NEW YORK, NY — (Marketwire) — 05/10/12 — Prospect Capital Corporation (NASDAQ: PSEC) (“PSEC”, “Prospect”, “we”, “our”, or “us”) today announced financial results for our third fiscal quarter ended March 31, 2012.
For the three and nine months ended March 31, 2012, our net income was $50.2 million and $154.6 million, respectively, or $0.44 per share and $1.39 per share, respectively. For the three and nine months ended March 31, 2011, our net income was $33.8 million and $91.3 million, respectively, or $0.38 per share and $1.11 per share, respectively.
Our net income increased 49%, and our net income per share increased 16%, from the March 2011 quarter to the March 2012 quarter. These increases are primarily due to growing interest income from additional investments, a loan prepayment premium received from NRG Manufacturing, Inc. (“NRG”), higher dividend income from our investments in Energy Solutions Holdings, Inc. (“Energy Solutions”) and NRG, and fees recognized in connection with the sale of our stock in NRG and the sale by Energy Solutions of its gas processing business.
Our net investment income (“NII”) was $58.1 million and $24.0 million for the March 2012 quarter and March 2011 quarter, respectively, or $0.51 per share and $0.27 per share, respectively. Our NII was $122.5 million and $64.0 million for the nine months ended March 31, 2012 and March 31, 2011, respectively, or $1.10 per share and $0.78 per share, respectively. Our NII was $36.5 million for the December 2011 quarter, or $0.33 per share. Our NII per share in the March 2012 quarter represented an increase of 55% from the December 2011 quarter and an increase of 89% from the March 2011 quarter.
We are targeting continued growth in NII per share as we utilize prudent leverage to finance our growth through new originations, given our debt to equity ratio stood at less than 34% as of March 31, 2012. We estimate that our NII for the current fourth fiscal quarter ended June 30, 2012 will be $0.38 to $0.43 per share.
Our net asset value per share on March 31, 2012 stood at $10.82 per share, an increase of $0.13 per share from December 31, 2011. This growth represents our sixth consecutive quarterly increase in net asset value per share. Our portfolio continued to perform during the March 2012 quarter. None of our loans originated in over four years have gone on non-accrual status.
We have generated cumulative NII in excess of cumulative distributions to shareholders for both (i) the current August 2012 tax year ($98.2 million of NII from September 1, 2011 through March 31, 2012, compared to shareholder distributions of $80.3 million during the same period) and (ii) since Prospect–s initial public offering almost eight years ago. Depending on future distributions to shareholders, spillback dividend classifications, differences between NII and investment company taxable income, and other factors, we may retain significantly all or a portion of recent realizations and reinvest them in additional income-producing investments.
We recently declared our 46th, 47th, 48th, and 49th consecutive cash distributions to shareholders, including 26 consecutive per share monthly cash distribution increases, as follows:
$0.101525 per share for May 2012 payable to holders of record on May 31, 2012 with a payment date of June 22, 2012;
$0.101550 per share for June 2012 payable to holders of record on June 29, 2012 with a payment date of July 24, 2012;
$0.101575 per share for July 2012 payable to holders of record on July 31, 2012 with a payment date of August 24, 2012; and
$0.101600 per share for August 2012 payable to holders of record on August 31, 2012 with a payment date of September 21, 2012.
Equity Values:
Net assets as of March 31, 2012: $1.319 billion
Net asset value per share as of March 31, 2012: $10.82
Third Fiscal Quarter Operating Results:
Net investment income: $58.07 million
Net investment income per share: $0.51
Net increase in net assets resulting from operations: $50.21 million
Net increase in net assets per share resulting from operations: $0.44
Dividends to shareholders per share: $0.304350
Third Fiscal Quarter Portfolio Activity:
New portfolio investments in quarter: $170.07 million
Fiscal Year to Date Operating Results:
Net investment income: $122.46 million
Net investment income per share: $1.10
Net increase in net assets resulting from operations: $154.60 million
Net increase in net assets per share resulting from operations: $1.39
Dividends to shareholders per share: $0.912375
Fiscal Year to Date Portfolio and Portfolio Activity:
New portfolio investments during the nine months ended March 31, 2012: $547.34 million
Total portfolio investments at cost at March 31, 2012: $1.656 billion
Total portfolio investments at fair value at March 31, 2012: $1.692 billion
Number of portfolio companies at March 31, 2012: 78
Our origination efforts during the March 2012 quarter and current June 2012 quarter continue to prioritize secured lending, with an emphasis on first-lien loans, though we also seek to close selected subordinated debt and equity investments. In addition to targeting investments senior in corporate capital structures with our new originations, we have also increased our new investments in third-party private equity sponsor-owned companies, which tend to have more third-party equity capital supporting our debt investments than in non-sponsor transactions, while still maintaining flexibility to pursue attractive non-sponsor investments. With our scale team of more than 50 professionals, one of the largest dedicated middle-market credit groups in the industry, we believe we are well positioned to select in a disciplined manner a small number of investments out of thousands of investment opportunities sourced per annum.
