prospect capital corporation · prospect capital is one of the largest multi-line business...

0

PROSPECT CAPITAL CORPORATIONNASDAQ: PSEC

MIDDLE MARKET FINANCE AND PRIVATE EQUITY

1

FORWARD-LOOKING STATEMENTS AND DISCLAIMERS

Certain statements made by us in this presentation that are not historical facts or that relate to future plans, events or performances are forward-

looking statements within the meaning of the federal securities laws. Forward-looking statements predict or describe our future operations, business

plans, business and investment strategies and portfolio management and the performance of our investments and our investment management

business. Our actual results or actions may differ materially from those expressed in any forward-looking statements made by us. Forward-looking

statements involve a number of risks of uncertainties including, but not limited to, the risks described under headings such as “Risk Factors” in our

SEC filings. All forward-looking statements are qualified by those risk factors. All statements made by us in this presentation are further qualified in all

respects by the information disclosed in our SEC filings. We disclaim any obligation to update our forward looking statements unless required by law.

Certain information discussed in this presentation (including information relating to portfolio companies) was derived from third-party sources and has

not been independently verified and, accordingly, Prospect Capital Corporation makes no representation or warranty in respect of this information.

The following slides contain summaries of certain financial and statistical information about Prospect Capital Corporation. The information contained

in this presentation is summary information that is intended to be considered in the context of our SEC filings and other public announcements that

we may make, by press release or otherwise, from time to time. We undertake no duty or obligation to publicly update or revise the information

contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of

future results, the achievement of which cannot be assured. You should not view the past performance of Prospect Capital Corporation, or

information about the market, as indicative of Prospect Capital Corporation’s future results. This presentation does not constitute an offer to sell or

the solicitation of an offer to buy any securities of Prospect Capital Corporation.

2

SIGNIFICANT

SCALE

►Founded in 2004, PSEC is one of the largest BDCs with ~$5.8 billion in capital under management(1)

►Scale allows us to target larger, more credit-worthy middle-market companies with one-stop financing solutions

►One of the largest teams in the industry focused on middle market lending (90+ professionals)

Source: Company filings, investor presentations and management.(1) Total assets as of 6/30/2020 plus estimated debt capacity.(2) Pricing data as of 8/21/2020.

Prospect Capital is one of the largest multi-line Business Development Companies (BDCs), providing debt financing to private middle-market companies and investing in other credit-related strategies

WHY PROSPECT?

BROAD

ORIGINATION

MIX

►Multiple yield-oriented origination strategies with upside potential

►Differentiated strategies drive high net yields

►Superior and proprietary deal flow channels

PROVEN

INVESTMENT

PHILOSOPHY

►Intensive screening process (<5% book-to-look ratio) with a majority focus on senior and secured lending

►Diverse portfolio of 121 investments across 39 industries and low non-accruals

►Independent third-party portfolio valuations

SOLID

FINANCIAL

FOUNDATION

►Investment grade ratings from S&P, Moody’s, Kroll, and Egan-Jones

►Laddered liability structure with long-term matched-book funding with no debt maturities until July 2022

►Approximately 71.2% of assets unencumbered and prudent leverage

ATTRACTIVE

VALUATION

►Fully covered monthly dividend of $0.06/share; current annualized dividend yield ~14.1%(2)

►Potential for capital appreciation based on the ~38% discount to NAV as of 8/21/2020

►Established historical track record and strong insider ownership

3

SIGNIFICANT SCALE PROVIDES COMPETITIVE ADVANTAGE

►PSEC is one of the largest publicly traded BDCs with total assets of ~$5.3 billion

►Strategy focused on risk reduction, capital preservation, and avoidance of “yield chasing” investments

Source: Company filings

(FY as of 6/30, $ in millions)

TOTAL EQUITY

$3,436 $3,355 $3,407$3,306

$3,056

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

FY2016 FY2017 FY2018 FY2019 FY2020

4

Source: Company filings, management.As of 6/30/2020.

