Prospect Capital Reports $1.04 of Net Investment Income per Share in 2016 Fiscal Year
OREANDA-NEWS. Prospect Capital Corporation today announced financial results for our fiscal year and fourth fiscal quarter ended June 30, 2016.
For the year ended June 30, 2016, our net investment income (“NII”) was $371.1 million or $1.04 per weighted average share. For the year ended June 30, 2015, our NII was $362.7 million or $1.03 per weighted average share. NII year over year increased by $8.4 million on a dollars basis and increased by $0.01 on a per share basis. Fiscal year 2016 NII exceeded dividends by $0.04 per share.
For the year ended June 30, 2016, our distributable income was $379.9 million or $1.07 per weighted average share, exceeding dividends by $0.07 per share.
For the June 2016 quarter, our NII was $91.4 million or $0.26 per weighted average share. For the June 2015 quarter, our NII was $89.5 million or $0.25 per weighted average share. NII year over year increased by $1.9 million on a dollars basis and $0.01 on a per share basis.
For the June 2016 quarter, our distributable income was $96.6 million or $0.27 per weighted average share, exceeding dividends by $0.02 per share.
We have previously announced monthly cash dividends to shareholders of $0.08333 per share through August 2016. Last week, we announced the declaration of monthly cash dividends in the following amounts and with the following dates:
- $0.08333 per share for September 2016 to holders of record on September 30, 2016 with a payment date of October 20, 2016; and
- $0.08333 per share for October 2016 to holders of record on October 31, 2016 with a payment date of November 17, 2016 representing our 99th consecutive cash distribution to shareholders.
Since our IPO 12 years ago through our October 2016 distribution, assuming our current share count for upcoming distributions, we will have distributed $15.12 per share to initial shareholders, exceeding $2.0 billion in cumulative distributions to all shareholders. As of June 30, 2016, our reported net asset value ("NAV") per share is $9.62 with a current dividend yield of 12% based on our most recent closing stock price of $8.48.
Our debt to equity ratio stood at 69.5% after subtraction of cash and equivalents at June 30, 2016, down 810 bps from 77.6% at June 30, 2015. Our objective is to sustain and grow NII per share in the coming quarters by focusing on matched-book funding to finance disciplined and accretive originations across our diversified lines of business. We are currently exploring initiatives to enhance our funding liability ladder, opportunistically harvest certain controlled investments at a gain, optimize our origination strategy mix, repurchase shares at a discount to net asset value, and rotate our portfolio out of lower yielding assets into higher yielding assets while maintaining a significant focus on first lien senior secured lending.
During the June 2016 quarter, we completed a successful exit of our investment in Harbortouch Payments LLC (“Harbortouch”) for which we received $328.0 million, including fees and escrowed amounts, for an expected IRR on all of our capital of 14%. Proceeds from the sale were used to repay our $167.5 million of convertible notes due in August 2016, decreasing our current leverage in early fiscal 2017.
Our NAV on June 30, 2016 stood at $9.62 per share, an increase of $0.01 in comparison to $9.61 at March 31, 2016.
Our balance sheet as of June 30, 2016 consisted of 91% floating interest earning assets and 99% fixed rate liabilities, positioning us to benefit from potentially significant increases in short-term interest rates.
We believe there is no greater alignment between management and shareholders than for management to own a significant amount of Prospect stock, particularly when our stock is purchased on the open market. Management is the largest shareholder in Prospect and has never sold a share. Management on a combined basis has purchased at cost over $160 million of stock in Prospect, including over $100 million combined since late calendar year 2015.
- Net assets as of June 30, 2016: $3.436 billion
- Net asset value per share as of June 30, 2016: $9.62
Fourth Fiscal Quarter Operating Results:
- Net investment income: $91.4 million
- Net investment income per share: $0.26
- Distributable income: $96.6 million
- Distributable income per share: $0.27
- Dividends to shareholders per share: $0.25
Fiscal Year 2016 Operating Results:
- Net investment income: $371.1 million
- Net investment income per share: $1.04
- Distributable income: $379.9 million
- Distributable income per share: $1.07
- Dividends to shareholders per share: $1.00
Fourth Fiscal Quarter Portfolio and Investment Activity:
- Portfolio investments acquired in quarter: $294.0 million
- Total portfolio investments at fair market value at June 30, 2016: $5.898 billion
- Number of portfolio companies at June 30, 2016: 125
PORTFOLIO AND INVESTMENT ACTIVITY
Our portfolio emphasis during the June 2016 quarter continued to prioritize secured lending. As of June 30, 2016, our portfolio at fair value consisted of 50.0% first lien, 20.6% second lien, 17.1% structured credit (with underlying first lien), 0.2% small business whole loan, 1.2% unsecured debt, and 10.9% equity investments.
