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Prospect Capital Corporation Message Board

steve484842 37 posts  |  Last Activity: Aug 4, 2015 4:58 PM Member since: Dec 22, 2010
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  • Reply to

    PSEC

    by fastphil10 Aug 4, 2015 12:26 PM
    steve484842 steve484842 Aug 4, 2015 4:53 PM Flag

    Phil How do we find out why the PSEC message Board is 'gone'?
    Thanks

  • Reply to

    SA PIK article

    by jamlsher99 Jul 29, 2015 3:16 PM
    steve484842 steve484842 Jul 29, 2015 6:29 PM Flag

    As a Long PSEC Holder this is scary. I hope Mgt.. fixes this
    Good luck

    Sentiment: Strong Buy

  • steve484842 steve484842 Jul 24, 2015 9:23 AM Flag

    Phil I thank YOU
    Good luck

    Sentiment: Strong Buy

  • Prospect Capital has shifted its focus from accumulation of assets to maintenance and distribution of assets. It has become a de facto conglomerate.
    The proposed spins can achieve several purposes, including allowing the company to continue to access the capital markets and increasing NAV.
    Many of the company's deals have historically been sourced from private equity sponsors. As share discounts widen, private equity may now be interested in buying the block assets back.
    There are other ways the company could return value to shareholders if buyouts do not materialize and current initiatives falter.
    I've written several articles on Prospect Capital (NASDAQ:PSEC) over the past couple years and, more than anything, I have enjoyed the reader feedback. There are a lot of skeptics out there who ask a lot of good questions. Though I have publicly stated in the past that I think the management of Prospect is very good at what they do, I decided to focus this article on some of the skeptical questions and ideas that I have heard asked and expound upon them a bit. Where answers were available from Prospect, I will provide them. I want also to examine the idea of Prospect as an investment at $7.50 vs. Prospect as an investment at much higher levels. This is indeed a different company today than it was three dollars higher for a variety of reasons. What are some of the options for the company at this price point? And what are some possibilities?

    Prospect at $7.50 vs. Prospect at $10.30
    It is no secret that the company tapped the equity and bond markets substantially in 2013-2014. Their ATM issuances were frequent and large. While many investors complain that these issuances did nothing to strengthen the company, there are reasons to disagree. The diversity of income sources and geographic concentration, access to deal flow, street name recognition, increased size of investment and type of deal done can all work together to reduce overall portfolio risk. Does this also increase management fees? Yes it does and those fees have been a major source of investor focus lately. But what Prospect has evolved into is part BDC, part conglomerate. The safety of a large company comes partly from its size and diversity of revenue sources. Is a $273 billion GE (NYSE:GE), for instance, safer than a $1 billion conglomerate even if the book value per share is the same for both companies? Ostensibly, yes, for a variety of reasons. Investors must consider that the regulatory restrictions on a BDC leave it little ability to organically grow. It generally must regularly tap the equity markets to be able to see diversity and growth.

    But trading at a 30% discount to NAV, Prospect can no longer reasonably grow assets this way. If they tried it would be grossly dilutive to shareholders and likely a breach of fiduciary obligations for the investment advisor. Because of these limitations, an investor buying into Prospect today is buying a completely different company than one who was buying into Prospect at $10.30. The company today is no longer about rapid growth of asset base. It is now about maintaining assets, income and value. In order to maintain assets, it must generate a nominal amount of organic growth to allow for a certain amount of defaults and write-downs of other investments.

    Unless one believes that the assets are of deteriorating quality and questionable valuation, one can buy them today with a margin of safety that has not been available in many years. The yield is not being paid from volatile fee income nor is it substantially drawing down on NAV each month. The share price is considerably below book value. There are catalysts for growth and revaluation upward. It is a different company today than it was just a year ago.

    What's the real purpose of the spins?
    Raise money for the company. As ColoradoWealthManagement stated in his recent article, the spins via a rights offering will allow the company to raise a certain amount of money at or near (or possibly above) NAV to make new acquisitions without the need to sell PSEC equity at a discount. This is far preferable to trying to raise new equity through asset sales at 25-30% discounts.

    Allow a public revaluation of certain portfolio assets. Management has asserted that assets are being given a "BDC discount." That is, a conglomerate is often valued lower than the sum of its parts - which is why many conglomerates eventually end up breaking up the parts to unlock value. Even the king of conglomerates, GE, recently spun off their once hallowed financial division (once a prime driver of profit and growth for the company, now a drag). BDCs are obviously not conglomerates in the traditional sense of the word but the way that Prospect has operated the company in acquiring control stakes in companies has tended to make it into a de facto mini conglomerate. By spinning off only a portion of their assets - initially unencumbered by significant debt or a weighty 2/20 management fee structure (my assumption given what has been stated publicly) - they can potentially increase their NAV by receiving higher market valuations on those retained assets. Prospect's NAV is based upon a fair value estimate of the companies' worth and the presence of secondary market valuations provide a better gauge of actual value than a third party estimate. Grier Eliasek recently stated in a Seeking Alpha interview that the company hoped to raise about $600 million with these spins (about $200-300 million per spin). They intend to retain only a portion of the spun asset to prevent being required to consolidate the public company on their balance sheet. The CLO spinco will likely contain only a small percentage of the total CLOs that are currently on Prospect's books.

    Allow for new ways for the company to grow. I envision growth potential a couple of ways for these spincos. The first is that they could begin to grow by acquisition on their own merits. If the online finance partnership is valued at 1.3x book, for instance (Wunderlich analyst Merrill Ross estimated comp value of 4x book in February), it could begin to use its stock as an accretive acquisition tool for both the REIT itself and for Prospect shareholders (backdoor NAV increases). Additionally, the new investments could be levered up to increase returns and potentially market value. There may be opportunities by Prospect to provide some of that new leverage as spincos mature as public companies.

    Questions on the Spins
    I've heard good questions asked about the spins so I posed some of those questions to the company.

