Prospect Capital - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 results: Total investment income was $185.5M, Net Investment Income (NII) $86.4M ($0.20 per share), and a net loss to common shareholders of $(31.0)M ($(0.07) per share); NAV per share declined to $7.84, with interest income comprising 91% of total investment income.
• Quarter-over-quarter, net loss per share improved to $(0.07) from $(0.38) in Q1 2025, while NII per share ticked down to $0.20 from $0.21; year-over-year, NII per share fell from $0.24 and total investment income decreased from $210.9M.
• The company maintained monthly common dividends at $0.045 for February–April 2025 and signaled future declarations in May; preferred dividends were declared across multiple series (5.50%, 6.50%, 7.50% and floating) for March–May 2025.
• Strategy remains focused on rotating into first‑lien senior secured middle-market loans (64.9% of portfolio vs 58.7% a year ago) and amortizing CLO equity/subordinated structured notes (down to 5.8% from 7.9% YoY) while preserving liquidity ($1.88B cash + undrawn commitments; 66% unencumbered assets).

What Went Well and What Went Wrong

What Went Well

• Strong recurring revenue profile: interest income was 91% of total investment income in Q2 2025, underscoring cash yield resilience.
• Continued portfolio rotation into lower‑variability first‑lien loans and away from equity‑linked assets; management emphasized redeploying proceeds into first‑lien senior secured middle‑market loans: “We continue to rotate assets into first-lien senior secured middle market loans…” (John Barry).
• Robust funding flexibility and duration: 48-bank revolver ($2.1B commitments) at SOFR + 2.05% with maturities laddered out to 2052; unsecured debt weighted average cost 4.49% at December 31, 2024.

What Went Wrong

• NAV per share fell to $7.84 from $8.10 QoQ and from $8.92 YoY, driven by realized and unrealized losses across investments.
• Middle‑market weighted average net leverage rose to 6.1x (from 5.7x in Q1 and 5.4x YoY), signaling increased borrower leverage amid macro shifts.
• Portfolio yields softened: annualized current yield on all investments declined to 9.1% (9.7% prior quarter; 10.1% prior year), with non‑accruals ticking to 0.4% (vs 0.5% in Q1 and 0.2% YoY).

Transcript

Operator (participant)

Hello and welcome to the Prospect Capital's second Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw from the question queue, you may press star, then two. As a reminder, this conference is being recorded. I would now like to hand the call to John Barry, Chairman and CEO. Please go ahead.

John Barry (Chairman and CEO)

Thank you, MJ. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer, and Kristin Van Dask, our Chief Financial Officer. Kristin?

Kristin Van Dask (CFO)

Thanks, John. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Future results are highly likely to vary materially. We do not undertake to update our forward-looking statements. For additional disclosure, see our earnings press release and 10-K filed previously and available on our website, prospectstreet.com. Now I'll turn the call back over to John.

John Barry (Chairman and CEO)

Thank you, Kristin. And as I told our board, Kristin is absolutely crushing it. Thank you, Kristin.

Kristin Van Dask (CFO)

Thanks, John.

John Barry (Chairman and CEO)

Okay. Thank you, Kristin. In the December quarter, our net investment income, or NII, was $86.4 million, or $0.20 per common share. Our NAV was $3.4 billion, or $7.84 per common share. At December 31st, our net debt to total assets was 28.1%. Unsecured debt plus unsecured preferred is 91.9% of total debt plus preferred. Since inception over 20 years ago through our April 2025 declared distribution, we will have distributed over $4.4 billion, or $21.39 per share, 2.7 times December 2024 NAV per share. We are announcing monthly common shareholder distributions of $0.045 per share for each of February, March, and April. We plan on announcing our next set of shareholder distributions in May. Our preferred shareholder cash distributions continue at their contractual rate.

We continue to rotate assets into first-lien, senior-secured middle-market loans, sometimes with select equity investments, amortize our subordinated structured notes, exit from equity-linked assets, including real estate, enhance portfolio company operating performance, and utilize our revolver. Thank you. I'll now turn the call over to Grier.

