Prospect Capital(PSEC) - 2022 Q3 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section identifies forward-looking statements and outlines inherent risks and uncertainties that could cause actual results to differ from projections - Forward-looking statements are identified by words like "believe," "expect," "intend," and "estimate," and are subject to risks and uncertainties[7] - Key risks include future operating results, business prospects of portfolio companies, impact of investments, contractual arrangements, general economy, global health epidemics (COVID-19), financial stability (US, Europe, China), financing difficulties, interest rate volatility (including LIBOR to SOFR transition), adverse investment opportunities, regulatory structure, and cash resources[8] PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents unaudited consolidated financial statements, detailing assets, liabilities, operations, cash flows, and investment schedules Consolidated Statements of Assets and Liabilities This statement provides a snapshot of the company's financial position, detailing assets, liabilities, and net assets at specific dates Consolidated Statements of Assets and Liabilities (Selected Data) | Metric (in thousands) | March 31, 2022 (Unaudited) | June 30, 2021 (Audited) | Change | | :-------------------- | :-------------------------- | :---------------------- | :----- | | Total investments at fair value | $7,429,931 | $6,201,778 | +$1,228,153 | | Cash | $36,402 | $63,610 | -$27,208 | | Total Assets | $7,495,685 | $6,303,092 | +$1,192,593 | | Revolving Credit Facility | $699,440 | $356,937 | +$342,503 | | Public Notes | $1,341,858 | $1,114,717 | +$227,141 | | Prospect Capital InterNotes® | $333,578 | $498,215 | -$164,637 | | Convertible Notes | $213,875 | $263,100 | -$49,225 | | Total Liabilities | $2,694,790 | $2,357,575 | +$337,215 | | Preferred Stock (carrying value) | $564,884 | $137,040 | +$427,844 | | Net Assets Applicable to Common Shares | $4,236,011 | $3,945,517 | +$290,494 | | Net Asset Value Per Common Share | $10.81 | $9.81 | +$1.00 | Consolidated Statements of Operations This statement details the company's revenues, expenses, and net income over specific periods, reflecting operational performance Consolidated Statements of Operations (Selected Data) | Metric (in thousands, except per share) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | Nine Months Ended March 31, 2022 | Nine Months Ended March 31, 2021 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Total Investment Income | $181,431 | $159,456 | $526,281 | $474,628 | | Total Operating Expenses | $94,426 | $86,054 | $272,350 | $262,120 | | Net Investment Income | $87,005 | $73,402 | $253,931 | $212,508 | | Net Realized (Losses) Gains | $(2,254) | $881 | $(12,082) | $7,451 | | Net Change in Unrealized Gains | $80,486 | $184,960 | $398,340 | $518,577 | | Net Increase in Net Assets Resulting from Operations | $164,296 | $246,408 | $630,040 | $720,121 | | Basic Earnings Per Common Share | $0.40 | $0.64 | $1.57 | $1.89 | | Diluted Earnings Per Common Share | $0.38 | $0.63 | $1.50 | $1.88 | - For the three months ended March 31, 2022, interest income from non-control/non-affiliate investments increased to $65,037 thousand from $52,846 thousand YoY[13] - For the nine months ended March 31, 2022, total dividend income significantly increased to $12,277 thousand from $3,707 thousand YoY, primarily from control investments[13] Consolidated Statements of Changes in Net Assets This statement outlines the changes in the company's net assets over time, including income, distributions, and stock transactions Consolidated Statements of Changes in Net Assets (Selected Data) | Metric (in thousands) | Three Months Ended March 31, 2022 | Nine Months Ended March 31, 2022 | | :-------------------- | :-------------------------------- | :------------------------------- | | Balance as of Dec 31, 2021 / June 30, 2021 | $4,140,128 | $3,945,517 | | Net investment income | $87,005 | $253,931 | | Net realized losses | $(3,195) | $(22,231) | | Net change in unrealized gains | $80,486 | $398,340 | | Distributions from earnings | $(77,578) | $(223,775) | | Shares issued through reinvestment of dividends | $9,050 | $25,982 | | Conversion of preferred