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Prospect Capital Reports $0.25 of Net Investment Income per Share in March 2016 Quarter, With Fiscal Year to Date Net Investment Income Exceeding Dividends by $0.04 per Share

NEW YORK, NY--(Marketwired - May 10, 2016) - Prospect Capital Corporation (NASDAQ: PSEC) ("Prospect" or "we") today announced financial results for our third fiscal quarter ended March 31, 2016.

For the nine months ended March 31, 2016, our net investment income ("NII") was $279.8 million or $0.79 per weighted average share. For the nine months ended March 31, 2015, our NII was $273.2 million or $0.78 per weighted average share. NII year over year increased by $6.5 million on a dollars basis and increased by $0.01 on a per share basis. Fiscal year to date NII has exceeded dividends by $0.04 per share.

For the March 2016 quarter, our NII was $87.6 million or $0.25 per weighted average share. For the March 2015 quarter, our NII was $87.4 million or $0.24 per weighted average share. NII year over year increased by $0.2 million on a dollars basis and increased by $0.01 on a per share basis.

Our recurring income as measured by the percentage of total investment income from interest income was 94% in the March 2016 quarter.

We have previously announced monthly cash dividends to shareholders of $0.08333 per share through April 2016. Yesterday, we announced the declaration of monthly cash dividends in the following amounts and with the following dates:

  • $0.08333 per share for May 2016 to holders of record on May 31, 2016 with a payment date of June 23, 2016;
  • $0.08333 per share for June 2016 to holders of record on June 30, 2016 with a payment date of July 21, 2016;
  • $0.08333 per share for July 2016 to holders of record on July 29, 2016 with a payment date of August 18, 2016; and
  • $0.08333 per share for August 2016 to holders of record on August 31, 2016 with a payment date of September 22, 2016.

Since our IPO 12 years ago through our August 2016 distribution, assuming our current share count for upcoming distributions, we will have distributed $14.96 per share to initial shareholders, aggregating $2.0 billion in cumulative distributions to all shareholders.

Our debt to equity ratio stood at 73.8% after subtraction of cash and equivalents at March 31, 2016, down 380bp from 77.6% at June 30, 2015. Our objective is to sustain and grow net investment income per share in the coming quarters by focusing on matched-book funding to finance disciplined and accretive originations across our diversified lines of business. We are currently exploring initiatives to lower our funding costs (including refinancing of existing liabilities at lower rates), opportunistically harvest certain controlled investments at a gain, optimize our origination strategy mix (including increasing our mix of online loans), repurchase shares at a discount to net asset value, and rotate our portfolio out of lower yielding assets into higher yielding assets while maintaining a significant focus on first lien senior secured lending.

Our net asset value ("NAV") on March 31, 2016 stood at $9.61 per share, a decrease of $0.04 in comparison to the value of $9.65 at December 31, 2015, and a decrease of $0.70 in comparison to the value of $10.31 at June 30, 2015. The decrease in our NAV in comparison to June 30, 2015, is primarily due to unrealized depreciation based on volatility in the capital markets rather than fundamental credit issues.

We believe there is no greater alignment between management and shareholders than for management to own a significant amount of stock, particularly when such stock is purchased on the open market as with Prospect. Management is the largest shareholder in Prospect and has never sold a share. Management on a combined basis has purchased at cost over $160 million of stock in Prospect, including over $50 million in the March 2016 quarter and over $100 million combined in the past two quarters.

HIGHLIGHTS

Equity Values:
Net assets as of March 31, 2016: $3.422 billion
Net asset value per share as of March 31, 2016: $9.61

Third Fiscal Quarter Operating Results:
Net investment income: $87.6 million
Net investment income per share: $0.25
Dividends to shareholders per share: $0.25

Fiscal Year to Date Operating Results:
Net investment income: $279.8 million
Net investment income per share: $0.79
Dividends to shareholders per share: $0.75

Third Fiscal Quarter Portfolio and Investment Activity:
Portfolio investments acquired in quarter: $23.2 million
Total portfolio investments at fair market value at March 31, 2016: $6.005 billion
Number of portfolio companies at March 31, 2016: 125

PORTFOLIO AND INVESTMENT ACTIVITY

Our portfolio emphasis during the March 2016 quarter continued to prioritize secured lending. As of March 31, 2016, our portfolio at fair value consisted of 51.6% first lien, 19.2% second lien, 16.6% structured credit (with underlying first lien), 0.3% small business whole loan, 1.2% unsecured debt, and 11.1% equity investments.

We currently have multiple primary investment origination strategies, including non-control agented and syndicated lending in private equity sponsored and non-sponsored transactions, control investments in operating and financial companies, structured credit investments, real estate investments, and online lending. As of March 31, 2016, our control investments at fair value stood at 33.3% of our portfolio, compared to 32.5% at December 31, 2015.

With our scale team of more than 100 professionals, one of the largest middle-market credit teams in the industry, we believe we are well positioned to select in a disciplined manner a small percentage of investment opportunities out of the thousands we source annually. Prospect closed approximately $1.1 billion of investments during the last four quarters, generally replacing investments as they were repaid or exited.

