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Prospect Capital's Results For Fiscal Q1 2016 - My Assessment

On 11/4/2015, PSEC reported results for the fiscal first quarter of 2016.

PSEC reported NII of $0.256 per share, earnings of $0.078 per share, net ICTI of $0.264 per share, and NAV of $10.17 per share as of 9/30/2015.

In this assessment article, I will summarize my previous account projections versus actual results.

There were several events that occurred with PSEC’s investment portfolio during the fiscal first quarter of 2016. This article discusses the impacts these events will have on future operations.

My buy, sell, or hold recommendation for PSEC is stated in the “Conclusions Drawn” section at the end of the article.

Introduction:

On 11/4/2015, Prospect Capital Corp. (NASDAQ:PSEC) reported net investment income ("NII") of $0.256 per share, net assets resulting from operations (also known as EPS) of $0.078 per share, net investment company taxable income ("ICTI") of $0.264 per share, and a net asset value ("NAV") of $10.17 per share as of 9/30/2015. In my prior PSEC fiscal Q1 2016 NII and NAV projection article, I projected the company would report quarterly NII of $0.242 per share, EPS of ($0.091) per share, net ICTI of $0.258 per share, and an NAV of $10.00 per share as of 9/30/2015.

As such, PSEC's NII and net ICTI was a slight "outperformance" when compared to my projections while the company's EPS figure was a notable outperformance. When calculated, my NII, EPS, net ICTI, and NAV projections had a variance of ($0.014), ($0.169), ($0.006), and ($0.17) per share, respectively. While all these projections were within my stated range, it should be noted PSEC's EPS and NAV per share figures were near the top end of my range. I will now summarize my prior article's account projections and compare each account to PSEC's actual results. If a specific account had at least a modest variance between my projection versus PSEC's actual results, I will also provide an explanation on the variance. I will discuss PSEC's accounts in the same order as projected in my NII and NAV projection article (see link provided above).

Projected Versus Actual Results:

To begin this discussion, Table 1 is provided below. Table 1 shows my prior account projections, which were referenced in the linked article above, and compares these figures to the company's actual results for the fiscal first quarter of 2016.

Table 1 - PSEC NII and EPS for the Fiscal First Quarter of 2016 (Actual Versus Projected Results)

(Source: Table created entirely by myself, partially using PSEC data obtained from the SEC's EDGAR Database)

In my prior PSEC NII and NAV projection article (link provided above), I stated the company's total investment portfolio would decrease approximately ($50) million for the fiscal first quarter of 2016 (prior to all quarterly "fair market value" ("FMV") fluctuations and scheduled principal payments). PSEC reported loan originations and add-on investments of $438 million while having portfolio sales/repayments/restructurings of ($529) million. When calculated, PSEC had a total investment portfolio decrease of ($91) million for the fiscal first quarter of 2016 which was fairly close to my projection.

Using Table 1 above as a reference, I projected PSEC would report "total interest income" of $186.5 million for the fiscal first quarter of 2016. In comparison, PSEC reported total interest income of $191.3 million which was slightly above my projection but within my stated range. The main reason for this slight outperformance was due to the fact PSEC did not put one of the company's oil and gas portfolio companies, CP Energy Services, Inc. (CP Energy), on "non-accrual" status during the fiscal first quarter of 2016 (contrary to my assumption). For readers unfamiliar with this term, when a company puts a specific debt investment on non-accrual status, there is no recognition of interest income and/or "payment-in-kind" ("PIK") income. In actuality, PSEC decided to put all three of the company's debt investments with CP Energy on non-accrual status at the end of the fiscal first quarter of 2016 (effective 9/30/2015). The calculated difference between putting PSEC's debt investments with CP Energy on non-accrual status at the beginning of the quarter, which I anticipated because this specific portfolio company has been "struggling" for several consecutive quarters, versus at the end of the quarter was approximately $4.2 million. This was a majority of the $4.8 million variance between my projection and PSEC's reported total interest income for the fiscal first quarter of 2016. It should also be noted I correctly anticipated PSEC "reversed out" all accumulated PIK income during the quarter.

Moving down Table 1, PSEC's reported dividend and structuring/fee income were very close to what I projected. I projected PSEC would report dividend and structuring/fee income of $2.0 and $6.1 million, respectively. In comparison, PSEC reported dividend and structuring/fee income of $3.2 and $5.7 million, respectively. Both figures were well within my stated range. Further discussion of these two accounts is unwarranted.

Still using Table 1 above as a reference, I projected PSEC would report total operating expenses of $108.8 million for the fiscal first quarter of 2016. In comparison, PSEC reported total expenses of $109.0 million. When calculated, this comes out to be a variance of only $0.2 million. Again, this was well within my stated range. When taking a look at all the accounts that make up this figure, since PSEC reported a slightly higher total interest income when compared to my projection (see discussion above), the company also reported a slightly higher "income incentive fee" for the fiscal first quarter of 2016. In addition, PSEC's interest expense was slightly lower when compared to my projection. This was due to the fact I projected a slightly higher weighted average debt outstanding figure pertaining to PSEC's revolving credit facility during the fiscal first quarter of 2016. This directly equates to a slightly higher interest expense projection when compared to actual results.

Continuing to move down Table 1, I projected NII of $85.8 million for the fiscal first quarter of 2016 while PSEC reported NII of $91.2 million. When calculated, PSEC reported NII that was $5.4 million above my projection. Again, this was well within my stated range. This minor NII variance was mainly due to the accounts already discussed earlier.

When just reviewing PSEC's "top-line" numbers, I believe the company's investment portfolio, as a whole, outperformed my expectations which ultimately led to the company reporting EPS of $0.078 per share when compared to my projected EPS of ($0.091) per share. As such, this directly led to PSEC reporting a NAV of $10.17 per share as of 9/30/2015 versus my projection of $10.00 per share. While PSEC's reported NAV per share was still within my stated range, it was near the "top-end." This quarter's NAV variance was the highest amount I have had since I began covering this stock at Seeking Alpha (going back to the quarter ending 3/31/2014). My quarterly PSEC NAV per share variance for the fiscal third and fourth quarters of 2014 was $0.01 and $0.00 per share, respectively. My quarterly PSEC NAV per share variance for the fiscal first, second, third, and fourth quarters of 2015 was $0.01, $0.01, $0.03, and $0.06 per share, respectively. As such, since this quarter's variance was near the top-end of my range, I wanted to understand why my projected valuations within PSEC's investment portfolio as of 9/30/2015 differed modestly when compared to reported valuations.

Continuing to move down Table 1, I projected PSEC...


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