stock to common stock | $115 | $259 | | Total increase / (decrease) for the period | $95,883 | $290,494 | | Balance as of March 31, 2022 | $4,236,011 | $4,236,011 | - During the nine months ended March 31, 2022, the company reclassified $144,914 thousand of preferred stock to temporary equity[18][19] Consolidated Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows (Selected Data) | Metric (in thousands) | Nine Months Ended March 31, 2022 | Nine Months Ended March 31, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | | Net Cash (Used in) Provided by Operating Activities | $(589,727) | $131,003 | | Payments for purchases of investments | $(1,767,402) | $(701,768) | | Proceeds from sale of investments and collection of investment principal | $940,539 | $673,329 | | Net Cash Provided by (Used in) Financing Activities | $562,519 | $(74,575) | | Borrowings under Revolving Credit Facility | $1,627,051 | $668,000 | | Proceeds from issuance of preferred stock, net of underwriting costs | $429,433 | $61,823 | | Dividends paid and distributions to stockholders | $(199,697) | $(132,671) | | Net (Decrease) Increase in Cash | $(27,208) | $56,428 | | Cash at End of Period | $36,402 | $100,989 | - Cash paid for interest decreased from $106,454 thousand in 2021 to $86,505 thousand in 2022 for the nine months ended March 31[23] Consolidated Schedules of Investments This schedule provides a detailed breakdown of the company's investment portfolio, categorized by control designation and investment type Total Investments at Fair Value by Control Designation | Control Designation | March 31, 2022 (Fair Value in thousands) | % of Net Assets | June 30, 2021 (Fair Value in thousands) | % of Net Assets | | :------------------ | :--------------------------------------- | :-------------- | :-------------------------------------- | :-------------- | | Control Investments | $3,378,505 | 79.8% | $2,919,717 | 74.0% | | Affiliate Investments | $417,652 | 9.9% | $356,734 | 9.0% | | Non-Control/Non-Affiliate Investments | $3,633,774 | 85.7% | $2,925,327 | 74.2% | | Total Investments | $7,429,931 | 175.4% | $6,201,778 | 157.2% | Investment Portfolio by Type (Fair Value) | Type of Investment | March 31, 2022 (Fair Value in thousands) | % of Portfolio | June 30, 2021 (Fair Value in thousands) | % of Portfolio | | :----------------- | :--------------------------------------- | :------------- | :-------------------------------------- | :------------- | | First Lien Debt | $3,561,170 | 47.9% | $3,128,845 | 50.4% | | Second Lien Debt | $1,373,240 | 18.5% | $959,311 | 15.5% | | Subordinated Structured Notes | $728,833 | 9.8% | $756,109 | 12.2% | | Equity | $1,724,755 | 23.2% | $1,304,181 | 21.0% | - As of March 31, 2022, the largest industry concentration in the portfolio by fair value is Equity Real Estate Investment Trusts (REITs) at 18.2%, followed by Consumer Finance at 11.1%[119] - As of March 31, 2022, 87.20% of interest-earning investments bore interest at floating rates, and 0.4% of total assets at fair value were on non-accrual status[235][718] Notes to Consolidated Financial Statements These notes provide detailed explanations and additional information supporting the consolidated financial statements Note 1. Organization This note describes the company's business, legal structure, and external management arrangements - Prospect Capital Corporation is a BDC and RIC, focused on debt and equity investments in middle-market private companies[118][122] - The company uses wholly-owned subsidiaries like Prospect Capital Funding LLC (PCF) for collateralized loans, Prospect Small Business Lending, LLC (PSBL) for small business loans, and Prospect Yield Corporation, LLC (PYC) for CLOs[119] - Prospect is externally managed by Prospect Capital Management L.P., with administrative services provided by Prospect Administration LLC[121] Note 2. Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - Investments are classified as Control (over 25% voting control), Affiliate (5-24.99% voting control), or Non-Control/Non-Affiliate (less than 5% voting control)[126] - As a BDC, at least 70% of total assets must be "qualifying assets"; as of March 31, 2022, qualifying assets were 79.22% of total assets[127] - Investment valuation follows ASC 820, categorizing inputs into Level 1 (quoted active markets), Level 2 (similar assets/inactive markets), and Level 3 (unobservable inputs); most investments are Level 3[138][139][140] - Loans are placed on non-accrual status when collectibility is doubtful; as of March 31, 2022, approximately 0.4% of total assets at fair value were on non-accrual[150] - The company has elected to be treated as a RIC and intends to distribute at least 90% of its investment company taxable income to stockholders, thus making no provision for income taxes[154] Note 3. Portfolio Investments This note provides detailed information on the company's investment portfolio, including valuation and activity Total Investments | Metric (in thousands) | March 31, 2022 | June 30, 2021 | | :-------------------- | :------------- | :------------ | | Amortized Cost | $6,887,937 | $6,058,124 | | Fair Value | $7,429,931 | $6,201,778 | Investment Activity (Nine Months Ended March 31) | Activity (in thousands) | 2022 | 2021 | | :---------------------- | :----------- | :----------- | | Total acquisitions | $1,844,869 | $781,138 | | Total dispositions | $952,621 | $665,878 | - The fair value of Level 3 investments increased by $396,958 thousand for the nine months ended March 31, 2022, primarily due to net unrealized gains of $408,612 thousand[176] - As of March 31, 2022, $4,245,990 thousand (at fair value) of loans bear interest at floating rates (with LIBOR/SOFR floors from 0.0%-3.0%), and $730,353 thousand bear interest at fixed rates (1.0%-22.0%)[234] - The COVID-19 pandemic continues to impact portfolio valuations, with aggregate increases in fair value and net unrealized depreciation driven by market multiple expansion and tightened credit spreads[181][545] - The company has guaranteed $2,737 thousand in standby letters of credit and $1,835 thousand of equipment lease obligations for InterDent, Inc[237][679] Note 4. Revolving Credit Facility This note details the terms, outstanding amounts, and collateral of the company's revolving credit facility - The Revolving Credit Facility has commitments of $1,500,000 thousand, matures on April 27, 2026, and has a revolving period until April 27, 2025[245] - Interest rate on borrowings is one-month LIBOR plus 205 basis points[247] Revolving Credit Facility Outstanding and Availability (in thousands) | Metric | March 31, 2022 | June 30, 2021 | | :-------------------- | :------------- | :------------ | | Outstanding Borrowings | $699,440 | $356,937 | | Available for Borrowing | $730,410 | $640,853 | - Collateral for the facility, held by PCF, had an aggregate fair value of $2,559,645 thousand as of March 31, 2022, representing 34.3% of total investments[248] Revolving Credit Facility Expenses (Nine Months Ended March 31) | Expense (in thousands) | 2022 | 2021 | | :--------------------- | :------ | :------ | | Interest costs, unused fees, and amortization of financing costs | $16,153 | $13,772 | Note 5. Convertible Notes This note describes the terms, outstanding principal, and interest expenses related to the company's convertible notes - As of March 31, 2022, outstanding principal for 2022 Notes is $60,501 thousand and for 2025 Notes is $156,168 thousand[258][260] - The 2022 Notes bear interest at 4.95% and the 2025 Notes at 6.375%[251][259] - The company recognized losses from tender offers and repurchases of Convertible Notes, including $1,584 thousand for 2022 Notes in August 2021 and $2,676 thousand for 2025 Notes in December 2020[258][260] Convertible Notes Interest Expense (Nine Months Ended March 31) | Expense (in thousands) | 2022 | 2021 | | :--------------------- | :------ | :------ | | Interest costs and amortization of financing costs | $11,333 | $17,905 | Note 6. Public Notes This note provides information on the company's public notes, including issuances, redemptions, and interest expenses - As of March 31, 2022, the total outstanding aggregate principal amount of Public Notes is $1,365,459 thousand[288] - The 2024 Notes and 2028 Notes were fully redeemed in February 2021 and June 2021, respectively[275][277] - New Public Notes issued in 2021 include 2026 Notes ($400,000 thousand at 3.706%), 3.364% 2026 Notes ($300,000 thousand at 3.364%), and 3.437% 2028 Notes ($300,000 thousand at 