EXPERIENCED AND BROAD TEAM

SENIOR EXECUTIVES

John Barry – Chairman and CEO

►Co-founder of Prospect Capital Corporation

►Over 41 years of experience, including Merrill Lynch, Rothschild and Davis Polk

►JD Harvard, AB Princeton

Grier Eliasek – President and COO

►Co-founder of Prospect Capital Corporation

►Over 22 years of experience; previously a consultant at Bain & Company

►MBA Harvard, BS Chemical Engineering University of Virginia

Daria Becker – MD and Head of Admin

►Joined Prospect Capital Management in 1998

►Over 34 years of experience, including Lexington, Citigroup and a family office

►BA Wellesley College

ADMINISTRATION

Administration Professionals 13

ACCOUNTING

& TAX

Accounting and Tax Professionals 21

LEGAL

Legal Professionals 11

With approximately 90 professionals, the Prospect team is one of the largest focused on the middle market

90+ person organization helps drive originations through superior scale and market coverage

INVESTMENT TEAM

Investment Professionals 38

BUSINESS

DEVELOPMENT & IR

Business Development & Investor Relations Professionals

7

5

FLEXIBLE ORIGINATION MIX

PRIVATE EQUITY SPONSOR FINANCE

(Non-Control)

9-12%Target IRRs

►Senior secured debt with significant junior / equity capital

►Stronger management / larger businesses

►Repeat business26.6% of

Portfolio

ONE-STOP YIELD BUYOUTS – FINANCECOS

(Control)

15-25%Target IRRs

►Consumer installment lending and auto finance

►Tax-efficient structure

►Strategic buyouts (Patriot Capital)

11.9% of

Portfolio

ONLINE LENDING

(Non-Control)

10-12%Target IRRs

►Online consumer loans and small business loans

►1-5 year term

►Relationships with multiple platforms

0.9% of

Portfolio

DIRECT NON-SPONSOR LENDING

(Non-Control)

11-16%Target IRRs

►Senior secured debt with lower leverage

►Higher yields from fewer lender competitors

►Proprietary call center

0.6% of

Portfolio

STRUCTURED CREDIT

(Hybrid)

13-17%Target IRRs

►Diversified credit exposure, with default rate well below market

►Large, more liquid credits andattractively priced AAA funding

►Call control strategy 15.3% of

Portfolio

AIRCRAFT LEASING

(Control)

10-18%Target IRRs

►Current-yielding equity in aircraft-ownership companies and aircraft securitizations

►Diversity by aircraft type, geography, and operator

1.6% of

Portfolio

ONE-STOP YIELD BUYOUTS – OPERATINGCOS

(Control)

14-25%Target IRRs

►One stop advantage (PSEC provides term debt)

►Current yield plus equity upside

►Management control6.1% of

Portfolio

REAL ESTATE

(Control)

14-18%Target IRRs

►Multi-family residential, student housing and self storage focus on fully developed properties

►Long-term fixed GSE funding

►Diversified tenants14.2% of

Portfolio

SYNDICATED DEBT

(Non-Control)

10-12%Target IRRs

►Senior secured debt of larger borrowers in liquid market

►Active during market dislocation

►Less active during bull markets22.9% of

Portfolio

Source: Company filings, management. PSEC portfolio data as of 6/30/2020.

Multiple origination channels allow PSEC to be selective in funding new investment opportunities

6

SUPERIOR DEAL FLOW AND DISCIPLINED EXECUTION

Source: Company filings, management.

ORIGINATE SCREEN

3,000+/year

STRUCTURE

200-300/year

CLOSE

30-50/year

MONITOR

121 portfolio

investments

EXITS

Over 200

since

inception

SYSTEMATIC

CALLING EFFORT

►PE sponsors

• ~200 Tier 1 relationships

►Other intermediaries

• ~4,000 total

►Syndication/Club relationships

COLD-CALLING

EFFORT

►Small-to-mid cap companies with identified financing needs

►Dedicated in-house call center

►Proprietary deal flow

MANAGEMENT

RELATIONSHIPS

►From 200+ past and present portfolio companies

►Add-on investments, new investments, assistance with due diligence and post-closing value add

CONTACT

DATABASE

►50,000+ contacts built over two decades

►Receive all transaction announcements, resulting in both in-bound opportunities and top-of-mind awareness

IN-BOUND

OPPORTUNITIES

►From scale, longevity, and visibility of Prospect

►~$5.8 billion of capital under management

Disciplined underwriting and execution helps to keep credit losses low

3,000+ opportunities sourced annually with <5% of initially screened investments advancing to closing

7

CONSERVATIVE APPROACH DRIVES CAPITAL PRESERVATION

Source: Company filings, management.(1) Includes debt through Prospect’s investment and excludes 3rd party debt.

