Prospect Capital (PSEC) has experienced yield compression in recent quarters, largely due to its efforts to reduce risk and focus on quality credit combined with rising interest rates, resulting in a higher cost of capital. In a rising interest rate scenario, companies having higher leverages and tend to see higher interest costs and lower interest margins or yields.
Prospect’s portfolio generated an annualized yield of 9.9% across its interest-bearing investments in fiscal 1Q18. That yield represents a 0.5% fall from fiscal 1Q17. The decline was due to higher interest rates, the company’s preference for lower risk paper, and lower originations.
Among its major peers (XLF), including Apollo Investment (AINV), BlackRock Investment (BKCC), and Ares Capital (ARCC), Prospect Capital has the highest yields in the long-run averages. The company is focusing on retail and new pipelines in order to improve its yields. However, the Fed’s target to raise rates three times in 2018 could result in stable yields, at least for the first half of 2018.
As of September 30, 2017, Prospect Capital’s overall portfolio consisted of 120 long-term investments with a fair value of $5.7 billion. As of June 30, 2017, Prospect had 123 investments, with a total value of $5.8 billion. The trend of concentrated offerings and holdings has continued over the past few years. However, a decline in fair value reflects a reduction of leverage and lower originations.
Prospect saw net exits in fiscal 1Q18 of $35 million, helped by higher capital repayments and exits compared to originations. Originations totaled $222 million, which was more than offset by repayments and exits totaling $258 million.
In fiscal 1Q18, its portfolio’s fair value was comprised of the following proportions of assets:
- 48.5% first-lien debts
- 19.5% second-lien debts
- 17% structured credit
- 14.3% equity investments
The company’s focus on senior and secured lending is evident from the recent changes in asset allocation. This could help it reduce the risk for its overall portfolio.