3.437%)[285][286][287] Public Notes Interest Expense (Nine Months Ended March 31) | Expense (in thousands) | 2022 | 2021 | | :--------------------- | :------ | :------ | | Interest costs and amortization of financing costs | $46,336 | $38,441 | Note 7. Prospect Capital InterNotes® This note details the outstanding amounts, issuances, repayments, and interest expenses of Prospect Capital InterNotes® - As of March 31, 2022, $340,774 thousand aggregate principal amount of Prospect Capital InterNotes® were outstanding[294] - During the nine months ended March 31, 2022, $155,909 thousand in new InterNotes® were issued with weighted average interest rate of 3.48%, maturing between 2025 and 2052[296][636] - During the nine months ended March 31, 2022, $323,846 thousand of InterNotes® were repaid or redeemed, resulting in a net loss on extinguishment of $6,403 thousand[297][638] Prospect Capital InterNotes® Interest Expense (Nine Months Ended March 31) | Expense (in thousands) | 2022 | 2021 | | :--------------------- | :------ | :------ | | Interest costs and amortization of financing costs | $13,130 | $30,431 | Note 8. Fair Value and Maturity of Debt Outstanding This note presents the fair value, carrying value, and contractual maturities of the company's outstanding debt Outstanding Debt as of March 31, 2022 | Debt Type | Principal Outstanding (in thousands) | Net Carrying Value (in thousands) | Fair Value (in thousands) | Effective Interest Rate | | :------------------------ | :----------------------------------- | :-------------------------------- | :------------------------ | :---------------------- | | Revolving Credit Facility | $699,440 | $699,440 | $699,440 | 1ML+2.05% | | Convertible Notes | $216,669 | $213,875 | $227,760 | 5.63%-6.63% | | Public Notes | $1,365,459 | $1,341,858 | $1,286,416 | 3.60%-6.57% | | Prospect Capital InterNotes® | $340,774 | $333,578 | $361,624 | 5.73% | | Total | $2,622,342 | $2,588,751 | $2,575,240 | | Contractual Maturities of Debt as of March 31, 2022 | Debt Type | Total (in thousands) | Less than 1 Year (in thousands) | 1 – 3 Years (in thousands) | 3 – 5 Years (in thousands) | After 5 Years (in thousands) | | :------------------------ | :------------------- | :------------------------------ | :------------------------- | :------------------------- | :--------------------------- | | Revolving Credit Facility | $699,440 | $— | $— | $699,440 | $— | | Convertible Notes | $216,669 | $60,501 | $156,168 | $— | $— | | Public Notes | $1,365,459 | $284,219 | $81,240 | $700,000 | $300,000 | | Prospect Capital InterNotes® | $340,774 | $— | $2,161 | $88,361 | $250,252 | | Total Contractual Obligations | $2,622,342 | $344,720 | $239,569 | $1,487,801 | $550,252 | - As of March 31, 2022, the asset coverage ratio for indebtedness was 282.6%, and for senior securities that are stock was 230.0%[302] Note 9. Equity Offerings, Offering Expenses, and Distributions This note covers details of preferred stock issuances, common stock distributions, and share repurchase plans - The company has issued multiple series of preferred stock (5.50% Series A1, M1, M2, AA1, MM1, A2, and 5.35% Series A), which rank senior to common stock and on parity with each other[320][322][327][328] - Preferred stock is convertible at the holder's option (Holder Optional Conversion) or the issuer's option (Issuer Optional Conversion) under specific terms, including cash or common stock settlement[323][325] - During the nine months ended March 31, 2022, the company issued 11,230,210 shares of Series A1 Preferred Stock, 1,251,361 shares of Series M1 Preferred Stock, and 6,000,000 shares of Series A Preferred Stock, for total net proceeds of $429,433 thousand[344] Distributions to Preferred Stockholders (Nine Months Ended March 31, 2022) | Preferred Stock Type | Amount Distributed (in thousands) | | :------------------- | :-------------------------------- | | 5.50% Preferred Stock | $11,078 | | 5.35% Series A Preferred Stock | $4,302 | | Total | $15,380 | - During the nine months ended March 31, 2022, common stock distributions totaled $210,722 thousand, and 3,268,814 shares of common stock were issued through the dividend reinvestment plan[362][364] - The company has a common stock repurchase plan for up to $100,000 thousand, with $65,860 thousand remaining as of March 31, 2022[354][355] Note 10. Other Income This note breaks down the components of other income, including structuring fees and royalty interests Other Income Components (Nine Months Ended March 31) | Income Type (in thousands) | 2022 | 2021 | | :------------------------- | :------ | :------ | | Structuring, advisory, and amendment fees | $38,963 | $26,293 | | Royalty and net revenue interests | $43,579 | $27,638 | | Administrative agent fees | $529 | $381 | | Total other income | $83,071 | $54,312 | - Other income increased from $54,312 thousand in 2021 to $83,071 thousand in 2022 for the nine months ended March 31, primarily due to higher structuring fees and royalty/net revenue interests[368][651] Note 11. Net Increase (Decrease) in Net Assets per Common Share This note provides a reconciliation of the changes in net assets per common share, including earnings and distributions Basic and Diluted Earnings Per Common Share (Nine Months Ended March 31) | Metric | 2022 | 2021 | | :----- | :---- | :---- | | Basic EPS | $1.57 | $1.89 | | Diluted EPS | $1.50 | $1.88 | - The net increase in net assets resulting from operations applicable to common stockholders for the nine months ended March 31, 2022, was $613,292 thousand, compared to $719,675 thousand in the prior year[370] Note 12. Income Taxes This note details the company's tax status as a RIC, dividend tax character, and capital loss carryforwards Tax Character of Dividends Paid to Common Stockholders (Tax Year Ended August 31, 2021) | Tax Character | Amount (in thousands) | | :------------ | :-------------------- | | Ordinary income | $251,171 | | Return of capital | $25,784 | | Total | $276,955 | - For the 2022 calendar year, 48.13% of taxable dividends qualified as interest-related dividends (exempt from U.S. withholding tax for non-U.S. stockholders), and 69.16% of taxable ordinary dividends qualified as section 163(j) interest dividends[375][376] - As of March 31, 2022, the estimated net unrealized gain for tax purposes was $527,188 thousand, with capital loss carryforwards of $129,669 thousand[382][380] Note 13. Related Party Agreements and Transactions This note describes agreements and transactions with related parties, including management and incentive fees - The Investment Adviser receives a base management fee of 2.00% on total assets and an incentive fee with income and capital gains components[385][386][389] Investment Advisory Fees (Nine Months Ended March 31) | Fee Type (in thousands) | 2022 | 2021 | | :---------------------- | :------- | :------- | | Base management fee | $102,472 | $83,866 | | Income incentive fee | $59,296 | $53,354 | - Prospect Administration provides administrative services and is reimbursed for allocable overhead, totaling $10,891 thousand for the nine months ended March 31, 2022[391][394] - The company has an exemptive order from the SEC for co-investment transactions with other funds managed by the Investment Adviser or affiliates[399] - The company provides managerial assistance to portfolio companies, remitting payments received from them to Prospect Administration; for the nine months ended March 31, 2022, $5,946 thousand was received and remitted[396][398] Note 14. Transactions with Controlled Companies This note provides details on significant transactions and income generated from controlled portfolio companies - CP Energy Services Inc. (including Spartan Energy Services, LLC) generated $5,185 thousand in interest income for the nine months ended March 31, 2022, and saw $9,681 thousand in additions[406] - First Tower Finance Company LLC generated $54,959 thousand in interest income and $7,898 thousand in structuring fees for the nine months ended March 31, 2022, with $22,123 thousand in additions[424][425] - National Property REIT Corp. (NPRC) generated $46,441 thousand in interest income and $45,867 thousand in other income (including royalty/net interest) for the nine months ended March 31, 2022; it also had $280,167 thousand in additions and $289,882 thousand in repayments[449][450] - NMMB, Inc. generated $394 thousand in interest income and $7,034 thousand in dividend income for the nine months ended March 31, 2022, with $25,000 thousand in additions and $12,983 thousand