    Will the spins trigger any incentive fees? No. The spins in and of themselves will not be a triggering event. The only way management benefits from a fee basis is if the spins cause a rise in NAV. This would also benefit shareholders, so I anticipate no negative fallout from this. The cash raised could potentially generate structuring fees which also would benefit shareholders.

    What about the so-called "anchor investors" in the rights? Anchor investors have not been definitively chosen as the method to launch the spins. If they are, though, the company stated that they would not be loaning out retained shares to those anchor investors. This would eliminate the "risk-free" conflict of interest that could be inherent in such an arrangement. Any investors in the spins would be investors who like the merits of what's being launched - not someone who was trying to establish a risk-free false market value and higher investor participation. Such a scheme would blow up in the following quarter's results anyway (thus lowering 2/20 fees) so I'm not sure why any management team that was desiring to stay employed would even consider it. Nonetheless, I wanted to ask the question.

    Tower loan
    One of the underappreciated assets of Prospect is First Tower loan. Here's a company that makes high risk/high return loans to people and then proceeds to offer credit life/credit disability insurance on those loans. I remember being offered credit life/disability/unemployment insurance on a credit card that I had about a dozen years ago. The sales pitch was great and it sounded very cheap…until I put pen to paper and realized that it was effectively doubling my interest rate on my card at the time for a benefit that I likely would (or could) never use. I started researching the claims rate on the insurance company and was awe struck by how profitable this investment is. A quick Google search of the states where AFIC and AFLIC (the insurance company subsidiaries of Tower) operates will show you how successfully these companies underwrite their clients. Tower has historically grown by acquisition, granting it entry into new markets. There's a lot of room for this company to expand. It recently made a minor splash across the newswires when it was downgraded by A.M. Best because of a distribution of capital that it made to owners (Prospect owns just over 80% of the company). Some cited this as a danger signal. The reality is that an insurance company of this type does not rely on a rating to garner business and the company is easily recapitalized if need be. This company oozes cash.

    Management's ability to identify and invest in assets of this caliber increases my confidence in them. They are exceptionally intelligent and connected individuals.

    Consolidation and Private Equity
    It has been noted by critics of the company that not all BDCs are currently being given the "BDC discount." In general, the BDCs that are holding up the best are internally managed BDCs. Since a mid-market loan made by an internally managed BDC is generally similar to a mid-market loan made by an externally managed BDC, it would make sense to me to begin to see some consolidations (hostile and/or friendly) begin to happen in the BDC space. In fact, it may already be quietly happening. After all, the market as a whole is hardly cheap right now. Where else will an acquiring company be able to boost earnings and book so easily? It's not every day that an exec can hand over $.73 and get a dollar in return. And while it's one thing to hand over $73 million to get $100 million in assets, it's quite another to hand over $2.2 billion to get $3 billion in assets…without even having to do any substantial work to get those assets. Restructure the company, get rid of the 2/20 incentive fees and you've suddenly bought some real profits, didn't you? I can imagine a company like Main Street Capital (NYSE:MAIN) using their inflated share price to do some shopping among distressed price BDCs. But if not another BDC, what about Bain, Blackrock (NYSE:BLK), KKR & Co (NYSE:KKR), Carlyle, or Goldman Sachs Private Equity (NYSE:GS)? These vulture firms have great depth of experience working with private companies (and some with BDCs) and did not get rich by paying too much for assets. They like buying bargains on businesses that someone else worked to build. Just think…if a private company were to buy an asset at a 27% discount they would net a 37% return from day one. Allow them to do a little restructuring on the asset and that could quickly turn into 100% without much work. Main Street Capital trades at 1.4x-1.5x book; Blackrock and KKR & Co both trade near 2x book while PSEC trades for only 0.73x book. Strip away incentive fees and an acquiring company is buying earnings incredibly cheap. There is upside in acquisition by both peers and private equity. Given the size of PSEC, private equity would be a more likely suitor and could probably accomplish an acquisition in a more efficient manner. Consider that a large number of Prospect's deals are sourced from private equity sponsors… so private equity is already intimately acquainted with many of the assets that are on the balance sheet. It might be of value to watch the institutional holdings of the stock going forward (not just Prospect, but all heavily discounted BDCs), especially if the prices continue to drop.

    Delisting
    Another option that I doubt management has considered (but perhaps they should) is to delist the company but continue to operate as a closed-end fund BDC. A competitor firm (FS Investment (NYSE:FSIC)) exclusively uses private capital raising to incubate their funds until they feel the market conditions are right to release them publicly. During the incubation period the company raises capital at NAV plus acquisition costs and offers quarterly redemptions at NAV. While a delisting is the opposite of what is typically done, PSEC would immediately give shareholders a paper value increase of nearly 40% from current levels and grant the company access to new share capital again. If market conditions ever improved, the company could be relaunched as a public company. It also would be easier to sell to a suitor as a non-traded company. Regulations would likely make this option a real headache, but it could still be a profitable headache.

    Management Internalization
    Of course a common go-to desire is to see fees cut (a suggestion that several analysts have implied as well). Management understandably does not want to go this route. My compromise suggestion is not a fee cut, per se, but an alignment of shareholder/management interests. Prospect could do a management buyout with shares to internalize the structure and initiate a hybridized compensation scheme that would involve cash and restricted shares for future transactions.

    I believe this would immediately narrow the discount and potentially cause the shares to trade at a premium. Management would not be hurt. Shareholders also would not be hurt and would likely be rewarded. At that point management and shareholder interests would be closely aligned which would incentivize both the maximization of income and capital appreciation. Share buybacks would be back on the table.

