The following is from the PSEC Deep Dive that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).
For calendar Q2 2019, Prospect Capital (PSEC) reported below base case projections due to a decline in portfolio investments and lower-than-expected dividend income. Interest and total income continue to decline with a debt-to-equity that remains at 0.73 (mid target leverage range). PSEC’s stock price will likely trade lower due to continued declines in income, earnings and dividend coverage as shown in the following table.
As predicted, its net asset value (“NAV”) per share decreased by 0.8% or $0.07 (from $9.08 to $9.01) due to additional markdowns in non-accrual investments including United Sporting Companies and Pacific World resulting in unrealized losses of almost $31 million or $0.08 per share. These losses were partially offset by gains in other non-accrual investments Edmentum Ultimate Holdings and USES Corp.
Non-accruals remain around 8.2% of the portfolio at cost and declined to around 3.0% at fair value (previously 3.4%) due to the previously discussed markdowns.
As mentioned in the previous report, primary concerns include portfolio concentration issues including its “top 10 investments accounting for over 40% of the portfolio” and the amount of equity investments that continue to increase “accounting for over 16% of the portfolio”. Also mentioned was that “InterDent, Inc. remains one of its largest investment and needs to be watched.” Previously, PSEC extended its loans to InterDent, which were past due as well as being marked down “but still marked near cost and likely overvalued”. During calendar Q2 2018, PSEC assumed control of InterDent and as shown in the following table, PSEC only placed around $41 million of the $249 million loans with InterDent on non-accrual. There is a chance that the other loans could be placed on non-accrual that would have a meaningful impact upcoming to dividend coverage. Also, InterDent still accounts for around $0.61 per share or 6.8% of NAV.
Its Term A and B loans to Pacific World remain on non-accrual status and continue to be marked down but still account for around $0.31 per share or 3.4% of NAV.
I consider PSEC to have a higher risk portfolio due to the previous rotation into higher yield assets during a period of potentially higher defaults and later stage credit cycle concerns, CLO exposure of 16% combined with real-estate 15%, online consumer loans of 3%, consumer finance of 11% and energy, oil & gas exposure of 3%. As mentioned in previous reports, Moody’s and S&P Global Ratings also consider the CLO, real-estate and online lending to be riskier allocations that currently account for almost 34% of the portfolio.
This information was previously made available to subscribers of Premium BDC Reports, along with:
- PSEC target prices and buying points
- PSEC risk profile, potential credit issues, and overall rankings
- PSEC dividend coverage projections and worst-case scenarios
- Real-time changes to my personal portfolio
To be a successful BDC investor:
- As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
- Identify BDCs that fit your risk profile.
- Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
- Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.