PSEC

Prospect Capital Corporation (PSEC)

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Prospect Capital Corporation (PSEC)

F1Q13 Earnings Call

November 9, 2012 11:00 AM ET

Executives

John Barry – Chairman & CEO

Brian Oswald – CFO

Grier Eliasek – President & COO

Analysts

Robert Dodd – Raymond James

Greg Mason – Stifel Nicolaus

Jonathan Bock – Wells Fargo

Greg Mason – Stifel Nicolaus

Jerry Luther – Retail

Presentation

Operator

Good morning and welcome to the Prospect Capital Corporation First Fiscal Quarter Year Earnings Release and Conference Call. All participants will be in a listen only mode. (Operator instructions) Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

John Barry

Thank you Ashley. Joining me on the call today are Grier Eliasek, our President and COO; and Brian Oswald, our CFO. 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 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-Qfiled previously. Now, I’ll turn the call back over to John.

John Barry

Before I dive into our record net investment income results for this quarter, I would like to take a moment to explain the thinking behind our successful equity raised last week. Starting months ago with the market expectation since confirmed of divided government heading into 2013 and increases in capital gains and other taxes and regulations. Counterparties have been approaching us to close transactions by year end. As a result, we have been seeing a surge in demand for our capital and our investment pipeline continues to build. We wanted to make sure we had enough dry powder to meet these demands and so last week issued equity on an accretive basis at a premium to net asset value.

Given the collapse in the markets following the election, a collapse we feared would occur, we believe we were fortunate to be able to thread the needle and clear our shelf filing with the SEC just in time to complete an offering before the election has now made such an offering difficult, if not impossible.

We now believe that we do have the dry powder necessary to meet all these escalating needs of capital and will be able to fill our nets while the salmon are running. On such a full sea, we are now afloat. We must take the current when it serves. We’ll lose our ventures.

In the September 2012 quarter, we achieved net record net investment income and record year-over-year great. We also delivered $0.47 and $0.05 of growth in net asset value per share for the year-over-year and sequential quarter periods. NAV stood at $10.88 on September 30th, 2012.

Net investment income for the quarter was $74 million up 166% from the prior year. on April share basis, net investment income for the quarter was $0.46 up 77% from the prior year. we've delivered strong net investment income growth while keeping leverage low. Net of cash and equivalents, our debt to equity ratio was less than 35% in September. We have substantial debt capacity and liquidity to drive future earnings. We estimate our net investment income per share in the December quarter will be $0.41 to $0.46.

We just announced more shareholder distributions through January, which will be our 54th shareholder distribution and 31st consecutive per share monthly increase. Our net investment income has exceeded distributions demonstrating substantial distribution coverage for the current fiscal year, the prior fiscal year, the last four quarters and for the cumulative history of the company. We've now paid out nearly $11 per share and almost $600 million in distributions over the life of the company.

I'll now turn the call over to Grier

Grier Eliasek

Thanks John. Our business continues to grow at a prudent pace. As of today we've now reached more than 3.5 billion of assets in undrawn credit. Our team is increased to more than 60 professionals representing one of the largest dedicated middle market credit groups in the industry. with our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that includes third party, private equity sponsor related lending, direct non-sponsor lending, prospect sponsored transactions and structured credit. Our team typically originates thousands of opportunities annually and invests in a disciplined manner in a single digit percentage of such opportunities.

Our non-bank structure gives us the flexibility to invest in multiples levels of the corporate capital stack with a preference for secured lending and senior loans. Our approach is the one that generates attractive risk adjusted yields and our debt investments were generating an annualized yield of 13.3% as of September 30. We also hold equity positions and mini-transactions that can act as yield enhancers of capital gains contributors as such positions generate distributions. Originations in the September 2012 quarter were 748 million, up 30% from the June quarter. We also experienced 158 million of repayments as the nice validation of our capital preservation objectives. As of September, we are up to 96 portfolio companies, a 13% increase from the June quarter and demonstrating both an increase in diversity as well as a migration toward the larger positions and larger portfolio companies. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration.

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