At March 31, 2012, our portfolio consisted of 78 long-term investments with a fair value of $1.692 billion, compared to 72 long-term investments with a fair value of $1.463 billion at June 30, 2011, and compared to 58 long-term investments with a fair value of $748.5 million at June 30, 2010.
During the March 2012 quarter, we completed new and follow-on investments aggregating approximately $170.1 million. Our repayments in the March 2012 quarter were $188.4 million.
On January 4, 2012, Energy Solutions sold its gathering and processing assets (“Gas Solutions”) for a sale price of $199.8 million, adjusted for the final working capital settlement, including a potential earnout of $28.0 million that can be paid to us based on the future performance of Gas Solutions. So far, after expenses, including structuring fees of $10.0 million paid to PSEC, Energy Solutions has received approximately $148.7 million in cash and an additional $10.0 million held in escrow. Our loans to Energy Solutions remain outstanding and are collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions– assets by Energy Solutions has resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012, which coincides with the tax year for Energy Solutions. As a result, dividend distributions from Energy Solutions to Prospect will be required to be recognized by Prospect as investment income to the extent there are current year earnings and profits sufficient to support such recognition. Energy Solutions currently has approximately $148 million of cash available for future debt service, distributions, operating investments, and the add-on acquisitions it is seeking and reviewing. Together with prior cash flows, but excluding both escrow and earnout, the exit price for Gas Solutions produced a 57% internal rate of return and 5.5 times cash on cash multiple for Energy Solutions on its Gas Solutions investment.
On January 9, 2012, Arrowhead General Insurance Agency, Inc. repaid our $27.0 million loan.
On January 12, 2012, we made a follow-on investment of $16.5 million to purchase 87% of the secured Class D Notes issued by CIFC Funding 2011-I, Ltd.
On January 17, 2012, we provided $18.3 million of secured second-lien financing to National Bankruptcy Services, LLC, a financial services processing company being acquired by a leading private equity sponsor.
On January 31, 2012, Aircraft Fasteners International, LLC repaid our $7.4 million loan.
On February 2, 2012, Prospect sold NRG to a strategic buyer for $123.3 million. In conjunction with the sale, our outstanding $37.2 million loan was repaid. We received a $26.9 million make-whole fee for early repayment of the outstanding debt, which was recorded as interest income in the March 2012 quarter. PSEC also earned a $3.8 million advisory fee in connection with the transaction, which was recorded as other income in the March 2012 quarter. After expenses, we received for sale of our equity net proceeds of $26.0 million and recognized a realized gain of $24.8 million in our results for the March 2012 quarter. In addition, there is $11.1 million being held in escrow of which at least 80% is due to us upon release of the escrowed amounts. Monies released from escrow will be recognized as additional gain when and if received. Including all cash flows over the life of the investment, but not including escrowed amounts, Prospect has realized a 58% annualized internal rate of return on our NRG investment.
On February 10, 2012, we provided $15.0 million of secured second-lien financing to Rocket Software, Inc., a leading global infrastructure software company.
On February 15, 2012, we provided $25.0 million of secured second-lien financing to Blue Coat Systems, Inc., a leading provider of Web security and wide area network optimization solutions.
On February 24, 2012, we made a follow-on investment of $7.9 million to purchase 24% of the unrated subordinated notes in Apidos CLO VIII, Ltd.
On February 28, 2012, we made a senior secured follow-on investment of $9.5 million in Clearwater Seafoods LP.