    Conclusion
    Price action in Prospect Capital has made it into the whipping boy of the stock market even though the book value has remained relative stable. Management and (by implication) other non- S-4 filing employees continue to acquire sizeable positions in the company's shares. The US economy is relatively robust and cheap assets are anything but plentiful right now. I believe that a consolidation of undervalued BDC companies is a reasonable outcome for experienced firms shopping for value. Even if this consolidation does not happen, there are several viable opportunities for the stock price to experience reversion to the mean. I believe that the company possesses many quality and desirable assets and that management is experienced and very connected. Any significant further downside would likely be met with a buyout offer given the inherent value of the company's portfolio assets. There are several options that could be deployed to enhance shareholder value if the current initiatives are unsuccessful. The lower the price becomes, the more likely it seems to me that a buyout will materialize. The shares appear mid/long-term attractive at this level and lower for capital appreciation. Current income is a bonus.

    Sentiment: Strong Buy

  • I am fine with the drop in price since Many of LONGS will be RE investing the Dividend as I will be doing.
    Good Luck PSEC LONGS!

  • steve484842 steve484842 Jul 16, 2015 4:15 PM Flag

    H VG

    Sentiment: Strong Buy

  • I expect to see some shorts try to do a sell OFF soon to try and get investors to also sell. Sit tight PSEC LONGS ALL is looking much better for US. I hope many of YOU were buying when the price dropped.

    Good Luck LONGS!

    Sentiment: Strong Buy

  • Should You Buy Prospect Capital Corporation? COO Grier Eliasek Gives Some Very Interesting AnswersSummary
    Discount to NAV will disappear in the medium term. Historical evidence to support that.
    Rising interest rate environment in favor of the company.
    Real estate portfolio allocated in emerging domestic markets chasing long-term value.
    All three planned spinoffs in the form of rights offering.
    A share buyback may be an option but with the ultimate attention to the company's credit rating.
    On June 22th, I conducted an interview with Prospect Capital Corporation's (NASDAQ:PSEC) President and COO, Mr. Grier Eliasek. The questions and answers are shown below. However, I should inform the readers that I changed the structure of the majority of the questions to follow the grammatical and syntax rules of the English language, given that in the oral communication these rules may be a little more fluid, especially when one of the speakers (me) is a non-native English speaker and certainly doesn't have a politician's or a lawyer's gift: fluency. The basic meaning and content of the questions has remained intact though.

    Me: In page 13 of your recently created corporate overview report, found in your website, we can see how the stock's price reacted after it traded at discounts to NAV similar or greater than the ones we find today. In all four cases that are presented, the underlying reasons are related to market dislocations such as the U.S. credit crisis and its transmission to the E.U. What is the cause, in your opinion, of the current discount to NAV?

    Grier: Sure. It's been a BDC industry specific phenomenon over the last year. We're not the only BDC trading at a discount to NAV. I think the average BDC is trading at a double-digit discount right now; there are very few trading at a premium. So the question becomes "What happened to BDCs last year?" The answer to this question lies in the fact that PSEC and other BDCs stopped being included in the S&P 600 and Russell 500 indices. That is a technical dislocation. We had - 18% of our shareholder base were index funds and we lost that demand and there are some institutions out there that can only buy companies that are in the index by mandate or by investment style, whatever it is. So some of the institutional demand was reduced. It takes time to recover from that. And last year wasn't pretty for BDCs. And a lot of times when you have a drop in NAV, institution demand kicks in, and now that's more difficult to occur for the technical reasons that I mentioned. So, markets can be inefficient, and sometimes widely inefficient short term, and you see that happening right now in our sector. On the long term, they shouldn't remain dislocated forever. So it's just a matter of time I think before discounts narrow. We haven't been in that discount super long, it's just been a few weeks, while we've been a private company for eleven years and the majority of that time we traded at a premium to book value. But it is interesting to have a discount like this available, and the fact that the economy is on relatively solid footing, and you look at how we deal in our business and the industry now compared to 6-7 years ago we were going at the last recession, it's a night and day difference, when you look at the strength of our funding, the diversity of the business, the scale etc.. So that's what I think has transpired. There's also some level of confusion when it comes to our sector. One of the biggest sources of confusion we hear is what will happen to BDCs when interest rates go up. The traditional rule of the thumb is that you sell your high yielders when rates are going up. Well that's true when you have a fixed cash flow stream, like a bond, or maybe a utility stock, but 90% of our assets are floating rate. So we have contracts that reset upward as rates go up. That means that not only do we expect not to be harmed, by rates going up, we expect to benefit. And the last time the Fed went through a tightening phase from 2004 to 2007, BDCs, including our stock, our company, did quite well. And we expect to do well in the next phase. But sometimes it takes time for these things to be understood in the playout.

    Me: Alright, you answered my second question on your own [Laughs]. So to the next question now, it's about the real estate portfolio. I saw that you have increased concentrations of multifamily properties located in Florida, Georgia, Miami and Ohio. And as far as I know from several researches for the U.S. property market, none of these markets are expected to be the top performers in 2015. Are there any views on the expansion of the real estate segment of your company?

    Grier: Well, I'm not sure what data source you're using there saying that they are going to underperform [interrupted]

    Me: Freddie Mac's 2015 multifamily outlook report.