Our portfolio's annualized current yield stood at 13.4% across all performing interest bearing investments as of March 31, 2016, an increase of 1.5% over September 2014, 1.0% over March 2015, 0.7% over June 2015, and 0.1% over December 2015. This yield metric has now increased each of the last six consecutive quarters. Distributions from equity positions that we hold are not included in this yield calculation. In many of our portfolio companies, we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns. We are seeking to enhance our yields by capitalizing on higher recent market spreads compared to prior years.

At March 31, 2016, our portfolio consisted of 125 long-term investments with a fair value of $6.005 billion. These investments span a diversified range of industries with no one industry representing more than 9.2% of the portfolio at fair value as of March 31, 2016. As of March 31, 2016, Prospect's asset concentration in the energy industry stood at 2.9%, including Prospect's first lien senior secured loans where third parties bear first loss capital risk. The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 0.5% at March 31, 2016, consistent with the prior quarter, with approximately 0.2% residing in the energy industry.

With regard to non-accrual loans, we believe that equitizing some portion of an investment in a business going through significant cyclical or other difficulties is often preferable compared to the alternative of maintaining on a balance sheet excessive debt that cannot be serviced in the foreseeable future. With such capital structure flexibility, a management team can remain focused on boosting operational performance for long-term value generation.

We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. As of March 2016, our weighted average portfolio net leverage stood at 4.12 times earnings before interest, taxes, depreciation, and amortization ("EBITDA"), down from 4.19 times as of December 2015 and down from 4.36 times as of September 2015. As of March 2016, our weighted average EBITDA per portfolio company stood at approximately $49.1 million, up from $48.6 million as of December 2015 and up from $44.6 million as of September 2015.

During the March 2016 quarter, we completed multiple follow-on investments aggregating $23.2 million, and we received full repayment on one investment. Our sales, repayments, and scheduled amortization payments in the March 2016 quarter were $163.6 million, resulting in net investment exits of $140.4 million. We slowed originations in the March 2016 quarter due to market volatility but expect to increase our investment pace, depending on market conditions, in the coming quarters.

The majority of our portfolio consists of sole agented middle-market loans that we have originated, selected, negotiated, structured, and closed. In recent years we have perceived the risk-adjusted reward to be superior for agented, self-originated, and anchor investor opportunities compared to the broadly syndicated market, causing us to so prioritize our proactive sourcing efforts. Our proprietary Prospect call center initiative has enabled us to source investment opportunities we may not have seen otherwise. We anticipate that our calling effort will contribute to our business in the upcoming years.

During the March 2016 quarter, our originations comprised 10% third party sponsor deals, 49% online lending, 20% syndicated debt, 9% operating buyout and 12% real estate. Our activity during the March 2016 quarter included the following transactions:

  • On January 21, 2016, we sold 100% of our CIFC Funding 2011-I, Ltd. Class E and Class D notes with a cost basis of $29.0 million and a December 31, 2015 mark of $31.6 million for $32.9 million. We realized a gain of $3.9 million on the sale.

  • In February 2016, we and other lenders foreclosed on Targus Group International, Inc. ("Targus"). Our $21.6 million first lien term loan was extinguished and exchanged for a 12.63% common equity ownership in the parent company of Targus. As part of the foreclosure and recapitalization, we provided $1.3 million and were allocated $3.8 million of additional senior debt financing. We recorded a realized loss of $14.2 million for the amount our amortized cost exceeded fair value.

  • On March 22, 2016 and March 24, 2016, United Sporting Company, Inc. repaid $17.4 million of our loan.

  • During the March 2016 quarter, we sold our $10.1 million debt investment in ICON Health and Fitness, Inc. We realized a loss of $1.1 million on the sale.

  • During the March 2016 quarter, we made one follow on investment in National Property REIT Corp ("NPRC") totaling $2.0 million to support the online consumer lending initiative. We invested $0.3 million of equity through NPH Property Holdings, LLC ("NPH") and purchased $1.7 million of debt issued to us by NPRC and its wholly-owned subsidiaries. We also provided $0.4 million of equity financing to NPRC to fund capital expenditures for existing real estate properties.
  • During the March 2016 quarter, we purchased a $2.1 million follow-on debt investment issued to us by United Property REIT Corp. ("UPRC").

  • During the March 2016 quarter, NPRC repaid $31.4 million of our loans and returned $5.3 million on our equity investment.

  • During the March 2016 quarter, American Property REIT Corp ("APRC") repaid $17.7 million of debt issued to us.

  • During the March 2016 quarter, we recorded a realized loss of $0.2 million on our remaining investment in New Century Transportation, Inc.

  • During the March 2016 quarter, we recorded a realized loss of $3.0 million on our remaining investment in Wind River Resources Corporation.

Since March 31, 2016 (in the current June 2016) quarter, we have completed new and follow-on investments of $115.4 million, sold $25.0 million of one investment, and received partial repayments of $22.4 million, including the following transactions:

  • During the period from April 1, 2016 through May 9, 2016, we made four follow-on investments in NPRC totaling $39.5 million to support the online consumer lending initiative. We invested $5.9 million of equity issued by NPH and purchased $33.6 million of debt issued by ACL Loan Holdings, Inc. ("ACL"), a...

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