Grier Eliasek (President and COO)

Thanks, John. Over the past two decades, Prospect Capital Corporation has invested $11.7 billion in over 300 exited investments that have earned a 13% unlevered investment level gross cash IRR to Prospect Capital Corporation. This more-than-two-decade time period includes the GFC and has been dominated in general by low interest rates. As of December, we held 114 portfolio companies across 33 different industries with an aggregate fair value of $7.1 billion. For the December quarter, our portfolio at fair value comprised 64.9% first-lien debt, that's up 620 basis points from the prior year. 10.2% second-lien debt, that's down 530 basis points from the prior year. 5.8% subordinated structured notes with underlying secured first-lien collateral, that's down 210 basis points from the prior year. And 19.1% unsecured debt and equity investments, resulting in 81% of our investments being assets with underlying secured debt benefiting from borrower-pledged collateral.

In our middle-market lending strategy, we recently provided a first-lien, senior-secured term loan, a first-lien, senior-secured convertible term loan, and a preferred equity investment to Taos Footwear, aggregating $65 million in collaboration with Taos' founder and leadership team. Taos is a leading, innovative footwear brand providing customers with stylish and supportive footwear products over the last 20 years. Examples of similar recent investments in our middle-market lending strategy with both first-lien, senior-secured debt and selected equity-linked investments include Druid City Infusion and Discovery Point Retreat. Druid City is an infusion therapy services company with multiple locations across the South and Mountain West regions of the United States. Since closing, Druid has made an add-on acquisition, expanding the reach of the company into Louisiana. We've worked with Druid's management team to evaluate improved market penetration and enhanced collection recovery strategies, which Druid management believes will lead to continued growth.

Discovery Point Retreat is a rapidly growing detox and rehabilitation provider in North Texas. Recent EBITDA has increased by approximately 37% from underwritten EBITDA only a few months ago. We've worked with Druid's management team to enter into a new service agreement with a goal of purchasing such facility in the future as an expansion into California. Druid has also moved its Dallas outpatient program to a new location that more than doubles capacity and has begun construction at one of its inpatient facilities to expand capacity. Discovery management believes these initiatives each will lead to continued growth. Our subordinated structured notes portfolio as of December represented 5.8% of our investment portfolio, a reduction of 210 basis points from 7.9% as of December 2023.

Since inception of this strategy for Prospect Capital Corporation in 2011 and through December 2024, we have exited 15 subordinated structured notes investments, earning an unlevered investment level gross cash internal rate of return of 12.1% and cash on cash multiple of 1.3 times. As of December, based on fair value and excluding investments being redeemed, the remaining subordinated structured notes portfolio had a trailing 12-month average cash yield of 24.4%, an annualized GAAP yield of 3.9%, with a difference between cash and GAAP yield representing amortization of our cost basis. We expect to continue to amortize our subordinated structured notes portfolio and to reinvest primarily into first-lien, senior-secured middle-market loans.

In our real estate property portfolio at National Property REIT Corp. or NPRC, since the inception of the strategy for Prospect Capital Corp in 2012 and through December 2024, we have exited 51 property investments, earning an unlevered investment level gross cash IRR of 24.3% and cash on cash multiple of 2.5 times. We exited two additional properties in the December 2024 quarter. The remaining real estate property portfolio includes 59 properties that paid us an income yield of 6.9% for the December quarter. Prospect's aggregate investments in NPRC had a $522 million unrealized gain as of December. We expect to continue to redeploy future asset sale proceeds primarily into both property value-added capital expenditures as well as more broadly first-lien, senior-secured middle-market loans. Prospect's approach is one that generates attractive risk-adjusted yields, and our performing interest-bearing investments were generating an annualized yield of 11.2% as of December.

Our interest income in the December quarter was 91% of total investment income, reflecting a strong recurring revenue profile to our business. Payment-in-kind income for the quarter ended December 2024 was $20 million, down 39% from the prior quarter and down nearly 50% from the June 2024 quarter. Non-accruals as a percentage of total assets stood at approximately 0.4% in December. Weighted average EBITDA per portfolio company stood at $102 million. Investment originations in the December quarter aggregated $135 million and were comprised of $120 million of first-lien, senior-secured loans, or close to 90% of total originations. We also experienced $383 million of repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $248 million. During the December quarter, our originations comprised 67.7% middle-market lending, 14.5% middle-market lending and buyouts, 17.8% real estate, and zero in subordinated structured notes.

So far, in the current March 2025 quarter, we have booked $111 million in originations and experienced $19 million of repayments. Our originations have consisted of 86.4% middle-market lending and 13.6% real estate. Thank you. I'll now turn the call over to Kristin. Kristin?