    Grier: Yes, well, you know we are observing the so-called Tier 1 real estate markets; New York, Boston, Chicago, San Francisco. I mean, they've been massively bid up. If you buy a property in New York now, enjoy your 3% cap rate, you're taking a huge amount of valuation risk in those markets. And what we did, going back several years ago, is to focus in Tier 2 cities such as Atlanta, Orlando, Tampa, Birmingham, Columbus and others, where we were able to purchase in nearly 7% cap rates. And I really think we bought cheap and we're seeing great fundamentals across the board, I mean we're in several years now of our TTM NOI growth in our portfolio. We're in markets that are doing well in terms of declining unemployment rates, and what you're seeing is that there's been very little apartment construction in the segment we're addressing. We've been exclusively buying around 20-year-old, so-called class B properties, very affordable apartments. We've been getting additional upside by renovating and bumping the rents in a fairly predictable incremental return profile, and that's been successful for us. I think 80% of the apartment construction in the U.S. in the last 5 years have been luxury apartments. And that's great if someone is in the 1% or 10% to afford that, but those are priced out of reach for the majority of people. And actually the markets are undersupplied and that's why rents start to go up, vacancy is low, apartments are full, it's a favorable supply-demand equation. The competition from a home ownership standpoint is quite favorable for apartments, I mean young people; the new generation saw that home ownership created huge amounts of problems for people who wrecked their credit from 2005 to 2010, and you get favorable dynamics; people getting married later, people having kids later, older people moving out of homes into apartments, significantly favorable dynamics which point to a renter-dominated market. And then you see rate going up, you see 10 year treasuries go up, you see mortgage rates move up. That makes it even more challenging for homeownership. So we like the fundamentals, we like the tailwind, and the most challenging part is identifying assets that are attractively priced to purchase, and that's why we look under a lot of rocks, and we have large team that is trying to find value. And this is one of our spin-off candidates, which we have three, and a big reason for that is that we want to capture a growth multiple because this is how equity REITs -they are portfolio companies, and as long as I remember, a dollar of yield coming out of a REIT, investment value data, 5200% premium, compared to a dollar of yield coming out of a BDC, and a big part of that is growth because it's an income stream that can grow over time in a more significant fashion than income coming out of a loan or credit, where you have only one direction to go, down, true to false. So, that's not the case when you're on properties. They have upside embedded in them. So we'd like to capture that multiple. And that's a great logic when looking at doing a spin-off.

    Me: Recently you filed the registration statements for the CLO business spinoff, therefore creating the Prospect Yield Corporation. Why this has to be done via a rights offering?

    Grier: Yes. So I have to give you some context to answer that. We've been looking in those spin-offs for several years now as a value creation strategy. We first tried to look at a, a couple of years back because we were frustrated that the stock was above book, but when looked at earnings multiples, we were trading at a discount to peer group average. And we said ok, maybe this difference is because of the diversity and the complexity of our business. Because we have nine different origination strategies, we think that there are a lot of significant positives to that. It's a more diversified approach; we reduce risk, we aim in places where there are high barriers to entry and high upside, but sometimes when you are more complicated, that can depress your trading multiple through a complexity discount or a conglomerate discount, whatever you want to call it. So we said, let's take some of our pure plays and examine spinning them off into more focused standalone companies to see if we can capture a better multiple. And we selected three; the online lending, real estate and structured credit businesses. So we first examined doing a straight dividend spin and we encountered a couple of significant issues. One was, it's actually more challenging to do that from a regulatory standpoint, there're a lot more hoops to jump through. But more importantly number 2, when you get to spin off assets to shareholders, like yesterday I owned one stock, today I own four, I have three new securities, it sounds great, there's no capital investment requirement. But what you've done when you spun off assets and you left behind debt - bonds behind is you've massively levered up as the leverage ratio climbs up to a much higher number. And we need to be very, very, very, very, careful about our leverage ratio. We're an investor grade company, we're very proud of that fact, we've been an investor grade company longer than anybody else in the sector, going back to 2009, we've been a pioneer in the debt capital markets, we did the first convertible bond, we did the first institutional bond, we are the first and only company in our sector to issue program notes and we have a nicely laddered maturity profile over bonds, but they come due and they need to be refinanced. So we're not going to do anything to jeopardize our investment grade rating, and the reason is that to do a capital raise is so we can try to leverage neutral - and the reason to do a rights offering capital raise is, first, that it's very fair for our existing investors. Basically our existing investors get first dibs on this compared to anybody else, and secondly, it's the format and structure that the regulator thinks is suitable. So far, we are in the middle of the regulatory process. We feel pretty good about it. We wouldn't be moving ahead, but that's really the logic for a rights offering. You're in Greece, and as you know, rights offerings are much more common in Europe than they are in the U.S. And there's a fair amount of education we have to go through here and explain to people what a rights offering is. They can also read our filed registration statements. The numbers are missing, but if they read the statements, they'll get a picture of how the offering goes, and it's unlikely to for this to change much, so hoping that helps to explain the logic there, Manos.

    Me: So, is this the way the other two businesses are going to be spun off? Via a rights offering?

    Grier: Yes. The rights offering is the format which agrees with the regulator, and the other two, that's right, you can't see them on Edgar and pull them up because they're not registered investment companies. The real estate is going to be a REIT and the online lending is going to be a publicly traded partnership. We have the ability under the Jobs Act to file them confidentially, and we did that, especially for the online business to protect intellectual property. We want to get on the market first with it, and after you get there first, you get a better trading multiple than anyone else. Eventually, of course, if you get the deal, you make the filing public, so that will be the intention, but we wanted to have this advantage as long as possible before doing this final public file.

    Me: How do you plan to fill in the gap of the CLOs in PSEC's portfolio? In other words, which sectors of the economy would you cite as the hottest right now and for the foreseeable future?

    Grier: I think what we'll do is reinvest back into CLOs and p-checks. It's not that p-checks are going to stop doing CLOs. It's that we want to add to our firepower another publicly-traded business and we've got the ability to co-invest across each over time. CLOs are higher returners for us. We generated 21% cash yield, so they are excellent earnings contributors. What we will do is, we'll start adding to our positions or increasing originations depending on whether it's going to be first, second or third in line for a spin. And as we get closer to it, we'll be ramping up to make sure that there is a minimum time period to reinvest. So this is a team that has the ability to do a lot of originations. We did 3 billion of originations in each of the past two years, including a pretty significant build-up of our CLO book. So we're not too worried about our ability to reinvest. As for the sectors of the economy we anticipate to outperform, we're very bullish on areas that touch the consumer. Consumers are doing quite well compared to past years. You see we have increased our exposure to consumer finance. The real estate business is a form of consumer credit exposure as well, so that's an area we've been pretty interested in, but we are very well diversified across industries. Energy is one, as well, to watch. Energy is an area that caused some credit concern among BDCs when crude oil traded down significantly in the second half of 2014, our exposure in energy has been fairly modest in the 4% range. But now the things have traded off, there's some pretty interesting value out there, and we have an office in Houston lead by Mark Hall which has been scanning the landscape for energy deals, so this is going to be opportunistic, but that's another area to watch as well.