Quarterly Portfolio Activity

Weighted Average Portfolio Company EBITDA and Net Leverage(1)

$59.8 $60.7 $62.0$69.5 $72.3 $72.0

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020

Weighted Average EBITDA ($ millions)

$35.7

$187.9

$94.5

$326.6

$402.4

$36.6

$195.1$212.8

$245.2

$431.5

$266.5

$64.1

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020

Investments ($ millions) Repayments/exits ($ millions)

4.51x 4.67x 4.69x 4.75x 4.63x 4.51x

0.00x

1.00x

2.00x

3.00x

4.00x

5.00x

6.00x

7.00x

8.00x

3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020

Weighted Average Net Leverage

PSEC generally invests in middle market companies with $5 - $150 million of annual EBITDA

8

10.6%10.2%

10.3% 10.1%

9.7%

Jun-19 Sep-19 Dec-19 Mar-20 Jun-20

Portfolio Yield

PORTFOLIO OVERVIEW: $5.3 BILLION IN ASSETS ACROSS 121 INVESTMENTS

Source: Company filings, management. PSEC portfolio data as of 6/30/2020.

(1) Excludes control investments, affiliated investments, and structured finance.

(2) Annualized current yield across all investments.

(3) Includes 50 separately capitalized properties.

2012,

0.3%2013,

4.0%

2014,

14.0%

2015,

3.8%

2016,

5.0%

2017,

8.4%

2018,

29.7%

2019,

18.3%

2020,

16.5%

Portfolio Vintage

Top 10 Investments

Portfolio Company % Assets Type

National Property REIT Corp.(3) 16.8% Real Estate

First Tower Finance Company LLC 9.7% Buyout

Interdent, Inc. 4.4% 1st Lien

PeopleConnect Holdings, LLC 3.8% 1st Lien

Broder Bros., Co. 3.1% 1st Lien

Town & Country Holdings, Inc. 3.1% 1st Lien

Valley Electric Company, Inc. 2.5% Buyout

PGX Holdings, Inc. 2.0% 2nd Lien

Capstone Logistics Acquisition, Inc. 1.9% 2nd Lien

Echelon Transportation, LLC 1.6% 1st Lien

(2)

First Lien

46.9%

Other Senior

Secured Debt

24.4%

Subordinated

Structured

Notes 13.5%

Equity 14.2%

Unsecured

Debt 1.0%

Senior and Secured Lending Focus

2.9%2.4%

1.6% 1.6%

0.9%


Non-accruals (FV)/Total Assets(1)

83.3%82.3% 81.2%

82.1%

84.8%


Secured Asset Mix

9

WELL DIVERSIFIED PORTFOLIO INVESTED IN 39 DIFFERENT INDUSTRIES


PSEC’s portfolio at fair value (6/30/2020)

Low energy/hotel/restaurant/leisure/retail concentration of 2.0%, the majority of which is secured debt

Structured Finance 15.2%

Equity Real Estate Investment

Trusts (REITs) 14.4%

Consumer Finance 12.3%

Health Care Providers &

Services 9.5%Commercial Services & Supplies 5.6%

Textiles, Apparel & Luxury

Goods 4.2%

IT Services 3.9%

Interactive Media & Services

3.8%

Distributors 3.4%

Diversified Consumer Services

3.2%

Construction & Engineering

2.5%

Professional Services 2.0%

Other 20.0%

10

SENIOR

PORTFOLIO

MANAGER

►Preliminary valuation discussions are documented and discussed with senior Prospect management

AUDIT

COMMITTEE

►Prospect’s Independent Audit Committee reviews the preliminary valuations

►Prospect Capital Management and the third-party valuation agent respond to and supplement any information required by Prospect’s Audit Committee

PROSPECT’S

BOARD OF

DIRECTORS

►Prospect’s majority independent board of directors determines the fair value of each investment in the portfolio based on the third-party valuations and recommendations from Prospect’s Audit Committee

►To date, the Board’s final valuations have never been outside the range provided by the third-party valuation firm

RIGOROUS AND INDEPENDENT VALUATION PROCESS


INDEPENDENT

THIRD-PARTY

VALUATION

►Every investment is marked quarterly and has been marked since inception at fair value by a third-party

►Third-party valuation agents complete a review of all assets with positive assurance (i.e., not merely a “negative assurance” process)

11

Source: Company filings and management. As of 6/30/2020 and as adjusted for a tender offer settled on 8/24/2020 in which $29.4 million of the 2022 Convertible Notes were validly tendered and accepted as disclosed in the 6/30/2020 10-K.(1) Includes $0 of floating rate notes. (2) $1,077.5 million of commitments from 30 lenders(3) Weighted average interest rate excluding amortization, accretion, and undrawn facility fees as of 6/30/2020.

