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Prospect Capital Corporation (PSEC)

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Prospect Capital Corporation

F2Q08 Earnings Call

February 12, 2008 11:00 am ET

Executives

John F. Barry III – Exec. Chairman

Mr. M. Grier Eliasek – Pres, Chief Operating Officer

Mr. W. Montgomery Cook – Managing Director

Mr. William E. Vastardis – Chief Financial Officer

Mr. John S. Hopely – Investment Personnel

Analysts

Henry Coffey – Ferris, Baker Watts, Inc.

Robert Dodd – Morgan, Keegan & Company, Inc.

Robert Carlson - Janney Montgomery Scott

David Fried - Fried Asset Management

Mr. Gustave – Independent Investor

Presentation

Operator

Hello and welcome to the Prospect Capital Second Fiscal Quarter Earnings Release. All participants will be in Listen Only mode. There will be an opportunity for you to ask questions at the end of today’s presentation.

(Operator Instructions)

John F. Barry III

Joining me in the call today are Grier Eliasek, our President and COO, Bill Vastardis our CFO, and Robert Kleinman, our SVP of Finance, making his maiden. Rob, thank you.

Before we begin, Bill will review a few legal matters.

Bill Vastardis

Forward-looking statement within the meaning of the securities Law. All such statements are intended to be subject to Safe Harbor Protection. Actual outcomes and results could differ materially from those forecasts due to the impact of many factors. We do not undertake to update our forward-looking unless required by law. For additional disclosure, VR earnings press release and our 10-Q filed previously. Now, I will turn the call back over to John.

John F. Barry III

Our net investment income for the second fiscal quarter adjusted for nonrecurring items was $11.1 million or 48 cents per weighted average number of shares for the quarter, an increase of approximately 146% and 45% from the prior year-over-year quarter on dollars and per share basis respectively. We estimated our net investment income for the current Third Fiscal Quarter, ended March 31, will be $0.45 to $0.53 per share.

We expect to announce our Third Fiscal Quarter dividend in March. Now, Grier Eliasek comment on our investment activity.

Grier Eliasek

On December 31, the fair value of our portfolio was approximately $440 million and 32 long-term portfolio companies. As of December 31, our portfolio generated current yield of 15.3% across all of our long-term debt and equity including dividend, net profit interest, and realty income.

Last quarter, we completed seven new investments which consisted of Resco, Unitech, Maverick, Shears, Qualitest, Deb Shops, IEC, and ARS, as well as follow on investments and existing portfolios totaling approximately $121 million. This was the record investment quarter for us.

Additionally, we monetized two positions, CIE and Advantage for a higher grade of $9.1 million in principal proceeds, not including interest payments. As of today, we now have 32 portfolio companies aggregating approximately $440 million of assets calculated as of December 31 investment portfolio, plus additional investments in every payment.

On December, we announced that we engage RBC’s Financial Adviser to explore strategic alternative including a potential sale of our largest 100% control investment Gas Solutions, a midstream gathering and processing business in East Texas. Gas solutions is currently generating approximately $26.5 million of adjusted EBITDA as an annualize run rate.

We expect to conclude that process over the next few months and hope to see a significant growth in shareholder value. Currently, we are pleased with the reward to risk characteristics of potential transactions under evaluation. With the retreat of credit providers in the marketplace, even with the drop in LIBOR, we are seeing diminished competition and attractive spreads across all of our direct corporate lending, sponsor and finance, and single-stock buyout investment strategies.

The vast bulk of our portfolio is at a fixed-rate loan or flowing rate loans with a fixed flow as a protection against LIBOR reductions. We expect an active calendar year 2008 after a calendar year 2007, with approximately twice the investment pays over the prior year.

Bill Vastardis

On December 31, borrowings under our credit facility stood at approximately $107 million. We are currently in discussion to increase the size of our $200 million facility to at least $400 million in Size.

On October 17, we priced a secondary offering of 3.5 million shares of common stock at $16.34 per share, raising $57.2 million in gross proceeds. On November 13, the underwriters exercised the over-allotment option raising an additional $3.3 million in gross proceeds when 0.2 million shares of common stock were issued.

John F. Barry III

We can now answer any questions.

Operator

Our fist question, I believe, comes from Robert Dodd at Morgan, Keegan & Company, Inc.

Robert Dodd – Morgan, Keegan & Company, Inc.

Could you go over the nonrecurring expenses that you talked about? I assume that it is with the legal side. Then, could you tell us what happened with CIE last quarter is carried at a cost and there did not seem to be any issues with. In this quarter, it was written down and sold. Thirdly, on Gas Solutions, could you give us any more color about what is going on there in terms of the number of, if you can disclose that, indication of indications of interest etc?

John F. Barry III

I will start with the two items that I will cover and Bill Vastardis will cover the expense items.

In the case of CIE, that is an ethanol facility in Southern Illinois that has been under construction for some time. We were not fully aware of the difficulties that were being generated there, and the fundamental problem being that Lergy which is the contractor, was that odds with the management. Once they started fighting, it created pressure elsewhere in the system including, with respect to the farmers’ willingness to live up to their subordination obligations under the corn delivery agreements.

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