    Me: Final question. Would you consider a share buyback, given the large NAV discount?

    Grier: Well, we're looking at it. And we have to do a periodic mailing to investors with an option to repurchase shares. We did a mailing in September, and that expired in March, so there's a refresh process to do there as well. Kind of going back to the spin-offs questions, we have to be extremely careful about that. If you lower your equity base with purchases, that also could blow your leverage, so that might feel well short term, but medium term if you get downgraded and you wreck your access to credit, increasing your financing costs substantially, that would obviously be a huge negative. So we have to be thoughtful and careful about that. Stock price is down, it's not the end of the world, the company is doing fine, our fundamentals are solid, we believe in it. And if you look at the last page of our latest presentation which shows the Form 4 with the stock purchases, that just shows three people out of over a hundred here in the company, what they've done, what we've done, it doesn't show what the other one hundred people are doing with their insider purchases as well.

    And right now, dear readers, this interview came to its end. I really believe that we gained some useful insights from this interview, although I hope you forgive me for any questions that I may have missed. I tried hard to address all the issues that public sentiment brought in the surface, mostly found in the SA's commenting platform, when it comes to this particular company. I would appreciate your comments and thoughts about this company as well as suggestions on issues that this interview didn't manage to address.

    Finally, although I will not analyze the company's financials in this article, as a final word, I will state again that what I like about this company goes way beyond the numbers. It is their conservative approach towards their long-term objective: sustainability. This was my key argument for them when they cut their dividend. And after this interview, it remains the same. If you're searching for a rollercoaster, then there are many options, from mREITs to some other BDCs, even some pharmaceutical companies will do the job. However, I would advise anyone searching for a long-term investment to add Prospect Capital to his/her portfolio. So, it's needless to say that my personal view is still positive and I will remain long on this one. What about you?

    Sentiment: Strong Buy

  • The Top 10 Things To Like About Prospect Capital Besides The 13.4% Dividend YieldThe high yield reflects extremely negative investor sentiment.
    Investors seem to be overlooking the positive case, which is presented here.
    Prospect Capital Corporation (NASDAQ:PSEC) is a business development corporation. BDCs are one reason the US economy is so dynamic and innovative. They help fund and nurture smaller companies until they are ready to go public or obtain more traditional funding such as bank loans. BDCs are required to pass through 90 percent of taxable income as dividends to investors. PSEC pays a monthly dividend of 8.3 cents, and currently yields 13.4% at a recent price of $7.48.

    Since I'm highlighting the positive case, readers may want to read one of the numerous recent negative articles such as this one for balance. Thanks to all the negativity, PSEC now has a 13.4% dividend yield and trades at a substantial discount to book value. I believe that investors have overlooked many important positive factors. Here's my top 10 list:

    1. Heavy Insider Buying
    PSEC senior management has bought over $43 million in stock on the open market since January 2010 with no sales.

    2. Big Discount to Book Value
    At a recent price of $7.48, PSEC is trading at a 27% discount to its $10.30/share book value. This is an unusually large discount. In fact PSEC has often traded at a premium to book value. As noted in the company's presentation (see graph on page 3), PSEC has had very high returns following periods when it traded at such an abnormally large discount to book value.

    3. Spin-offs Are Actually a Good Thing
    PSEC plans to spin-off some client companies as they reach maturity. This makes sense because PSEC is trading at a discount to book value and some growth stock spin-offs would be expected to trade at a multiple of book value. Why do some investors see this as a negative? To retain capital, these spin-offs would be structured as rights offerings. Although certainly not the case here, rights offerings are often associated with distressed companies in desperate need of capital. Of course PSEC investors can always decline to participate in a spin-off rights offering if they don't like the deal.

    4. They Already Cut the Dividend
    The monthly dividend was cut from 11.1 cents to 8.3 cents back in February. Long-term investors hate dividend cuts and have punished PSEC accordingly. However, for new investors, this is a positive. You get a high yield and the company has already cut the dividend to a level it believes is sustainable.

    5. Energy Sector Exposure Is Minimal
    PSEC was originally focused on the energy sector, but this is no longer the case. Only 4% of their portfolio is energy-related, and even there exposure is limited as the company typically invests in secured debt rather than equity.

    6. PSEC is Less Risky Than Most BDC Peers
    Many BDCs invest heavily in equity as compared to PSEC. First lien debt investments account for a majority of PSEC assets. BDC's are legally prohibited from leveraging each dollar of equity capital with more than a dollar of debt financing. In order to avoid approaching the legal limit, BDC's typically limit debt to 80-85 cents for each dollar of equity. This limited leverage makes BDC failures extremely rare. PSEC's large size further reduces risk since it invests in more companies than smaller peers. This minimizes the downside risk from one "bad apple" in the portfolio.

    7. The Whole BDC Sector is Depressed
    Many BDCs are trading at a significant discount to book value due to fears that interest rates will rise. The Market Vectors BDC Income ETF (NYSEARCA:BIZD) that tracks the sector is down 14% over the past year. As a contrarian, this is a great time to invest in the BDC sector. PSEC is trading within 5% of its 52 week low and appears particularly depressed.

    8. Management is Pounding the Table For PSEC Stock
    I have seen numerous interviews on CNBC where management talks about their business, but refuses to even answer questions about their stock price. It's refreshing to read an interview where the President is pounding the tablefor his undervalued stock.

    9. Net Interest Margin is Increasing
    Contrary to conventional wisdom, moderately higher interest rates are not so bad for PSEC. Much of their funding is from fixed rate bonds. Several PSEC bond issues are currently trading above par. This suggests borrowing costs may decline as debt is refinanced. PSEC typically makes variable rate loans to portfolio companies. Higher interest rates would therefore increase net interest margins.

