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Prospect Capital Reports Strong 4Q15 Operating Performance

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Part 5
Prospect Capital Reports Strong 4Q15 Operating Performance PART 5 OF 7

Prospect Capital Expands Its Balance Sheet after Strong Showing

Exploring capitalization options

Prospect Capital (PSEC) continues to make use of leverage to generate higher returns. The company’s 4Q15 debt-to-equity ratio increased to 77.6%, up from its 4Q14 debt-to-equity ratio of 72.9%, and its 4Q13 debt-to-equity ratio of 55.7%. Prospect Capital still has significant unencumbered assets, matched book funding, access to diversified funding markets, and an unsecured fixed-rate liability focus.

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Prospect Capital has suspended market equity issuances for the indefinite future due to unattractive share price levels. This reduction in equity and asset growth has resulted in lower origination volumes than in previous quarters.

The company is looking at spin-offs and increasing leverage as sources for raising capital. More leverage should allow Prospect Capital to generate a higher return for its equity holders.

Balance sheet expansion

Prospect Capital successfully reduced its cost of debt to 6.03% in the June 2015 fiscal year, compared to a cost of debt of 6.56% in the June 2014 fiscal year. It achieved this reduction by repaying certain higher-cost debts and using its revolving credit facility efficiently. In August 2014, Prospect Capital renegotiated an expanded five-and-a-half-year revolving credit facility. The facility saw an increased commitment to the tune of $885 million as of June 30, 2015. The facility also includes a feature through which the commitment can be increased up to $1.5 billion. Prospect Capital has also managed a lower interest rate on the facility by choosing LIBOR (London Inter-Bank Offered Rate) plus 225 basis points instead of LIBOR plus 275 basis points without the clause of minimum LIBOR.

The enhanced debt on the firm’s balance sheet is supported by the repeat issuance of five-to-thirty-year unsecured term debt. This has extended its average liability duration. The company has expanded its balance sheet with assets now totaling $6.80 billion, up from $6.48 billion as of June 30, 2014. Net assets also grew, reaching $3.70 billion as of June 30, 2015, up from $3.62 billion as of June 30, 2014.

Return on equity among peers

  • CIT Group (CIT): 12.72%
  • American Capital (ACAS): 7.22%
  • United Rentals (URI): 35.85%

Together, these companies form 2.04% of the PowerShares Global Listed Private Equity Portfolio (PSP).

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