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Prospect Capital's Performance Improves, Yields Rise

PART:
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Part 4
Prospect Capital's Performance Improves, Yields Rise PART 4 OF 7

Prospect Capitalizes on Its Controlled and Structured Credit in 4Q

Harbortouch Payments

Prospect Capital’s (PSEC) controlled investments in fiscal 4Q16 declined to 29.7% of its total portfolio, as compared to 33.3% in the previous quarter. The company monetized its stake in Harbortouch Payments for $328 million.

Prospect targets selective monetizations when it has found attractive pricing. Prospect deployed the proceeds into non-controlled investments consisting of first-lien and structured notes.

Prospect Capitalizes on Its Controlled and Structured Credit in 4Q

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Prospect Capital generated 25% of its origination in the June quarter through online lending. Overall originations fell substantially in the quarter. During fiscal 2014, the company entered the online lending industry jointly with National Property REIT, or NPRC. Its total business currently stands at ~$806 million across multiple third-party and captive origination and underwriting platforms.

During the fiscal year ending June 30, 2016, Prospect Capital made 29 follow-on investments in NPRC totaling $243.6 million to support its online consumer lending initiative.

The business currently delivers an expected leveraged yield of ~15%. The EPS (earnings per share) growth in the investment management space is as follows:

  • CIT Group (CIT): 78%
  • American Capital (ACAS): 157%
  • United Rentals (URI): 33.8%

Together, these companies make up 14.8% of the ProShares Global Listed Private Equity (PEX).

Structured credit

Prospect has altered its strategy with a focus on taking majority equity stakes, working with strong management teams, providing strong collateral underwriting through primary issuance, and targeting attractive risk-adjusted opportunities.

As of June 30, 2016, Prospect has invested in 38 structured credit investments with a fair value of $1 billion, with individual standalone, non-recourse financing to the company, which is risk capped at the net investment amount. Its underlying structured credit portfolio was made up of over 3,031 loans, with a total asset base of over $18.5 billion. The portfolio had a default rate of 1.37% during the past four quarters, which is 60 basis points less than the broadly syndicated market rate of 1.97%.

In fiscal 4Q16, Prospect’s structured credit equity portfolio generated an annualized cash yield of 22.8% and an annualized GAAP (generally accepted accounting principles) yield of 15.4%. The portfolio has generated cumulative cash distributions of $695.9 million, making up approximately 54% of the original investment.

The company has also exited seven structured credit investments totaling $153.6 million, with an average realized an internal rate of return of 16.8% and a cash-on-cash multiple of 1.42x.

In the next part of this series, we’ll discuss Prospect’s higher leverage, which allows it to take advantage of low-interest rates.

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