Prospect Capital Corporation (PSEC)

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Prospect Capital Corporation (PSEC)

F1Q09 (Qtr End 09/30/08) Earnings Call

November 10, 2008 1:00 pm ET

Executives

John Barry - Chairman and CEO

Brian Oswald - CFO

Grier Eliasek - President and COO

Analysts

Jack Zurbach - Fox-Pitt Kelton

James Shanahan - Wachovia

Henry Coffey - Sterne, Agee & Leach

Sean Jackson - Avondale Partners

John Ellis

Jim Percy - Gaya Capital Management

Fred Knight - Dallas Capital Management

Presentation

Operator

Hello, and welcome to the Prospect Capital Corporation first fiscal quarter Earnings Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator instructions). Please note this conference is being recorded. Now, I would like to turn the conference over to Mr. John Barry, Chairman and CEO. Mr. Barry?

John Barry

Thank you very much, Amy. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer, Brian Oswald, our Chief Financial Officer, and Bill Vastardis, our former Chief Financial Officer. Brian?

Brian Oswald

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the Securities Laws that are intended to be subject to Safe Harbor protection.

Actual outcomes and results could differ materially from those forecasted due to the impact of many factors. We do not undertake to update our forward-looking statements, unless required by law. For additional disclosure, see our earnings press release and our 10-K filed previously.

Now I will turn the call back over to John.

John Barry

Thank you. Our net investment income for the fiscal quarter ended September 30 was $23.5 million or $0.80 per weighted average share for the year, an increase of 199% and 105% from the prior year on a dollars and per share basis respectively. Our results include approximately $0.34 per share of positive net investment income resulting from the settlement of net profits interest in IEC and ARS.

Our net asset value per share on September 30 increased $0.08 per share from June 30 to $14.63 per share. We estimate our net investment income for the current second fiscal quarter ended December 31 will be $0.42 to $0.50 per share. We expect to announce our second first quarter dividend next month.

Now, Grier Eliasek will comment on our investment activity.

Grier Eliasek

Thanks John. On September 30, the fair value of our portfolio of 31 long-term investments was approximately $549 million. As of September 30, our portfolio generated a current yield of 15.5% across all of our long-term debt and equity investments, including interest and dividends.

Last quarter, we completed three new investments which consisted of Castro Cheese, TriZetto and Biotronic totaling approximately $50.7 million, as well as follow-on-investments in the existing portfolio.

Additionally, we exited our investment in Deep Down for 53% all-in internal rate of return of return. R-V Industries has also repaid our $7.5 million of debt. On September 30, we settled our net profits interest in IEC Systems and Advanced Rig Services for a combined $12.6 million.

In conjunction with the NPI settlement, we simultaneously reinvested the $12.6 million as incremental senior secured debt in IEC and ARS. The incremental debt will amortize over the period ending November 20, 2010.

Prospect has been in discussions with interested purchasers for Gas Solutions, but has not yet entered into a binding agreement. Significant negotiations continue. While Prospect wishes to unlock the value Prospect sees in Gas Solutions, Prospect does not wish to enter into any agreement at any time that does not recognize the long-term value Prospect sees in Gas Solutions.

As an almost fully hedged midstream asset generating predictable consistent cash flow to Prospect, Gas Solutions is an asset that Prospect wishes to sell at a value maximizing price or not at all.

Prospect has a patient approach toward the process. Prospect's multi-year puts purchased earlier this year are substantially in the money, providing downside protection to commodity price declines.

Gas Solutions Holdings has generated approximately $19.5 million of unadjusted plant operating income during the eight months ended August 31, 2008. On an annualized basis, this represents an increase over the results from the year ended December 31, 2007, of 127%.

Since our last investor update only two months ago, we have seen a significant shift in the opportunity set for capital deployment from the primary to the secondary market place. Given our low leverage, we are in an attractive position to benefit from an environment which distressed sellers look to de-leverage their balance sheets by exiting positions.

Given significant pricing volatility, we have in the past two months chosen to observe the market rather than close new investments. We expect to be rewarded by that discipline in the weeks and months ahead in the secondary market, while still looking at primary opportunities.

Thank you. I will now turn the call over to Brian.

Brian Oswald

Thanks Grier. At September 30, borrowings under our credit facilities stood at approximately $131.7 million. We are currently seeking to increase our revolving credit facility from its current size of $200 million.

Over the past few months, we have worked with the rating agencies to structure an expanded facility of up to $400 million in size. We have not yet embarked upon initiating a syndication process for this facility due to the current credit environment. We expect to initiate such activities in early 2009. The closing of the facility is subject to lender syndication and other conditions customary for this type of a transaction.

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