    10. High Yield is Being Generated with Only Moderate Leverage
    As noted above in #6, balance sheet leverage is quite modest. Many high yield issues I look at require massive balance sheet leverage to generate a high yield. Take Orchid Island Capital (NYSE:ORC) for example. It yields 19%, but the balance sheet is leveraged over 6:1 and all sorts of complex hedging is used to achieve that yield. The 13.4% yield from PSEC is remarkable in that it is achieved with less than 1:1 leverage. Lower balance sheet leverage means that PSEC is less risky than many high yield issues in other sectors.

    My newsletter (see additional disclosure at the bottom of this article) is focused on high yield issues. To find such a healthy yield elsewhere, you typically must deal with distressed companies or a highly leveraged balance sheets. It's nice to find an attractive yield from an issue like PSEC that is neither distressed nor overleveraged.

    Sentiment: Strong Buy

  • Reply to

    Well Done!

    by steve484842 Jul 14, 2015 5:25 PM
    steve484842 steve484842 Jul 14, 2015 5:55 PM Flag

    Richard Lejeune, Panick Value Research Report

    Sentiment: Strong Buy

  • steve484842 by steve484842 Jul 14, 2015 5:25 PM Flag

    The Top 10 Things To Like About Prospect Capital Besides The 13.4% Dividend YieldThe high yield reflects extremely negative investor sentiment.
    Investors seem to be overlooking the positive case, which is presented here.
    Prospect Capital Corporation (NASDAQ:PSEC) is a business development corporation. BDCs are one reason the US economy is so dynamic and innovative. They help fund and nurture smaller companies until they are ready to go public or obtain more traditional funding such as bank loans. BDCs are required to pass through 90 percent of taxable income as dividends to investors. PSEC pays a monthly dividend of 8.3 cents, and currently yields 13.4% at a recent price of $7.48.

    Since I'm highlighting the positive case, readers may want to read one of the numerous recent negative articles such as this one for balance. Thanks to all the negativity, PSEC now has a 13.4% dividend yield and trades at a substantial discount to book value. I believe that investors have overlooked many important positive factors. Here's my top 10 list:

    1. Heavy Insider Buying
    PSEC senior management has bought over $43 million in stock on the open market since January 2010 with no sales.

    2. Big Discount to Book Value
    At a recent price of $7.48, PSEC is trading at a 27% discount to its $10.30/share book value. This is an unusually large discount. In fact PSEC has often traded at a premium to book value. As noted in the company's presentation (see graph on page 3), PSEC has had very high returns following periods when it traded at such an abnormally large discount to book value.

    3. Spin-offs Are Actually a Good Thing
    PSEC plans to spin-off some client companies as they reach maturity. This makes sense because PSEC is trading at a discount to book value and some growth stock spin-offs would be expected to trade at a multiple of book value. Why do some investors see this as a negative? To retain capital, these spin-offs would be structured as rights offerings. Although certainly not the case here, rights offerings are often associated with distressed companies in desperate need of capital. Of course PSEC investors can always decline to participate in a spin-off rights offering if they don't like the deal.

    4. They Already Cut the Dividend
    The monthly dividend was cut from 11.1 cents to 8.3 cents back in February. Long-term investors hate dividend cuts and have punished PSEC accordingly. However, for new investors, this is a positive. You get a high yield and the company has already cut the dividend to a level it believes is sustainable.

    5. Energy Sector Exposure Is Minimal
    PSEC was originally focused on the energy sector, but this is no longer the case. Only 4% of their portfolio is energy-related, and even there exposure is limited as the company typically invests in secured debt rather than equity.

    6. PSEC is Less Risky Than Most BDC Peers
    Many BDCs invest heavily in equity as compared to PSEC. First lien debt investments account for a majority of PSEC assets. BDC's are legally prohibited from leveraging each dollar of equity capital with more than a dollar of debt financing. In order to avoid approaching the legal limit, BDC's typically limit debt to 80-85 cents for each dollar of equity. This limited leverage makes BDC failures extremely rare. PSEC's large size further reduces risk since it invests in more companies than smaller peers. This minimizes the downside risk from one "bad apple" in the portfolio.

    7. The Whole BDC Sector is Depressed
    Many BDCs are trading at a significant discount to book value due to fears that interest rates will rise. The Market Vectors BDC Income ETF (NYSEARCA:BIZD) that tracks the sector is down 14% over the past year. As a contrarian, this is a great time to invest in the BDC sector. PSEC is trading within 5% of its 52 week low and appears particularly depressed.

    8. Management is Pounding the Table For PSEC Stock
    I have seen numerous interviews on CNBC where management talks about their business, but refuses to even answer questions about their stock price. It's refreshing to read an interview where the President is pounding the tablefor his undervalued stock.

    9. Net Interest Margin is Increasing
    Contrary to conventional wisdom, moderately higher interest rates are not so bad for PSEC. Much of their funding is from fixed rate bonds. Several PSEC bond issues are currently trading above par. This suggests borrowing costs may decline as debt is refinanced. PSEC typically makes variable rate loans to portfolio companies. Higher interest rates would therefore increase net interest margins.

    10. High Yield is Being Generated with Only Moderate Leverage
    As noted above in #6, balance sheet leverage is quite modest. Many high yield issues I look at require massive balance sheet leverage to generate a high yield. Take Orchid Island Capital (NYSE:ORC) for example. It yields 19%, but the balance sheet is leveraged over 6:1 and all sorts of complex hedging is used to achieve that yield. The 13.4% yield from PSEC is remarkable in that it is achieved with less than 1:1 leverage. Lower balance sheet leverage means that PSEC is less risky than many high yield issues in other sectors.

    My newsletter (see additional disclosure at the bottom of this article) is focused on high yield issues. To find such a healthy yield elsewhere, you typically must deal with distressed companies or a highly leveraged balance sheets. It's nice to find an attractive yield from an issue like PSEC that is neither distressed nor overleveraged.

