Prospect Capital's CEO Discusses F4Q 2012 Results - Earnings Call Transcript

Prospect Capital Corp. (PSEC)

FQ4 2012 Earnings Call

August 23, 2012 10:00 am ET

Executives

John F Barry III – Chairman of the Board & Chief Executive Officer

M. Grier Eliasek – President & Chief Operating Officer

Brian Oswald – Chief Financial Officer & Chief Compliance Officer of PSEC

Analysts

Arren Cyganovich – Evercore Partners

Mickey Schleien – Ladenburg Thalmann & Co.

Robert Dodd – Raymond James

Greg Mason – Stifel Nicolaus

John Ellis – Private Investor

[Steve Koloff] – Private Investor

Lynn Cook – Private Investor

Presentation

Operator

Good day and welcome to the Prospect Capital Fiscal Year Earnings Release and Conference Call. (Operator instructions.) Please note this event is being recorded. I would now like to turn the conference over to Mr. John F Barry III, Chairman and CEO. Mr. Barry, the floor is yours, sir.

John F Barry III

Well thank you, Mike. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Brian Oswald, our Chief Financial Officer. Brian?

Brian Oswald

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be a Safe Harbor protection. Actual outcomes and results could differ materially from those forecast due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and our 10(k) filed previously. Now, I’ll turn the call back over to John.

John F Barry III

Thanks, Brian. Over the past year your management delivered record prospect net investment income and record prospect year-over-year growth in the June 2012 quarter as well as in the 2012 fiscal year. Your management also delivered $0.47 per share growth in net asset value per share over the course of the last year.

Net investment income for 2012 was $187 million, up 98% from the prior year. On a per share basis, net investment income for the year was $1.63, up 48% from 2011. Net investment income for the quarter was $64 million, up 113% from the prior year. On a per share basis, net investment income for the quarter was $0.51, up 66% from the prior year. Your management delivered strong net investment income growth while keeping leverage low.

Net of cash and equivalents, our debt to equity ratio was less than 36% in June. We have substantial unused debt capacity and liquidity to drive future earnings. We estimate our net investment income per share in the current September quarter will be $0.41 to $0.46. We just announced more shareholder distributions through October which will be Prospect’s 51 st shareholder distribution and 28 th consecutive per share monthly increase.

Our net investment income has exceeded distributions, demonstrating substantial distribution coverage for the current tax year, the prior fiscal year, the last three quarters and the cumulative history of the company. That excess coverage is more than $50 million in the current tax year, demonstrating our conservative approach to distribution payouts and coverages.

Prospect has now paid out more than $10 per share and more than $500 million in distributions since 2004. I will now turn the call over to Grier.

M. Grier Eliasek

Thanks, John. Our business continues to grow at a prudent pace. As of today we’ve now reached more than $3 billion of assets and undrawn credit. Our team has increased to nearly 60 professionals, representing one of the largest dedicated 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 includes third-party, private equity sponsor related lending, direct non-sponsor lending, prospect-sponsored transactions, and structured credit.

Our team typically originates thousands of opportunities per annum and invests in a disciplined manner in a 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. Our approach is one that generates attractive risk-adjusted yields and in our debt investments we’re generating an annualized yield of 13.6% as of June 30. We also hold equity positions and many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions.

Originations in F2012 were $1.12 billion, up 17% from the prior fiscal year. We also experienced $501 million of repayments as a nice validation of our capital preservation objective. As of June we are up to 82 portfolio companies, a 14% increase from the prior year and demonstrating both an increase in diversity as well as a migration towards both larger positions and larger portfolio companies. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration.

The June quarter was particularly active, with $573 million of originations and $146 million of repayments. Exits for SonicWall, Copernicus, C&J and Sports Helmets generated realized IRRs of 16%, 35%, 36%, and 41% respectively. We closed the First Tower acquisition in the June quarter and we are expecting to receive annualized yields in excess of 18% from this investment.

ESHI paid us $33 million in dividends in the June quarter and was a significant income contributor. We don’t know precisely what dividends ESHI will pay us in the future but we hope to see solid dividends in the next two quarters. The current September quarter is off to a strong start with $400 million or originations and $45 million of repayments. Pinnacle and US Healthworks exited with realized IRRs of 15% each.

Our credit quality continues to be robust. None of our loans originated in nearly five years has gone on nonaccrual status. Nonaccruals as a percentage of total assets stood at 1.9% in June, down from 3.5% the prior year. Our advanced investment pipeline aggregates more than $600 million of potential opportunities boding well for the coming months.

Thank you. I’ll now turn the call over to Brian.

Brian Oswald

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