On February 29, 2012, we provided $15.0 million of secured second-lien financing to Focus Brands, Inc., a leading franchiser and operator of restaurants, cafes, ice cream stores, and retail bakeries.
On March 1, 2012, we made a senior secured follow-on investment of $27.5 million in SG Acquisition, Inc. to support a recapitalization.
On March 14, 2012, we made an investment of $26.6 million to purchase 74% of the unrated subordinated notes in Babson CLO Ltd. 2012-1A.
On March 16, 2012, VPSI, Inc. repaid our $16.6 million loan.
On March 23, 2012, Anchor Hocking, LLC repaid our $20.4 million loan.
On March 27, 2012, we provided $12.5 million of senior secured financing to IDQ Holdings, Inc., a manufacturer of refrigerant refill kits for automobile air conditioners.
On March 30, 2012, ROM Acquisition Corporation repaid our $31.6 million loan.
Since March 31, 2012 (in the current June 2012 quarter), we have completed three new investments aggregating approximately $80 million and received a repayment of $23 million.
On April 2, 2012, we made an investment of $22.0 million to purchase 51% of the subordinated notes in Galaxy XII CLO, Ltd.
On April 16, 2012, we made a senior secured debt investment of $15.0 million to support the acquisition of Nixon, Inc., a designer and distributor of watches and accessories.
On April 20, 2012, we made an investment of $43.2 million to purchase 71% of the subordinated notes in Symphony CLO IX, Ltd.
On May 8, 2012, SonicWALL, Inc. repaid our $23.0 million loan.
On March 19, 2012, we entered into a definitive agreement to provide debt and equity for the acquisition of the businesses of First Tower Corp. (“First Tower”), a private multiline specialty finance company based in Flowood, Mississippi with over 150 branch offices. We are acquiring 80.1% of First Tower for $110.2 million of cash and 14,518,207 shares of our common stock. We have the option, at our sole discretion, to substitute up to 100% cash in lieu of such 14,518,207 shares of our common stock at a price per share based on average trading prices prior to the closing date. Completion of the First Tower acquisition is subject to regulatory approvals and is expected to close late in the quarter ended June 30, 2012.
We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. None of our loans originated in over four years have gone on non-accrual status. The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 2.2% on March 31, 2012, down from 3.5% on June 30, 2011.
Because of the performance of several controlled positions in our portfolio, we have selectively monetized certain such companies and may monetize other positions if we identify attractive opportunities for exit. As such exits materialize, we expect to reinvest such proceeds into new income-producing opportunities. We are pleased with the performance of our controlled portfolio companies, and are actively exploring other new investment opportunities at attractive multiples of cash flow.
Our advanced investment pipeline aggregates more than $500 million of potential opportunities. These investments are primarily secured investments with double-digit coupons, sometimes coupled with equity upside through additional investments, and diversified across multiple sectors.
Our modestly leveraged balance sheet is a source of significant strength. Our debt to equity ratio stood at less than 34% at March 31, 2012. Our equitized balance sheet also gives us the potential for future earnings upside as we prudently look to utilize and grow our existing revolving credit facility as well as potentially add additional secured or unsecured term facilities, made more attractive by our investment-grade ratings at corporate, revolving facility, and term debt levels.
On March 27, 2012, we renegotiated our credit facility and closed on an expanded five-year revolving credit facility (the “Facility”) for Prospect Capital Funding LLC. As of March 31, 2012, ten original lenders had extended commitments of $410 million under the Facility. We increased the Facility size to $482.5 million in April 2012 with commitments from four additional lenders, thereby bringing the total number of lenders to 14. The Facility includes an accordion feature which allows aggregate commitments to be increased to up to $650 million without the need for re-approval from the existing lenders or the rating agency.
As we make additional investments, we generate additional availability to the extent such investments are eligible to be placed into the borrowing base. The revolving period of the Facility extends through March 2015, with an additional two-year amortization period, with distributions allowed after the completion of the revolving period. Interest on borrowings under the Facility is one-month Libor plus 275 basis points, with no minimum Libor floor. The Facility continues to carry a high-investment-grade Moody–s rating of Aa3.
Improvements in the new five-year Facility from the prior three-year Facility include longer tenor, increases in advance rates under certain conditions, decreases in drawn interest cost, decreases in unused line fees, increases in maximum eligible loan sizes, and increases in baskets for longer-dated and quarterly pay loans. Based on current Libor, we achieved an approximately 125 basis point reduction in annual drawn interest coupon compared to the previous three-year Facility.