We currently have multiple primary investment origination strategies, including non-control agented and syndicated lending in private equity sponsored and non-sponsored transactions, control investments in operating and financial companies, structured credit investments, real estate investments, and online lending. As of June 30, 2016, our control investments at fair value stood at 29.7% of our portfolio, compared to 33.3% at March 31, 2016.
With our scale team of more than 100 professionals, one of the largest middle-market credit teams in the industry, we believe we are well positioned to select in a disciplined manner a small percentage of investment opportunities out of the thousands we source annually. Prospect received over $1.3 billion in exit proceeds from the sale or repayments of investments during our 2016 fiscal year, generally replacing investments as they were repaid or exited.
Our portfolio’s annualized current yield stood at 13.2% across all performing interest bearing investments as of June 30, 2016, an increase of 0.5% over June 2015. Distributions from equity positions that we hold are not included in this yield calculation. In many of our portfolio companies, we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns.
At June 30, 2016, our portfolio consisted of 125 long-term investments with a fair value of $5.898 billion. These investments span a diversified range of industries with no one industry representing more than 8.2% of the portfolio at fair value as of June 30, 2016. As of June 30, 2016, Prospect’s asset concentration in the energy industry stood at 2.9%, including Prospect’s first lien senior secured loans where third parties bear first loss capital risk. The fair market value of our loan assets on non-accrual as a percentage of total assets was approximately 1.4% at June 30, 2016, an increase of 1% from the prior quarter, with approximately 0.5% in the energy industry.
With regard to non-accrual loans, we believe that equitizing some portion of an investment in a business going through significant cyclical or other difficulties is often preferable compared to the alternative of maintaining on a balance sheet excessive debt that cannot be serviced in the foreseeable future. With such capital structure flexibility, a management team can remain focused on boosting operational performance for long-term value generation.
We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. As of June 2016, our weighted average portfolio net leverage stood at 4.18 times earnings before interest, taxes, depreciation, and amortization (“EBITDA”), up from 4.12 times as of March 2016 but constant compared to June 2015. As of June 2016, our weighted average EBITDA per portfolio company was approximately $48.1 million, down from $49.1 million as of March 2016 and up from $45.9 million as of June 2015.
During the June 2016 quarter, we completed multiple follow-on investments aggregating $294 million, and we sold one investment. Our sales, repayments, and scheduled amortization payments in the June 2016 quarter were $383.5 million, resulting in net investment exits of $89.5 million. We slowed originations in the first half of calendar year 2016 due to market volatility but expect to increase our investment pace, depending on market conditions, in the coming quarters.
The majority of our portfolio consists of sole agented middle-market loans that we have originated, selected, negotiated, structured, and closed. In recent years we have perceived the risk-adjusted reward to be superior for agented, self-originated, and anchor investor opportunities compared to the broadly syndicated market, causing us to so prioritize our proactive sourcing efforts. Our proprietary Prospect call center initiative has enabled us to source investment opportunities we may not have seen otherwise. We anticipate that our calling effort will continue to contribute to our business in the upcoming years.
During the June 2016 quarter, our originations comprised 50% third party sponsor deals, 25% online lending, 24% syndicated debt and 1% real estate. Our activity during the June 2016 quarter included the following transactions:
- On April 29, we purchased an additional $25.0 million of Senior Secured Term Loan A Notes and $25.0 million of Senior Secured Term Loan B Notes issued by Trinity Services Group, Inc. (“Trinity”).
- On April 29, through our delayed draw term loan commitment with Instant Web, LLC (“IWCO”), we purchased $8.0 million of Senior Secured Term Loan A Notes and $8.0 million of Senior Secured Term Loan B Notes issued by IWCO.
- During the period from May 3 through May 10, we collectively sold 72.10% of the outstanding principal balance of our Senior Secured Term Loan A Notes issued by Trinity for $25.0 million. There was no gain or loss realized on the sale.
- During the period from May 18 through June 22, we purchased $34.7 million of follow-on first lien senior secured debt Notes issued by Empire Today, LLC.
- On May 31, we sold our investment in Harbortouch for total proceeds of $328.0 million, including fees and escrowed amounts. We received a $5.1 million prepayment premium for early repayment of the outstanding loans, which was recorded as interest income in the year ended June 30, 2016, as well as a $12.9 million advisory fee for the transaction, which was recorded as other income in the year ended June 30, 2016. We recorded a realized loss of $5.4 million related to the sale. $5.4 million is held in escrow and will be recognized as realized gain if and when it is received. Concurrent with the transaction, we purchased $27.5 million of second lien secured Notes issued by Harbortouch.
