The following information was previously provided to subscribers of Premium BDC Reports along with:
- PSEC target prices/buying points
- PSEC risk profile, potential credit issues, and overall rankings. Please see BDC Risk Profiles for additional details.
- PSEC dividend coverage projections (base, best, worst-case scenarios). Please see BDC Dividend Coverage Levels for additional details.
PSEC September 30, 2021, Quick Update
Prospect Capital (PSEC) reported just below its base case projections after taking into account the preferred stock dividend and using diluted common shares. PSEC’s announcement of $0.21 per share of net investment income (“NII”) did not include the preferred stock dividend as well as only using 389 million shares versus the 409 million diluted shares. After taking both of these into account the adjusted NII was $0.193 per share covering its monthly dividends by 107%. I am pointing this out because this discrepancy will continue to grow larger as the company issues additional preferred stock.
There was another decline in CLO residual income as well as a decline in its overall portfolio yield fully offset by structuring, advisory, and amendment fees from First Tower Finance Company and PGX Holdings, Inc. (“PGX”). Dividend income remains lower-than-expected at only $1.3 million especially given 22.4% of its portfolio is now in equity positions that typically pay dividends (for healthy companies).
Leverage remains low with a current debt-to-equity at 0.63 (below the lower end of its target range) after taking into account the convertible Perpetual Preferred stock that continues to increase.
NAV per share increased by 3.2% (from $9.81 to $10.12) due to unrealized appreciation related to the same control/affiliate investments as previous quarters (National Property REIT, InterDent, and First Tower Finance). It should be noted that the continued issuance of common shares below NAV through its DRIP and additional issuances of preferred stock have a dilutive impact on its NAV.
For common shareholders, the preferred shares create additional risks as the preferred is cumulative and has to be paid in full before common stock shareholders receive their distributions. The preferred stockholders have the option to convert into common at any time and there is a chance that PSEC could redeem these shares at “any time” converting into common stock based on the most recent 5-day trading price. This could be another way for management to issue additional shares below NAV.
It should be noted that four investments (National Property REIT, InterDent, PGX Holdings, and First Tower Finance) have been continually marked up and now account for over $2.6 billion, 41% of the total portfolio or almost 67% of NAV per share (see below). This is very high concentration risk, especially if management is using aggressive valuation measures.
The company reaffirmed its monthly dividend of $0.06 per share through January 2022:
What Can I Expect Each Week With a Paid Subscription?
Each week we provide a balance between easy to digest general information to make timely trading decisions supported by the detail in the Deep Dive Projection reports (for each BDC) for subscribers that are building larger BDC portfolios.
- Monday Morning Update – Before the markets open each Monday morning we provide quick updates for the sector including significant events for each BDC along with upcoming earnings, reporting, and ex-dividend dates. Also, we provide a list of the best-priced opportunities along with oversold/overbought conditions, and what to look for in the coming week.
- Deep Dive Projection Reports – Detailed reports on at least two BDCs each week prioritized by focusing on ‘buying opportunities’ as well as potential issues such as changes in portfolio credit quality and/or dividend coverage (usually related). This should help subscribers put together a shopping list ready for the next general market pullback.
- Friday Comparison or Baby Bond Reports – A series of updates comparing expense/return ratios, leverage, Baby Bonds, portfolio mix, with discussions of impacts to dividend coverage and risk.
This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying including setting target prices using the portfolio detail shown in this article (at a minimum) as well as financial dividend coverage projections over the next three quarters as discussed earlier.