DIVERSIFIED FUNDING SOURCES

►Access to diversified funding sources across multiple investor bases

►Emphasis on unsecured term debt with no financial covenants or cross defaults with revolving credit facility

►Prospect’s corporate credit rating is BBB- by Kroll, BBB by Egan-Jones, Baa3 by Moody’s, and BBB- by S&P

►No Debt Maturities until July 2022

ISSUANCE COUPONORIGINAL AMOUNT (millions)

OUTSTANDING(millions)

MATURITY

SR. UNSECURED CONVERTIBLE NOTES

►April 2017 - $9.98

►February 2019 - $9.03

4.950%

6.375%

$328.5

$201.3

$228.8

$201.3

7/15/2022

3/1/2025

SR. UNSECURED RETAIL NOTES

►Prospect Capital InterNotes®

►Prospect Baby Bond (NYSE: PBB)

►Prospect Baby Bond (NYSE: PBY)

►Prospect Baby Bond (NYSE: PBC)

3.75% - 6.75%(1)

6.25%

6.25%

6.875%

$725.5

$234.4

$70.8

$69.2

$680.2

$233.8

$70.8

$69.2

Sep 2023 - Oct 2043

6/15/2024

6/15/2028

6/15/2029

SR. UNSECURED INSTITUTIONAL TERM DEBT

►March 2013

►September 2018

5.875%

6.375%

$320.0

$100.0

$320.0

$100.0

3/15/2023

1/15/2024

SR. SECURED CREDIT FACILITY 1ML + 2.20% $1,077.5(2) $237.5 9/9/2024

5.37%(3) $2,141.6

12

Source: Company filings and management. As of 6/30/2020.(1) Funding maturity in 2024 includes revolving credit facility. The facility, for which $1,077.5 million of commitments have been closed to date from 30 lenders, matures in September 2024 with a revolving period extending through September 2023 followed by a one-year amortization period. Pricing for amounts drawn under the new facility is one-month Libor plus 2.20%. (2) Includes investments, equity capital, and debt capital maturing after 2025.

LONG-TERM, MATCHED-BOOK FUNDING LOCKS IN ATTRACTIVE SPREADS

PSEC’s well-laddered funding sources match the tenor of its investments

►Maturity date for revolving credit facility extended to September 2024; average daily utilization rate of ~13.3% since 2011

►Approximately $3.1 billion of Prospect’s funding is in the form of equity, which does not mature

►Repurchased or redeemed $549.4 million of debt maturing between 2018-2021 during the year ended 6/30/19 and $551.0 million of debt maturing between 2019-2024 for the year ended 6/30/20

$326 $230

$545

$993

$674

$654

$1,809

$0 $0

$258 $339

$748

$285

$3,597

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

2020 2021 2022 2023 2024 2025 No Maturity

Mill

ions

Asset Maturities Funding Maturities Cumulative Funding Maturities Cumulative Asset Maturities

(2)(1)

13

UNENCUMBERED ASSETS PROVIDE FINANCIAL FLEXIBILITY

$4,122 $4,020 $3,944$3,562 $3,772

$5,800 $5,585 $5,509

$5,218 $5,300

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

6/30/19 9/30/19 12/31/19 3/31/20 6/30/20

Tota

l A

ssets

($M

)

Unencumbered Assets Encumbered Assets

High level of unencumbered assets reduces risk in the event of a market downturn

Source: Company filings and management.

Approximately $3.8 billion of unencumbered assets, representing ~71.2% of total assets

14

PRUDENT NET LEVERAGE CONSISTENTLY WITHIN TARGET RANGE

Source: Company filings and management.