- On June 7, we purchased $19.0 million of second lien secured Notes issued by Generation Brands Holdings, Inc., a leading designer and provider of lighting fixtures for commercial and residential applications.
- On June 8, we purchased $17.0 million of first lien senior secured Notes issued by Inpatient Care Management Company, LLC, a company providing general surgery services to hospitals with a focus on emergency care.
- During the period from June 10 through June 29, we collectively purchased an additional $11.1 million of second lien senior secured Notes issued by NCP Finance Limited Partnership.
- During the period from June 15 through June 29, we purchased an additional $3.5 million of Term Loan A Notes issued by USES Corp. (“USES”) and its subsidiaries. In connection with this Note purchase, USES issued to us 268,962 shares of its common stock representing a 99.96% common equity ownership interest in USES.
- On June 17, we purchased $25.0 million of follow-on secured Notes issued by IWCO.
- During the year ended June 30, 2016, we purchased $68.8 million of small business whole loans from OnDeck.
- Effective May 23, 2016, American Property REIT Corp. (“APRC”) and United Property REIT Corp. (“UPRC”) merged with and into National Property REIT Corp. (“NPRC”), with NPRC as the surviving entity.
- During the year ended June 30, 2016, we made 29 follow-on investments in NPRC totaling $243.6 million to support the online consumer lending initiative. We purchased $41.1 million of equity through NPH Property Holdings, LLC and $202.5 million of debt issued by NPRC and its wholly-owned subsidiaries. We also provided $12.4 million of equity capital to NPRC, consisting of $9.0 million for the acquisition of Orchard Village Apartments, a multi-family property located in Aurora, Illinois, and $3.4 million to fund capital expenditures for existing properties.
- During the period from July 1, 2015 through May 23, 2016, we purchased $2.3 million of equity issued by APRC, and we purchased $4.5 million of Notes and $3.0 million of equity issued by UPRC to fund capital expenditures for existing properties.
- During the year ended June 30, 2016, we received partial repayments of $115.5 million of our loans previously outstanding and $12.4 million as a return of capital on our equity investment in NPRC.
- During the period from July 1, 2015 through May 23, 2016, we received a partial repayment of $29.7 million of our loan previously outstanding with APRC and recorded $11.0 million of dividend income from APRC in connection with the sale of its Vista Palma Sola property.
- During the period from July 1, 2015 through May 23, 2016, we received a partial repayment of $7.6 million of our loan previously outstanding with UPRC.
Since June 30, 2016 (in the current September 2016) quarter, we have completed new and follow-on investments of $173.8 million, sold $10.2 million of three investments, and received repayments of $40.3 million, resulting in net investments of $123.3 million, and including the following transactions:
- On July 1, we purchased $7.3 million or 19.7% of the subordinated Notes issued by Madison Park Funding IX, Ltd.
- On July 22, we purchased $32.5 million of Senior Secured Term Loan A Notes and $32.5 million of Senior Secured Term Loan B Notes issued by Universal Turbine Parts, LLC, an independent supplier of aftermarket turboprop engines and parts.
- On August 9, JHH Holdings, Inc. repaid our $35.5 million loan.
- On August 9, we purchased $29.6 million or 71.9% of the subordinated Notes issued by Carlyle Global Market Strategies CLO 2016-3, Ltd.
- On August 15, our 5.50% unsecured convertible notes, which had an outstanding principal balance of $167.5 million, matured and were repaid in full.
- During the period from July 1 through August 29, we made seven follow-on investments in NPRC totaling $55.7 million to support the online consumer lending initiative.
- During the period from July 1 through August 25, we issued $28.8 million aggregate principal amount of Prospect Capital InterNotes® (“InterNotes®”) for net proceeds of $28.5 million.
- During the period from July 1 through August 24, we issued $37.9 million in aggregate principal amount of our 2024 Notes for net proceeds of $37.1 million.
Benefiting from the solid performance of several controlled positions in our portfolio, we have historically selectively monetized our equity in certain companies and may monetize other positions if we identify attractive opportunities for exit. As such exits materialize, we expect to reinvest such proceeds into new income-producing and other attractive opportunities. We are pleased with the overall performance of our controlled portfolio companies, and are actively exploring other new investment opportunities at attractive multiples of cash flow.
