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PC

PROSPECT CAPITAL CORP (PSEC)·Q2 2025 Earnings Summary

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) .

Financial Results

Income and Earnings Comparison

MetricQ2 2024 (Dec 2023)Q1 2025 (Sep 2024)Q2 2025 (Dec 2024)
Total Investment Income ($000)$210,942 $196,308 $185,466
Net Investment Income ($000)$96,927 $89,877 $86,431
NII per Common Share ($)$0.24 $0.21 $0.20
Net Income to Common ($000)$(51,436) $(165,069) $(30,993)
Net Income per Common Share ($)$(0.13) $(0.38) $(0.07)

Margins and Mix

MetricQ2 2024 (Dec 2023)Q1 2025 (Sep 2024)Q2 2025 (Dec 2024)
Interest as % of Total Investment Income (%)92.3% 94.0% 91.0%
NAV per Common Share ($)$8.92 $8.10 $7.84
Net of Cash Debt to Total Assets (%)31.2% 29.7% 28.1%
Cash + Undrawn Revolver ($000)$1,187,740 $1,631,291 $1,879,738

Segment/Portfolio Composition

Portfolio MetricDec 2023Sep 2024Dec 2024
First Lien Debt (%)58.7% 64.9% 64.9%
Second Lien Debt (%)15.5% 11.1% 10.2%
Subordinated Structured Notes (%)7.9% 6.2% 5.8%
Unsecured Debt (%)0.1% 0.1% 0.1%
Equity Investments (%)17.8% 17.7% 19.0%
Mix with Underlying Collateral Security (%)82.1% 82.2% 80.9%

KPIs

KPIDec 2023Sep 2024Dec 2024
Annualized Current Yield – All Investments (%)10.1% 9.7% 9.1%
Annualized Current Yield – Performing Interest Bearing Investments (%)12.3% 11.8% 11.2%
Non‑Accrual Loans as % of Total Assets (%)0.2% 0.5% 0.4%
Middle‑Market Portfolio Weighted Avg EBITDA ($000)$109,719 $104,682 $101,644
Middle‑Market Portfolio Weighted Avg Net Leverage (x)5.4x 5.7x 6.1x

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Common Dividend per ShareNov 2024–Jan 2025$0.045/month ——
Common Dividend per ShareFeb–Apr 2025$0.045/month (Nov–Jan) $0.045/month Maintained
Floating Rate Preferred DividendMar–May 2025—$0.135417/month Declared
7.50% Preferred DividendMar–May 2025—$0.156250/month Declared
6.50% Preferred DividendMar–May 2025—$0.135417/month Declared
5.50% Preferred DividendMar–May 2025—$0.114583/month Declared

Notes: Management expects to declare May–August common distributions in May 2025 (no amounts specified) .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2024, Q1 2025)Current Period (Q2 2025)Trend
Rotation to First‑Lien LoansFirst‑lien grew to 60.3% (Q4) and 64.9% (Q1) of portfolio First‑lien steady at 64.9%; continued focus per prepared remarks Improving then stable
Structured Notes AmortizationStructured notes down to 6.9% (Q4) and 6.2% (Q1); intent to amortize Further down to 5.8%; plan to continue amortizing Declining
Real Estate/NPRC Exit Pace & Other IncomeCautious on future exit-related income (Q1 PR) Interest income 91% of total; NPRC paid 6.9% yield; $522M unrealized gain Exit-related income subdued
Funding and LiquidityRevolver extended to 2029/2028; $2.1B commitments (Q4, Q1) $1.88B cash+undrawn; 66% unencumbered; WAC of unsecured debt 4.49% Strong/stable
Rates, Floors, CoverageHigher SOFR floors and rightsized distribution (Q1) Revolver SOFR+2.05%; continued focus on lower‑middle market spread/floors (Q&A) Positioned for rate normalization
Leverage/Balance SheetNet of cash debt to assets 30.5% (Q4) and 29.7% (Q1) 28.1% (Q2); mix 91.9% unsecured debt+preferred Conservative

Management Commentary

  • John Barry: “In the December quarter, our net investment income… was $86.4 million or $0.20 per common share… We continue to rotate assets into first-lien senior secured middle market loans…” .
  • Michael (Grier) Eliasek: “As of December, we held 114 portfolio companies… 64.9% first lien debt… We expect to continue to amortize our subordinated structured notes portfolio and to reinvest primarily into first-lien senior secured middle market loans” .
  • Kristin Van Dask: “Our company has locked in a ladder of liabilities extending 27 years… $1.9 billion cash and undrawn… $4.8 billion unencumbered assets… drawn pricing SOFR+2.05%… weighted average cost of unsecured debt financing was 4.49%” .

Q&A Highlights

  • Financing strategy unchanged despite rating changes; management emphasized diversified unsecured and revolver markets, tighter credit spreads vs July 2024, and ongoing access to bond/program notes/preferred markets .
  • Preferred exchange activity: strong participation historically; new 7.5% series coupon reflects balancing decisions across markets amid shifting short‑ and medium‑term rates; rationale for moving away from floater with floor given rate decline dynamics .
  • Closing remarks were brief; no additional quantitative guidance beyond declared distributions .

Estimates Context

  • Wall Street consensus EPS and revenue estimates for Q2 2025 via S&P Global were unavailable at time of analysis due to data access limits. As a result, comparisons to consensus cannot be provided and should be interpreted based on company-reported results only [Values retrieved from S&P Global unavailable at time of request].

Key Takeaways for Investors

  • The portfolio remix toward first‑lien senior secured loans continues to reduce variability and credit risk, with structured notes steadily amortized; this should support more stable NII through the rate cycle .
  • Liquidity and funding are robust ($1.88B cash + undrawn; 66% unencumbered assets; revolver to 2029/2028), lowering near‑term refinancing risk and enabling opportunistic originations .
  • Dividend policy: monthly common dividends maintained at $0.045 (Feb–Apr), and preferred distributions declared; stability here is a near‑term trading anchor for income‑focused holders .
  • NAV pressure persisted (down QoQ and YoY) alongside higher borrower leverage (6.1x), warranting monitoring of credit performance and any further unrealized losses in 2025 .
  • Yield metrics softened QoQ/YoY, but interest income share remains high (91%), indicating recurring cash earnings resilience even as exit-related “other income” wanes .
  • The strategic emphasis on lower‑middle market loans (wider spreads, higher floors, better covenants) versus upper market should mitigate margin compression if SOFR declines, supporting medium‑term NII .
  • Watch for catalysts: progress on NPRC asset monetizations, continued reductions in structured notes, and net originations pace; each can impact NII trajectory and NAV volatility near term .