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Prospect Capital Corporation (PSEC)

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Prospect Capital Corporation (PSEC)

F4Q08 (Qtr End 06/30/08) Earnings Call Transcript

September 9, 2008 11:00 am ET

Executives

John Barry – Chairman and CEO

Bill Vastardis – CFO and Chief Compliance Officer

Grier Eliasek – President and COO

Analysts

Robert Dodd – Morgan, Keegan & Company

Jim Shanahan – Wachovia Securities

James Bellessa – D.A. Davidson & Co.

Henry Coffey – Sterne Agee

David Ratliff – Doucet Asset Management

John Ellis [ph]

Paul Norris [ph]

Mark Lindy [ph] – Wachovia Securities

Jasper Birch [ph] – Fox-Pitt, Kelton

Presentation

Operator

Hello and welcome to the Prospect Capital Scheduled Fiscal Year Earnings Release and Conference 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. Mr. Barry, you may begin.

John Barry

Thank you, Camille. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; Bill Vastardis, our Chief Financial Officer; and Brian Oswald, our Managing Director for Finance. Bill?

Bill Vastardis

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statement 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 forecast 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

Thanks, Bill. Out net investment income for the fiscal year ended June 30, 2008, was $45.1 million, or $1.91 per weighted average share for the year, an increase of 95% and 30% from the prior year on a dollars and per share basis, respectively.

Our net asset value per share on June 30 increased by $0.40 per share from March 31 to $14.55 per share.

Our net investment income for the fourth fiscal quarter was $13.7 million, or $0.50 per weighted average share for the quarter, an increase of 64% and 19% from the prior year-over-year quarter on a dollars and per share basis, respectively.

We estimate our net investment income for the current first fiscal quarter ended September 30 will be $0.45 to $0.53 per share. We expect to announce our first fiscal quarter dividend this month.

Now, Grier Eliasek will comment on our investment activity.

Grier Eliasek

Thanks John. On June 30, the fair value of our portfolio of 29 long-term investments was approximately $498 million. During the fiscal year, our portfolios generated a current yield of 15.5% across all our long-term debt and equity investments, including interest and dividends.

Last quarter, we completed two new investments, which consisted of Ajax and Peerless, totaling approximately $59.8 million, as well as follow-on investments in existing portfolio.

Additionally, we exited our investment in Cougar last quarter through the sale of our equity for $3.4 million, earning a 34% internal rate of return.

Deep Down fully repaid our $12 million loan last quarter. We received warrants in Deep Down, which we exercised and then sold in August for $1.65 million, resulting in an overall 54% internal rate of return for that investment.

On June 30, we consolidated our coal investments into Yatesville Coal under one management team, allowing for a more efficient utilization and oversight of our assets. We are pleased with the improvement of Yatesville, which we attribute to more efficient operations as a result of the consolidation of the multiple operating companies, as well as significant increases in coal prices in Central Appalachia.

In the current quarter, we have made three new investments in Castro Cheese, TriZetto Group, and Biotronic NeuroNetwork, aggregating $50.7 million. R-V Industries also repaid our $7.5 million of secured debt.

In early May, Gas Solutions purchased a series of propane puts at prices of $1.53 per gallon and $1.39 per gallon covering each of the next four 12-month periods, respectively. These hedges have been executed at close to the highest market propane prices that have been achieved on an historical basis. Such hedges preserve the upside of Gas Solutions to benefit from potential future increases in commodity prices. Gas Solutions is generating approximately $27.3 million of unadjusted plant operating income based on annualizing the performance of the six months ending June 30, 2008, which is an increase of 55% from the prior year. For calendar year 2008, Gas Solutions estimates, based on current commodity prices and annualized run rates, that it would achieve more than $30 million of unadjusted plant operating income.

As previously disclosed, we are in the process of monetizing Gas Solutions. This monetization process is ongoing, and extensive discussions are occurring now with an interested party related to a definitive purchase agreement. While we are optimistic, we can make no definitive assurances as to the likelihood or timing of such agreement.

Besides Gas Solutions, we are in active discussions concerning monetizing other controlled investments to maximize shareholder value.

We continue to execute on our balanced business model addressing the controlled buyout, direct lending, and sponsor finance segments. We also continue to diversify the portfolio across industry sectors in accordance with our strategy. The team is busy addressing an investment pipeline aggregating [ph] more than $400 million in potential transaction value. In the past few months, in the new financing marketplace, absolute yields have increased despite the drop in LIOBR, and leverage multiples have decreased both risk-reward dynamics working significantly in our favor. Now is an excellent time to be deploying capital into new transactions. We hope to reap the benefits of our past equity raises, anticipated monetizations, and current low leverage as our business continues to grow.

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