Kristin Van Dask (CFO)

Thanks, Grier. We believe our prudent leverage, diversified access to matched-book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed-rate debt, and avoidance of unfunded asset commitments demonstrate both balance sheet strengths as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 27 years into the future. Our unfunded eligible commitments to portfolio companies total approximately $62 million, of which $29 million are considered at our sole discretion, representing approximately 0.9% and 0.4% of our assets as of December 2024, respectively. Our combined balance sheet cash and underlying revolving credit facility commitments stood at $1.9 billion as of December, and we held $4.8 billion of our assets as unencumbered assets, representing approximately 66% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, a non-recourse SPV.

We currently have $2.12 billion of commitments from 48 banks, demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry. The facility does not mature until June 2029 and revolves until June 2028. Our drawn pricing continues to be SOFR plus 2.05%. Outside of our revolver, we have access to diversified funding sources across multiple investor bases and have successfully issued securities in an array of markets. Prospect has issued multiple types of unsecured debt, institutional non-convertible bonds, institutional convertible bonds, retail baby bonds, and retail program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross-defaults with our revolver. As of December, unsecured term debt represents 85% of all of Prospect's indebtedness.

We've tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 27 years, with our debt maturities extending through 2052. With so many banks and debt investors across so many unsecured and non-recourse debt tranches, we have substantially reduced our counterparty risk. At December 31st, 2024, our weighted average cost of unsecured debt financing was 4.49%. Now, I'll turn the call back over to John.

John Barry (Chairman and CEO)

Thank you, Kristin. I think we can take questions now.

Operator (participant)

Thank you, John. We will now begin the question-and-answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. Today's first question comes from Finian O'Shea with Wells Fargo. Please go ahead.

Finian O'Shea (Managing Director)

Hey, everyone. Good morning. Question on the debt, specifically the unsecured. Can you talk about how the rating changes will impact how you shape that going forward if you intend to replace the, over the next year or two, the public maturities in similar channels, or might you lean more on the revolver there? Thank you.

Grier Eliasek (President and COO)

Thanks, Finney, for that question. We don't anticipate significant changes in our financing strategy. Recall, Prospect was the pioneer that basically introduced to the BDC industry. We've been doing this for over two decades. First to issue a convertible bond, first to issue an institutional bond, first to issue program notes, preferreds, many, many types of financing that the rest of the industry enjoys today as a result of our leadership. We're big believers in having a diversified array of markets to tap into. We do plan on utilizing our facility that matches on a floating rate basis with our assets that are dominated by floating rate. We have a well-diversified set of strong bank relationships, close to 50 in that facility. We plan on continuing to tap the bond markets over time, the program notes markets as well, and our preferred markets.

Our credit spread versus Treasuries is actually tighter now than where it was in July of 2024, which I think is a reflection of our strong credit profile as a company.

Finian O'Shea (Managing Director)

Okay. Thanks. That's helpful. And just one on the preferreds. There was a, I think, a disclosed offer at the end of January for an exchange. I know it's just a few days in, but if you could talk about how that's going, if there's a lot of participation. And then I think 7.5% is the rate for the new securities, if that's indicative on where you would issue a new class of preferreds. Thanks.

Grier Eliasek (President and COO)

Sure. I'll take those two questions in turn. In terms of exchanges, we have selectively offered for various convertible tranches of older series to exchange their paper into non-convertible but still perpetual preferreds and still providing credit support to our bonds as junior capital for same and attractive financing for our common equity. We've had strong participation in those exchange offers historically and would expect the same going forward. In terms of our new preferred series, yes, you have the coupon correct for that, which is a reflection in balancing decisions across different fixed-income markets. Short-term rates are down a little bit, but medium 5- to 10-year rates are up a bit. We had previously had a floater with a floor based on short-term that had declined to the floor level.

We saw a lot of demand at the prior level where we're issuing sort of last summer on more of a fixed basis, decided to move away from using a floater with a floor. Turns out people like floaters and rates are going up. Big surprise and not so much when rates are going down. Did that help, Finney?

Operator (participant)

Pardon me. It looks like we have lost Finian in his line.

Grier Eliasek (President and COO)

Okay.

Operator (participant)

Cool.

Grier Eliasek (President and COO)

I think we can wrap up.

Operator (participant)

Okay. In that case, this concludes our question-and-answer session. I'd like to turn the call back to Mr. Barry for closing remarks.

John Barry (Chairman and CEO)

Okay. Here are my closing remarks. Thank you very much. Bye now.

Operator (participant)

The conference has now concluded. Thank you for your participation. You may now disconnect your lines.