0.69x0.67x

0.75x 0.75x0.69x 0.70x

0.66x 0.64x

0.74x0.70x

0.00x

0.20x

0.40x

0.60x

0.80x

1.00x

1.20x

1.40x

1.60x

1.80x

2.00x

3/31/2018 6/30/2018 9/30/2018 12/31/2018 3/31/2019 6/30/2019 9/30/2019 12/31/2019 3/31/2020 6/30/2020

PSEC continues to target net leverage of 0.70x - 0.85x

15Source: Company filings, management.Note: Declared dividends are through the October 2020 distribution

PSEC CUMULATIVE DISTRIBUTIONS TO SHAREHOLDERS

Declared cumulative distributions of $18.24 per share totaling approximately $3.2 billion since 2004 IPO($ in millions)

0

500

1,000

1,500

2,000

2,500

3,000

Mar

-05

Jun-0

5Se

p-0

5D

ec-

05

Mar

-06

Jun-0

6Se

p-0

6D

ec-

06

Mar

-07

Jun-0

7Se

p-0

7D

ec-

07

Mar

-08

Jun-0

8Se

p-0

8D

ec-

08

Mar

-09

Jun-0

9Se

p-0

9D

ec-

09

Mar

-10

Jun-1

0Se

p-1

0D

ec-

10

Mar

-11

Jun-1

1Se

p-1

1D

ec-

11

Mar

-12

Jun-1

2Se

p-1

2D

ec-

12

Mar

-13

Jun-1

3Se

p-1

3D

ec-

13

Mar

-14

Jun-1

4Se

p-1

4D

ec-

14

Mar

-15

Jun-1

5Se

p-1

5D

ec-

15

Mar

-16

Jun-1

6Se

p-1

6D

ec-

16

Mar

-17

Jun-1

7Se

p-1

7D

ec-

17

Mar

-18

Jun-1

8Se

p-1

8D

ec-

18

Mar

-19

Jun-1

9Se

p-1

9D

ec-

19

Mar

-20

Jun-2

0Se

p-2

0

PSE

C C

um

ula

tive

Dis

trib

utions

to S

har

ehold

ers

Oct

-20

1616

DIFFERENTIATED PERFORMANCE

17

PSEC HAS POSTED AN AVERAGE ANNUAL RETURN ON NET ASSETS OF 8.2% WITH POSITIVE RETURNS IN ~84% OF THE FULL QUARTERLY PERIODS

Source: Company filings. Quarterly returns based on the line item “net increase in net assets resulting from operations” on the income statement. To calculate a quarterly return rate, quarterly returns were divided by the sum of the net asset value from the prior quarter’s filing (beginning net asset value) and half of the change in paid-in capital between the prior quarter and the then-current quarter. Annual and cumulative figures derived from compounding of quarterly returns.1. Total return average was calculated by taking the geometric average of all quarterly returns and then annualizing by compounding over four periods.

March June September December Annualized Cumulative

2004 - - (0.9%) 1.3% 0.4%

2005 0.9% 7.3% 1.4% 2.5% 12.5% 12.9%

2006 2.8% 5.7% 2.6% 1.2% 12.9% 27.5%

2007 1.7% 1.6% 2.8% (1.1%) 5.1% 34.0%

2008 (0.3%) 6.1% 3.3% 1.5% 10.8% 48.4%

2009 3.5% (0.2%) (1.1%) (2.2%) (0.0%) 48.4%

2010 4.0% 2.2% 3.4% 3.8% 14.0% 69.2%

2011 3.7% 2.7% 3.6% 5.7% 16.5% 97.1%

2012 4.1% 2.6% 2.8% 2.2% 12.1% 120.9%

2013 1.8% 3.2% 2.9% 2.8% 11.0% 145.3%

2014 2.4% 2.0% 2.3% 2.3% 9.3% 168.2%

2015 2.2% 2.6% 0.8% (2.6%) 2.8% 175.8%

2016 2.2% 2.8% 2.4% 2.9% 10.7% 205.3%

2017 0.6% 1.5% 0.4% 3.7% 6.2% 224.3%

2018 1.5% 3.4% 2.5% (2.0%) 5.5% 242.1%

2019 2.7% 1.2% 0.5% (0.3%) 4.1% 256.1%

2020 (5.8%) 5.5% (0.6%) 253.8%

Total Return Average 2004 – 2020 8.2%(1)

18

0%

5%

10%

15%

20%

25%

30%

3/31/16 3/31/17 3/31/18 3/31/19 3/31/20

Cum

ulat

ive

Ret

urns

Compounded Dividends Plus Change in NAV Per Share

Publicly-Traded BDC Median PSEC

PSEC HAS GENERATED SUPERIOR OPERATING RETURNS COMPARED WITH PUBLICLY-TRADED BDC MEDIAN OVER THE PAST 5 YEARS

Note: Dividends plus change in net asset value compounded on a quarterly basis. Investors purchase and sell shares of PSEC common stock at prevailing market prices, which may be higher or lower than NAV.