We also have significantly diversified our counterparty risk. We currently have 14 institutional lenders in our Facility, up from five lenders at June 30, 2010, two lenders at June 30, 2009, and one lender at June 30, 2008.
In addition, our repeat issuance in the past three calendar years in the five-year and greater, as well as ten-year and greater, unsecured term debt market has extended our liability duration, thereby better matching our assets and liabilities for balance sheet risk management. All of our term debt offerings are unsecured, have fixed interest rates, have no asset restrictions, have no financial covenants, have no technical cross-default provisions, and have no payment cross-default provisions to our revolving credit facility. In the March 2012 and current June 2012 quarters, we have also diversified our term debt beyond convertible debt and into the program registered bond and listed registered bond markets, thereby expanding our access to capital across multiple capital markets. All of our term debt has an investment-grade S&P rating of BBB.
On February 16, 2012, we entered into a selling agent agreement for our issuance and sale from time to time of an unsecured program registered bond series (“Program Notes”). The Program Notes issued to date have a fixed interest rate and ten-year maturity. During the March 2012 quarter, we issued $5.5 million of such Program Notes at an average interest rate of 6.97%. Since March 31, 2012, we have issued an additional $8.5 million of such Program Notes.
On April 16, 2012, we issued $130 million of 5.5-year unsecured 5.375% convertible notes due 2017 (“2017 Notes”). This coupon represents the lowest coupon of any term debt that we have issued to date. The 2017 Notes are convertible into shares of common stock at a conversion price of approximately $11.65 per share of common stock, subject to adjustment in certain circumstances.
On May 1, 2012, we issued $100 million in aggregate principal amount of 10.5-year unsecured 6.95% notes due 2022 in the form of listed registered notes (“2022 Notes”). The 2022 Notes represented the longest dated notes issued in the prior 18 months by any business development company.
On December 21, 2010, we issued $150 million of five-year unsecured 6.25% convertible notes due December 2015 (“2015 Notes”). The 2015 Notes are convertible into shares of common stock at a conversion price of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances.
On February 18, 2011, we issued $172.5 million of 5.5-year unsecured 5.50% convertible notes due August 2016 (“2016 Notes”). The 2016 Notes are convertible into shares of common stock at a conversion price of approximately $12.76 per share of common stock, subject to adjustment in certain circumstances.
Between January 30, 2012 and February 2, 2012, we repurchased $5.0 million of our 2016 Notes at a price of 97.5% of par, including commissions. We may look to make additional repurchases of our debt if attractive opportunities become available.
We currently have no borrowings under our Facility. Assuming sufficient assets are pledged to the Facility and that we are in compliance with all Facility terms, and taking into account our cash balances on hand, we have over $600 million of new investment capacity. Any principal repayments or other monetizations of our assets would further increase our new investment capacity. Any increase in our Facility size or issuance of other debt, including additional term debt, would also further increase our investment capacity.
Prospect will host a conference call on Friday, May 11, 2012 at 11:00 a.m. Eastern Time. The conference call dial-in number will be 877-317-6789. A recording of the conference call will be available for approximately 30 days. To hear a replay, call 877-344-7529 and use passcode 10013901.
Prospect Capital Corporation () is a closed-end investment company that lends to and invests in private and microcap public businesses. Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments.
We have elected to be treated as a business development company under the Investment Company Act of 1940 (“1940 Act”). We are required to comply with a series of regulatory requirements under the 1940 Act as well as applicable NASDAQ, federal and state rules and regulations. We have elected to be treated as a regulated investment company under the Internal Revenue Code of 1986. Failure to comply with any of the laws and regulations that apply to us could have an adverse effect on us and our shareholders.
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, whose safe harbor for forward-looking statements does not apply to business development companies. Any such statements, other than statements of historical fact, are highly likely to be affected by other unknowable future events and conditions, including elements of the future that are or are not under our control, and that we may or may not have considered; accordingly, such statements cannot be guarantees or assurances of any aspect of future performance. Actual developments and results are highly likely to vary materially from these statements. Such statements speak only as of the time when made, and we undertake no obligation to update any such statement now or in the future.