Prospect Capital’s Disappointing Performance in Fiscal 3Q17

Prospect Capital (PSEC) reported a decline in its net investment income in its fiscal 3Q17[1. fiscal 3Q17 ended March 31, 2017] earnings release. Analysts expect PSEC’s fiscal 4Q17 earnings per share (or EPS) to reach $0.20, representing no change from fiscal 3Q17. This EPS estimate is mostly due to the company’s investment in low-rate offerings.

Prospect Capital’s net investment income for fiscal 3Q17 was $73.1 million compared to $84.4 million in fiscal 2Q17. This decrease was mostly due to a reduction in its interest income. The lower-coupon First Tower refinancing and prepayment fees have resulted in lower interest income for the company.

Prospect Capital (PSEC) also missed the estimated EPS of $0.24 by delivering lower EPS of $0.20 in fiscal 3Q17. Because of unrealized depreciation in the financial, energy, and structured credit sectors, PSEC has reported declining numbers in its net income. Its net income stood at $19.5 million in fiscal 3Q17 compared to $100.9 million in fiscal 2Q17.

Over the past five years, Prospect Capital’s net investment income yield has beaten the publicly traded BDC[1. business development company] median. PSEC’s five-year average stands at 12% compared to its median of 9.5%. Of the total BDCs, 14% don’t concentrate on generating current income.

Prospect Capital (PSEC) is seeking to deploy more capital in new originations. PSEC is also planning to generate its revenues through extensions and refinancing in its structured credit portfolio.

The Federal Reserve has hinted at additional rate hikes, and the company’s fiscal 3Q17 balance sheet consists of 99.9% fixed-rate liabilities and 90.7% interest-earning assets on a floating basis. These factors indicate that rate hikes could put the company in a better position.

Prospect Capital also benefits from its strategy of diversification in its investment portfolio. Of its total investment portfolio, 17.8% is composed of structured finance. The company’s net asset value in fiscal 3Q17 stood at $9.43 per share, which is lower than its net asset value of $9.62 per share in fiscal 2Q17. This trend is mostly due to a reduction in its net investment income and net income.

Prospect Capital’s competitors reported the following net asset value readings on March 31, 2017:

• Ares Capital Corporation (ARCC): $16.50
• BlackRock Capital Corporation (BKCC): $8.22
• Alcentra Capital Corporation (ABDC): $13.43

Together, these companies comprise ~22.0% of the VanEck Vectors BDC Income ETF (BIZD).

In this series, we’ll study Prospect Capital’s (PSEC) high distributions, originations, valuation, and what analysts have to say about its stock.