will not be AS relatively attractive to yield investors so there could be less demand fr stock thus downward pressure on stock [price, is how I look at it?

    • It will cost more money for a BDC with interest rate hikes.Their margins will go down.

      Sentiment: Buy

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