Information related to past performance, while potentially helpful as an evaluative tool, is not indicative of future results. Source: PSEC analysis of Capital IQ data as of 8/19/2020 for the 46 BDCs for which there is

quarterly data for the five years ended 3/31/2020.

PSEC Performance

Percentile:

58%

21.7%

19.6%

19

PSEC’S RETURN ON EQUITY HAS OUTPERFORMED PUBLICLY-TRADED BDC MEDIAN ON AVERAGE OVER THE PAST FIVE YEARS

3.6%

4.2%

3.5%

4.5%


Average Annual Return on Equity

Note: Return on equity defined as change in net assets resulting from operations per share divided by average of beginning and ending book value of common equity. Information related to past performance, while

potentially helpful as an evaluative tool, is not indicative of future results. Source: PSEC analysis of Capital IQ data as of 8/19/2020 for the 48 BDCs for which there is quarterly data for the five years ended 3/31/2020.

20

PSEC HAS GENERATED SUPERIOR RISK-ADJUSTED OPERATING RETURNS OVER THE PAST FIVE YEARS

0.5x

0.9x


Returns / Volatility –Trailing 5 Years

Note: Returns calculated as change in net asset value per share plus dividends. Volatility measured as one standard deviation in returns. Returns and volatility are measured on a quarterly basis and annualized to calculate

returns / volatility ratio. Information related to past performance, while potentially helpful as an evaluative tool, is not indicative of future results. Source: PSEC analysis of Capital IQ data as of 8/19/2020 for the 46 BDCs for

which there is quarterly data for the five years ended 3/31/2020.

21

SENIOR MANAGEMENT HAS MADE SIGNIFICANT INVESTMENTS IN PSEC

$542.4M

$64.0M$33.5M $18.8M $3.9M $9.3M

PSEC HTGC MAIN ARCC AINV BDC Median

5 Largest Publicly-Traded BDCs by NAV

Insider Filings Purchases (January 2010 to June 2020)

Source: PSEC analysis of 23 BDCs that have been active during this period. PSEC senior management has not sold any of such investments.

* Includes $160.2 million in open market purchases through the John and Daria Barry Foundation.

*

22

SENIOR MANAGEMENT IS A SIGNIFICANT INVESTOR IN PSEC

2.4%

26.4%


*

Source: PSEC analysis of Capital IQ data as of 8/19/2020 for 49 BDCs. PSEC senior management has not sold any of such investments in PSEC.

* Includes 6.8% share ownership through the John and Daria Barry Foundation.

Insider Ownership as of 6/30/20

2323

BDC OVERVIEW

24

PUBLICLY TRADED BDCs

TOPIC KEY CHARACTERISTICS

INVESTMENT

STRATEGY

► Current-yielding credit investments primarily in middle-market companies

► To a lesser extent, other current-yielding investments

REGULATION ► Regulated as a Business Development Company (“BDC”) under Investment Company Act of 1940

► Generally BDCs elect to be treated as a Regulated Investment Company (“RIC”) for U.S. federal income tax purposes

INVESTMENTS

LIMITATIONS

► Generally, at least 70% of a BDC’s assets must be investments in U.S. non-financial sector operating companies that either have (a) no class of securities listed on a national securities exchange (i.e., private) or (b) a market cap less than $250 million

LEVERAGE

LIMITATION(1)► 2:1 debt-to-equity ratio (i.e. gross asset coverage must be at least 150%)

DIVERSIFICATION

REQUIREMENTS(2)

► At least 50% of a BDC’s assets must consist of securities of an issuer in which the BDC owns less than 10% of the voting stock and in which the investment is less than 5% of the value of the BDC’s assets

INCOME

RESTRICTIONS(2)

► At least 90% of BDC income must be from investment sources such as interest, dividends, and gains / losses associated with investments in equity, debt, or other securities

DISTRIBUTION

REQUIREMENTS(2)

► Must distribute at least 90% of taxable income to avoid U.S. federal income tax on all taxable income

► Not subject to U.S. federal income tax on the income and net capital gains distributed to stockholders (provided that the above distribution requirement is met)

VALUATION ► Must mark portfolio to fair value on a quarterly basis for GAAP(3) purposes

(1) Effective 3/23/2018, the Small Business Credit Availability Act permits a BDC to change its asset coverage ratio from 200% to 150%.