Effective May 23, 2016, APRC and UPRC merged with and into NPRC, with NPRC as the surviving REIT entity. In addition to a substantial investment in real estate assets, we and NPRC continued our investment in the online lending industry with a focus on super-prime, prime, and near-prime consumer and small business borrowers. We and NPRC currently hold $806 million of loans, across multiple origination and underwriting platforms. Our online business, which includes attractive advance rate financing for certain assets, is currently delivering a yield of approximately 14-15% (net of all costs and expected losses). In the past year we have closed and upsized five bank credit facilities and one securitization to support our online business, with more credit facilities and securitizations expected in the future that we hope will enhance our investment returns through efficient financing. We have multiple origination sources for the online business and expect to explore diversifying those sources in the future through our proactive efforts. As the average age of our loan portfolio and related delinquencies increase, we expect to experience a decline in value attributed to our online lending portfolio.
The investment performance of our structured credit business has exceeded our underwriting expectations, demonstrating one of the benefits of our strategy of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance, and focusing on attractive risk-adjusted opportunities. As of June 30, 2016, we were invested in 38 structured credit investments with a fair value of $1.01 billion with individual standalone financings non-recourse to Prospect and with our risk capped at the net investment amount. Our underlying structured credit portfolio comprised over 3,031 loans and a total asset base of over $18.5 billion. As of June 30, 2016, our structured credit portfolio experienced a trailing twelve month default rate of 1.37%, or 60 basis points less than the broadly syndicated market trailing twelve month default rate of 1.97%. In the June 2016 quarter, our structured credit equity portfolio generated an annualized cash yield of 22.8% and an annualized GAAP yield of 15.4% based on June 30, 2016 fair value. As of June 30, 2016, our existing structured credit portfolio has generated $695.9 million in cumulative cash distributions, representing 53.6% of our original investment. In addition, we have exited seven structured credit investments totaling $153.6 million with an average realized IRR of 16.8% and cash on cash multiple of 1.42 times.
Prospect’s structured credit portfolio consists entirely of majority owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases Prospect receives fee rebates and other special economics because of its majority position. The average collateral management fee rebate across the Prospect portfolio is 6 basis points, which is a 12% discount to a typical collateral management fee of 50 basis points for CLOs. As the majority holder, Prospect controls the right to call a transaction in Prospect’s sole discretion. Prospect has the option of waiting years to call a transaction at a time optimal for Prospect rather than when loan asset valuations might be temporarily low. Prospect as majority investor can refinance liabilities on more advantageous terms (as we have done four times since the beginning of 2015) and negotiate better terms to “Volckerize” a deal (i.e., remove a bond basket) in exchange for better terms from the debt investors in the transaction (as we have done five times since the beginning of 2015). Options can have significant embedded value as per Black-Scholes and other option valuation methods. Options typically have greater value with a greater time horizon. We are currently pursuing an initiative to refinance and extend the reinvestment period by several years for several of our structured credit investments, thereby enhancing the longevity and option value of our portfolio.
Prospect’s structured credit equity portfolio has paid to Prospect an average 28.8% cash yield (based on June 30, 2016 fair value) in the 12 months ended June 30, 2016, demonstrating our careful underwriting and the resultant strong credit metrics of our structured credit equity portfolio. We believe structured credit remains an attractive asset class given its strong historical performance. According to Citigroup Global Markets Research, WF Structured Products Research, and Intex:
- The average annualized structured credit equity investment dividend since 2003 is over 22%, including 8% in 2009, which was the lowest year on record.
- Pre-credit crisis U.S. structured credit investments have outperformed other asset classes with an average return of 19.47% versus 8.49% for the U.S. high yield bond index and 11.78% for the S&P 500.
- Over 98% of structured credit corporate loan investments in the lifetime of the industry have realized a positive return to equity investors.
As a yield enhancement for our business, in the past two years we launched an initiative to divest lower yielding loans from our balance sheet, thereby allowing us to rotate into higher yielding assets and to expand our ability to close scale one-stop investment opportunities with efficient pricing. For the year ended June 30, 2016, we have made five sales of such lower yielding investments totaling $99.4 million with a weighted average coupon of 6.1%. We receive recurring servicing fees paid by multiple loan purchasers in conjunction with certain divested loans. We expect additional similar sales in the future as a potential earnings contributor for the June 2017 fiscal year and beyond.
Business development companies (“BDCs”) like Prospect primarily make senior secured loans to private American companies for such purposes as growth, development, acquisitions, expansion, job hiring, and other purposes. BDCs historically have had low single digit percentage average loss rates because of disciplined underwriting standards, with third party research showing that BDCs have had lower loss rates than banks. For many of the middle-market private companies in which a BDC invests, traditional sources of financing like bank lending or public offerings often have limited availability. BDCs offer advantages to the companies that are in need of investment capital to grow since BDCs are also required to offer managerial assistance to the companies in which they invest.