    Sentiment: Strong Buy

  • Reply to

    PROSPECT KEEPS ADDING DEALS TO THE QUARTER

    by ockiote Jul 14, 2015 11:02 AM
    steve484842 steve484842 Jul 14, 2015 4:11 PM Flag

    V V Good

    Sentiment: Strong Buy

  • Investigating Prospect Capital's Q2 Lending ActivityIn my exclusive interview with Grier Eliasek less than two weeks ago, I had asked about a perceived slow down in lending, which affirmed.
    After this re-reading my transcript this weekend and doing some buying in shares yesterday (7/13) I decided to investigate the Q2 activity directly.
    There was a lot of activity since the Q1 report in may and I discuss the implications.
    I recently covered Prospect Capital (NASDAQ:PSEC) in depth and discussed the major shortcomings with the stock. I discussed the basic investing strategy, the strengths and weaknesses of the company and of course highlighted the exorbitant management fees all while the company cut its payout to shareholders. It wasn't until after this announced cut, and shareholders getting crushed, that I got behind the name and did some buying. Many issues still remain, but in my opinion, the most important part of being a Prospect Capital shareholder is knowing where they are investing. We want to ensure management is avoiding excessive risk and reducing the chances to run into underperforming or non-performing loans. The purpose of this paper is to discuss the investments the company has made in 2015. Prior to delving into the material, recall that in my exclusive interview with Grier Eliasek less than two weeks ago, I had asked about a perceived slow down in lending, which he affirmatively responded:

    "Yeah… in general, it's interesting. If you look at M&A, which drives a lot of our industry, it creates a lot of financing opportunities. It's a driver. A big driver. The headline number of M&A is strong, but a lot of this is mega-strategic deals that don't use a ton of financing. So a lot of our business is being driven by this, as it's floored a bit in 2015 compared to 2014. There's a gap between buyers and sellers. Sellers are holding out for the outlier strategic bid to come in and the financial buyer/equity firm can't/won't pay it. A stand-off has emerged in a number of auction situations. Over time it will correct itself, and of course, there is activity occurring. We have a big team over 100 people; we can look at a lot of opportunities and be quite disciplined and we're happy with the opportunity set that we're seeing in the market. It'll be interesting for us to see if we can calculate it, but the book to look ratio has probably declined this year. Historically 1%-2% range; last year, probably higher end; this year, probably lower end. We've been passing on a lot of opportunities. We're also cautious; others are too. It's been 8 years since the last recession; within a few years, we may be due. I'm not saying the tea leaves pointing to that right now. With every passing quarter, we will tighten up a little more. We are big believers in reversion to the mean. That's not easy to predict, but general direction can be predicted, as a student of history."

    After this re-reading my transcript this weekend and doing some buying in shares yesterday (7/13) I decided to investigate the Q2 activity directly. Recall that Prospect focuses on offering non-control debt financing to corporate management teams as well as financial sponsors. However, it also makes very selective acquisitions by investing in multiple levels of business' capital structure. The company has grown its equity substantially in the last few years to a total of $3.7 billion to start 2015. I still expect that total to easily surpass $4 billion this year. The company's asset portfolio is quite impressive, as Prospect has managed to grow its assets from just $105 million at the end of 2005 to over $6.7 billion at the end of 2014. With the recent issues the company has faced, it has become more selective in its investments, as Mr. Eliasek alluded to above. Table 1 summarizes the investing activities for the company in Q2 2015 that I could find since the company reported Q1 earnings on May6th. I found them buried in a prospectus dated July 6th, 2015, a press release on the last investment July 7th and a press release this morning (July 14th).

    Table 1. Investing Activities of Prospect Capital in Calendar Year 2015, as of April 1, 2015

    Company
    Date(s)
    Investment ($ millions) activity
    Brief description

    Mountain View CLO IX, Ltd.
    5/13
    $44.6
    Purchased 81.48% of the subordinated notes in Mountain View CLO IX Ltd. in a co-investment transaction with Priority Income Fund, Inc

    Blue Coat Systems, Inc.
    5/22
    ($11.0)
    Repaid the $11.0 million loan receivable to PSEC.

    Traeger Pellet Grills LLC
    5/28
    $15.0
    Made a $15.0 million follow-on first lien senior secured debt investment in Traeger Pellet Grills LLC in connection with a delayed purchase price payment.

    Fleetwash, Inc.
    6/2
    ($24.1)
    Sold 100% of the outstanding principal balance of the senior secured Term Loan A investment in Fleetwash, Inc. for $24.1 million. There was no gain or loss realized on the sale

    Harbour View CLO VII, Ltd.
    6/5
    $15.1
    Made an investment of $15.1 million to purchase 50.07% of the subordinated notes in HarbourView CLO VII, Ltd. in a co-investment transaction with Priority Income Fund, Inc

    Trinity Services Group, LLC
    6/8
    ($9.9)
    Sold an additional 10% of the total outstanding principal balance of the senior secured Term Loan A investment in Trinity Services Group, Inc. for $9.9 million. There was no gain or loss realized on the sale.

    Edentum, Inc.
    6/9
    $10.8
    Provided additional debt and equity financing to support the recapitalization of Edmentum, Inc. As part of the recapitalization, exchanged 100% of the $50.0 million second lien term loan to Edmentum, Inc. for $26.4 million of junior PIK notes and 370,964.14 Class A common equity units representing 37.1% equity ownership in Edmentum Ultimate Holdings, LLC. In addition, invested $5.9 million in senior PIK notes issued by Edmentum Ultimate Holdings, LLC. We also funded $4.9 million as part of a second lien revolving credit facility to Edmentum, Inc.

    Captsone Logistics Acquisition, Inc.
    6/12
    $37.5
    Made a $37.5 million follow-on second lien senior secured debt investment in Capstone Logistics Acquisition, Inc., to support an acquisition.