(2) Above criteria apply to BDCs that elect RIC treatment for U.S. federal income tax purposes.

(3) GAAP is defined as Generally Accepted Accounting Principles.

25

$0 BN

$10 BN

$20 BN

$30 BN

$40 BN

$50 BN

$60 BN

$70 BN

$80 BN

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Total Assets

Total MarketCapitalization

BDC PUBLIC MARKET LANDSCAPE

BDCs are benefitting from the reduction of capital provided by traditional lenders

► Reduced bank lending driven by regulation and consolidation

► Post-crisis shift of institutional debt investor demand to larger credits with greater liquidity

Source: S&P

Public BDC Group – Total Assets and Market CapNumber of Public BDCs

25

28

36

41

45

51 52 52 51 50 51

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

26

549

395

300

350

400

450

500

550

600

Middle-Market Large Corporate

Avera

ge N

om

inal S

read

10-YEAR AVERAGE SPREADS(2)(3)

HIGHER RISK-ADJUSTED RETURNS ON A CONSISTENT BASIS

Middle Market Offers More Conservative Structures, Higher Yields, and Stronger Covenants

► U.S. middle market consists of ~200,000 companies across diverse industries(1)

► Represents one-third of U.S. Private Sector GDP(1)

► $6.0 trillion – 3rd largest economy globally(1)

► Continuous need for access to debt capital

► Hundreds of middle-market private equity sponsors

► Provides increased returns and enhanced risk protections relative to syndicated credit

(1) National Center for the Middle Market and U.S. government websites and reports(2) Spread premium for middle-market leveraged loans over large-corporate leveraged loans.(3) Source: S&P LCD Q2 2020 High-End Middle Market Lending Review. S&P LCD defines middle market as EBITDA of $50 million or less and large corporate as EBITDA of more than $50 million.

5.0x

5.6x

4.0x

4.5x

5.0x

5.5x

6.0x


Tota

l Deb

t M

ult

iple

10-YEAR AVERAGE LEVERAGE(3)

48%

42%

35%

40%

45%

50%


Equ

ity

Cap

ital

izat

ion

10-YEAR AVERAGE EQUITY CAPITALIZATION(3)

154bpsaverage spread premium over 10 years

2727

APPENDIX

28

FINANCIAL HIGHLIGHTS

Source: Company filings.

In thousands, except per share data

Statement of OperationsQuarter ended

June 30, 2020

Quarter ended

March 31, 2020

Quarter ended

December 31, 2019

Quarter ended

September 30, 2019

Quarter ended

June 30, 2019

Total investment income $145,229 $154,501 $161,917 $161,883 $164,353

Total operating expenses 86,956 86,025 94,032 90,823 94,726

Net investment income 58,273 68,476 67,885 71,060 69,627

Net realized and unrealized gain (loss)

on investments & extinguishment of debt

104,340 (254,175) (79,088) (52,995) (30,741)

Net increase (decrease) in net assets

resulting from operations

162,613 (185,699) (11,203) 18,065 38,886

Net increase (decrease) in net assets

resulting from operations per share

0.44 (0.51) (0.03) 0.05 0.11

Net investment income per share 0.16 0.19 0.18 0.19 0.19

Distributions per share $0.18 $0.18 $0.18 $0.18 $0.18

Statement of Assets and

Liabilities June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019

Total investments at fair value $5,232,328 $5,144,542 $5,268,545 $5,450,560 $5,653,553

Cash and cash equivalents 44,561 46,646 137,867 106,174 107,098

Total assets 5,300,163 5,217,596 5,432,293 5,585,098 5,800,063

Revolving credit facility borrowings 237,536 165,600 92,000 108,000 167,000

Total liabilities 2,244,302 2,284,221 2,248,428 2,325,325 2,493,788

Net assets 3,055,861 2,933,375 3,183,865 3,259,773 3,306,275

Net asset value per share $8.18 $7.98 $8.66 $8.87 $9.01

prospect capital corporation · prospect capital is one of the largest multi-line business...

Documents