Prospect Capital (PSEC) is expected to focus on developing new product lines and maintaining leverage in a bid to garner risk-adjusted returns on investments in the upcoming quarters. Rising rates have led to higher cost of capital for the company, which is expected to stabilize in 2018 and pave the way for decent net interest margins amid stable originations. Prospect is expected to post net investment income per share of $0.18 in its December and March quarters, which is in line with fiscal 1Q18, which ended in September 2017.
Originations are the key
Prospect Capital missed its earnings estimate by $0.01 in fiscal 1Q18, which was in line with its current dividend payout. It had originations of $222 million compared to $223 million in the previous quarter. Its approach to reduce risk and improve investments in quality credit led to a careful allocation of capital as a result lower originations. Management is confident that the company can improve its originations through new product lines, a focus on retail lending, and rationalizing investments in structured credit.
Closed-ended asset managers (XLF) Ares Capital (ARCC), Apollo Investment (AINV), and BlackRock Capital Investment (BKCC) have seen some yield contractions amid higher interest rates. Prospect Capital managed an annualized current yield of 9.9% in fiscal 1Q18, which was higher than its peers and lower than the prior year’s yield of 10.4%. The company’s net debt remained high but fell 2% to 71.6% in fiscal 1Q18.
In this series, we’ll analyze Prospect Capital’s originations, expansion or contraction of yields, valuations, dividend yields, future prospects, and new investment pipelines for 2018.