    Royal Holdings, Inc.
    6/12
    $5.0
    Made a second lien secured investment of $5.0 million to support the recapitalization of Royal Holdings, Inc., a manufacturer of high-value specialty adhesives and sealants. As part of the recapitalization, on June 22, 2015, received repayment of the $20.0 million loan previously outstanding from Royal Adhesives and Sealants, LLC, a wholly-owned subsidiary of Royal Holdings, Inc.

    Apollo Security Services Borrower, LLC
    6/19
    $10.0
    Made a $10.0 million second lien secured investment in Apollo Security Services Borrower, LLC to support the simultaneous acquisitions of two providers of alarm monitoring services in the U.S.

    IDQ Holdings, Inc.
    6/22
    ($12.5)
    Repaid the $12.5 million loan receivable

    PrimeSport, Inc.
    6/22
    ($20.0)
    Sold 26.85% of the outstanding principal balance of the senior secured Term Loan A investment in PrimeSport, Inc. for $20.0 million. There was no gain or loss realized on the sale.

    Trinity Services Group
    6/22
    ($19.8)
    Sold an additional 20% of the total outstanding principal balance of the senior secured Term Loan A investment in Trinity Services Group, Inc. for $19.8 million. There was no gain or loss realized on the sale.

    PlayPower, Inc.
    6/23
    $10.0
    Made a $10.0 million second lien secured investment in PlayPower, Inc., a global designer and manufacturer of commercial playgrounds as well as indoor and outdoor recreational equipment.

    Deltek, Inc.
    6/25
    ($12.0)
    Deltek, Inc. repaid the $12.0 million loan receivable

    Global Employement Solution
    6/26
    $21.4
    Made a $21.4 million follow-on first lien senior secured debt investment in Global Employment Solutions, Inc. to support an acquisition.

    Jefferson Mill CLO, Ltd.
    6/26
    $16.9
    Made an investment of $16.9 million to purchase 56.52% of the subordinated notes in Jefferson Mill CLO Ltd. in a co-investment transaction with Priority Income Fund, Inc

    BAART Programs Inc
    6/30
    $58.5
    Provided $58.5 million of first lien senior secured financing, of which $44.0 million was funded at closing, to BAART Programs, Inc., an operator of outpatient opioid treatment service clinics.

    Inome, Inc.
    7/1
    $31.0
    Provided $31.0 million of first lien senior secured financing, of which $30.2 million was funded at closing, to inome, Inc., an online information commerce company

    On Deck Capital, Inc.
    5/9-7/6
    $22.5
    Prospect Small Business Lending, LLC purchased $22.5 million of whole loans from On Deck Capital, Inc., an online small business lender.

    National Property REIT Corp.
    5/9-7/6
    $45.5
    Made six follow-on investments in National Property REIT Corp totaling $45.5 million to support the online consumer lending initiative. We invested $11.4 million of equity through NPH Property Holdings, LLC and $34.1 million of debt directly to ACL Loan Holdings, Inc., a wholly-owned subsidiary of NPRC.

    H.I.G Capital
    7/7
    $31.0
    Capital Commits $31 Million of First Lien Floating Rate Debt to Support the Acquisition of Intelius Holdings

    System One Holdings/ MidOcean Partners
    7/14
    $11.8
    Provides System One Holdings - a portfolio company of MidOcean Partners - with another $11.8M of first lien senior secured floating rate debt to support the purchase of AECOM's quality programs business.


    As you can see from the reported deals I was able to find nearly $278 million in net loans, loans purchased and sold. There was $387 million in lending and purchasing activity in addition to a repayments/sales totaling $109 million. Much of this activity was buried in the prospectus mentioned above that was discussing Prospect Capital's 4.75% Senior Notes. Please note there was activity related to the notes in Q2 but I am not discussing them here.

    So what does this all mean for shareholders? Well, the goal here was to determine what the company was doing in terms of investing. As I predicted in my article calling for accumulation of Prospect at these levels, the company has seemed rather conservative in its lending. If my data is correct and complete, the company has only provided a little over $278 million in loans and acquisitions. This is of course, and expectedly, far below the pace of the $3.2 billion in originations made in 2014. This seems to fit with my observation and Mr. Eliasek's assertion that not only is the company going to be more conservative, but it would grow its asset portfolio more linearly and selectively.

    Why is this a good thing for shareholders in my opinion? Remember that the base management fee rose tremendously year-over-year, from $25,075,000 in Q4 2013 to $34,034,000 in Q4 2014, or a rise of 36%. The reason fees had gone up like this that there were so many more assets under management. Looking ahead, with more assets under management now, it is likely we see a rise in fees in the Q2 report. They will likely not be too dramatic given that relatively small increase in assets under management. Here is the interesting item. In the last 12 months, PSEC has made about $2 billion in loans. However, the last two quarters only account for about a quarter of this total. Because Mr. Eliasek affirmed my notion that lending was slowing, I thought I would conduct this investigation. Management doesn't always issue a release when they make a move. Thus, a periodic investigation of this nature is warranted.

    Sentiment: Strong Buy

  • steve484842 steve484842 Jul 4, 2015 7:35 AM Flag

    ockiote, New investors and longs in PSEC just need to know factual info. going forward.
    Good luck

    Sentiment: Strong Buy

  • steve484842 steve484842 Jul 2, 2015 9:33 AM Flag

    doc, Looking much better for PSEC going forward.
    Good luck

    Sentiment: Strong Buy

  • steve484842 steve484842 Jul 2, 2015 9:32 AM Flag

    Ig, I (we) agree
    Good luck

    Sentiment: Strong Buy

  • steve484842 steve484842 Jul 2, 2015 7:27 AM Flag

    Pwww I also have ALL the noise (Short) posters on Ignore for a long time. Once I see a new poster doing these I put them on Ignore.
    Good Luck and Thanks

    Sentiment: Strong Buy

PSEC
7.71+0.21(+2.80%)4:00 PMEDT