Prospect Capital Corporation (NASDAQ:PSEC) Q1 2019 Earnings Conference Call Transcript

Nov 07, 2018 • 10:00 am ET

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Prospect Capital Corporation (NASDAQ:PSEC) Q1 2019 Earnings Conference Call Transcript

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Presentation
Executive
John Francis Barry

team has been in the investment business for decades with experience handling both challenges and opportunities provided by dynamic economic and interest rate cycles. We have learned when it is more productive to reduce risk than to reach for yield. And the current environment is one of those time periods. At the same time, we believe the future will provide us with substantial opportunities to purchase attractive assets utilizing the dry powder we have built-in reserve.

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

Executive
Michael Grier Eliasek

Thanks, John. Our scaled business with over $6 billion of assets and un-drawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals, representing one of the largest middle market credit groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related and direct non-sponsor lending; Prospect sponsored operating and financial buyouts; structured credit; real state yield investing and online lending.

As of September 2018, our controlled investments at fair value stood at 41.9% of our portfolio, down 21% from the prior quarter. This diversity 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 non-bank 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 September 2018, our portfolio at fair value comprised 44.4% secured first lien, up 0.5% from the prior quarter; 21.7% secured second lien, down 0.4% from the prior quarter; 16.3% structured credit with underlying secured first lien collateral, 0.5% unsecured debt; and 17.1% equity investments, resulting in 82% of our investments being assets with underlying secure debt benefiting from borrow-pledged collateral.

Prospect's approach is one that generates attractive risk adjusted yields, and our debt investments were generating an annualized yield of 13.5% as of September 2018, up 0.5% from the prior quarter and the fourth straight quarterly increase. We also hold equity positions and 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 originations to protect against downside risk while still achieving above market yields through credit selection discipline and a differentiated origination approach.

As of September 2018, we held 137 portfolio companies, up 2 from the prior quarter with a fair value of $5.94 billion. We also continued to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration, the largest is 14.1%. As of September 2018, our asset concentration in the energy industry stood at 3.2% and our concentration in the retail industry stood at 0%. Non-accruals as a percentage of