Can somebody who has access to the Wells Fargo report list the criticisms of PSEC? I would really appreciate
seeing this spelled out in as much detail as possible!!!
Much too long to give everything (and not much specific to PSEC, though bunches PSEC with others that have same issue). Starting:
1) Page 1 - Huge emphasis on "Vintage Security Class and Yield Composition" - credit risk on H2 2012 vintage assets increasing due to (a) lower spreads, (b) higher leverage, and (c) weaker structures. Found that SLRC, PNNT, TCRD, PSEC, and TCAP had outsized exposures to '12 assets which are deemed higher risk
2) Page 3 - general concern - investors should be vary of risk due to credit markets signals that BDCs should take breather - "pay particular attention to the BDC quartile ranking in the Scorecard" - PSEC in bottom quartile
3) Page 6 - Specific to PSEC and Scorecard - "PSEC and PNNT declined as a result of high shareholder costs and a significant decline in our new vintage factor" Explains declines in TCRD, AINV, and TICC for other reasons.
4) Page 18 - Financial inovation - "easiet view that highlights a potential overheating in the credit markets is nearly every BDC's management team's desire (or sudden desire) to utilize the nonqualified asset bucket." these assets may allow for more off-balance sheet leverage and higher return "(i.e. SLR's purchase of Crystal Finance, or ARCC's, SSLP's, or PSEC's purchase of CLO securities)"
5) Pages 28-29 - Estimating NAV upside due to various factors. PSEC in bottom half in of both charts; if assets return to cost - PSEC has upside to NAV of 5% versus industry average of 10%; and based upon "Estimated realizable NAV," PSEC is 2% versus 6% and in bottom half
6) Page 30 - Costs - mentioned several other places too - PSEC had 2012 fees of 4.85% of assets - third highest of all the BDCs - average was 3.47% (in my view ane of the two main reasons for its overall low rank)
More later - much more discussion of the importance of "2012 vintage" assets and why they are bad.
7) Pages 34-39 - Vintage - basic theme is that credit risks have increased late 2012-early 2013, especially compared to attractive 2009-2010 vintage assets. Since many of the 2009/10 assets have been repaid, now focus is on current investments. Greater risk is result of (a )higher leverage levels; (b) increasing share of covenant-lite deals; and (c) much tighter spreads. Looked at three components - (a) percentage of portfolio; (b) higher risk investments (sub debt/equity/structured product); and (c) yield composition compared to BDC average (BDCs reaching for yield are likely increasing credit risk). Percentage of assets - PSEC had 37.9% of assets from late '12 vs. 24.4% average for industry, ranking next to last. Sub-debt/equity/structured - PSEC AT 52.6% vs. 39.1% industry average, about 6th worst. Yield composition - again PSEC has a lot of high yielding assets, 24% 14% and 20% 12%-14%, for a totall of 44% - over 28%, the industry average. Bottom line - "PNNT/TCRD/PSEC/TCAP are likely taking higher vintage risks, in our view." Chart putting all three factors together and ranking PSEC next to last.
Thank you so much for the color here.
While credit spreads are tight and Prospect seems to have deployed allot of capital during this (tightening). The Wells Fargo analyst had many detailed question regarding the tightening spreads and increased comp.
The real concern seemed to be the lack of leverage here and the fact so much capital was sitting..
The analysis , and credit spread models utilized by underwriting use much tighter spreads and default rates. Even at the height of the financial crisis when CLO's vaporized from record highs to near zero Prospect made money.
I believe this downgrade was without specific modeling to Prospect and its umbrella.
I see the fees were high, but in years of tremendous deployment those fees will rise accordingly.
If you could follow up on the "2012 vintage comments" that would be much appreciated.
Thanks again for the informative post
Sentiment: Strong Buy
My interpretation is that the analyst said market underperform vs market perform.
Market perform = PPS increasing like many stox prices are increasing at this time.
Market underperform = PPS is not increasing, but stagnating or declining.
Market underperform does describe PSEC.
I am satisfied with this underperformance as I am buying more PSEC every month.
Lower PPS = higher yield.
If I can find it and purchase it I will, however it is likely only available to clients. I read a blurb and there was nothing "specific" to Prospect. In fact it was a downgrade in an effort to quell expectations due to such robust performance by the group in 2012, 2013.
However Prospect PPS has not experienced this run up in PPS and therefore should not have been included in the downgrade .
Sentiment: Strong Buy