in repayments[459][462] Note 15. Litigation This note addresses any material legal proceedings the company may be involved in - The company is not aware of any material legal proceedings as of March 31, 2022[494][730] Note 16. Financial Highlights This note presents key financial performance metrics and ratios on a per-share basis Per Share Data (Nine Months Ended March 31) | Metric | 2022 | 2021 | | :----- | :---- | :---- | | Net asset value per common share at beginning of period | $9.81 | $8.18 | | Net investment income | $0.65 | $0.56 | | Net realized and change in unrealized gains | $0.96 | $1.33 | | Net increase from operations | $1.61 | $1.89 | | Distributions of net investment income to preferred stockholders | $(0.04) | $— | | Net increase from operations applicable to common stockholders | $1.57 | $1.89 | | Distributions of net investment income to common stockholders | $(0.53) | $(0.48) | | Net asset value per common share at end of period | $10.81 | $9.38 | | Total return based on net asset value | 17.92% | 26.70% | - The annualized ratio of operating expenses to average net assets applicable to common shares was 9.01% for the nine months ended March 31, 2022[496] Note 17. Selected Quarterly Financial Data (Unaudited) This note provides a summary of key financial data for the most recent quarter Selected Quarterly Financial Data (Quarter Ended March 31, 2022) | Metric (in thousands, except per share) | Quarter Ended March 31, 2022 | | :------------------------------------ | :--------------------------- | | Total Investment Income | $181,431 | | Net Investment Income | $87,005 | | Net Realized and Unrealized (Losses) Gains | $77,291 | | Net Increase in Net Assets from Operations Applicable to Common Stockholders | $157,157 | | Per Share (Basic) | $0.40 | Note 18. Subsequent Events This note discloses significant events that occurred after the reporting period but before the financial statements were issued - On April 26, 2022, the company made a new $18,500 thousand First Lien Term Loan and a $75,000 thousand Second Lien Term Loan investment in DTI Holdco, Inc[503][710] - Monthly dividends of $0.114583 per share for 5.50% Preferred Stock and $0.0600 per share for common stock were declared for June, July, and August 2022[504][505][712] - Quarterly dividends of $0.334375 per share for 5.35% Preferred Stock were declared for May-July 2022[505][712] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses the company's financial condition, operational results, and liquidity, focusing on investment activities and performance Third Quarter Highlights This section summarizes key financial and operational achievements during the third quarter Investment Originations and Repayments (Three Months Ended March 31, 2022) | Metric (in thousands) | Amount | | :-------------------- | :-------- | | Gross investment originations | $564,827 | | Net repayments | $184,561 | - The company redeemed $35,084 thousand of Prospect Capital InterNotes®, incurring a net loss of $941 thousand on extinguishment[523] - Revolving Credit Facility commitments increased by $202,500 thousand to $1,500,000 thousand[524] - $125,355 thousand in net proceeds were generated from the issuance of Series A1 and M1 Preferred Stock[526] Investment Holdings This section provides an overview of the company's investment portfolio, including its composition and fair value - As of March 31, 2022, the company held 127 long-term portfolio investments and CLOs with a fair value of $7,429,931 thousand[528] - The annualized current yield was 10.6% for performing interest-bearing investments and 8.1% for all investments as of March 31, 2022[529] Investment Portfolio Composition by Control Level (Fair Value) | Level of Control | March 31, 2022 (Fair Value in thousands) | % of Portfolio | | :--------------- | :--------------------------------------- | :------------- | | Control Investments | $3,378,505 | 45.5% | | Affiliate Investments | $417,652 | 5.6% | | Non-Control/Non-Affiliate Investments | $3,633,774 | 48.9% | | Total Investments | $7,429,931 | 100.0% | Investment Portfolio Composition by Type (Fair Value) | Type of Investment | March 31, 2022 (Fair Value in thousands) | % of Portfolio | | :----------------- | :--------------------------------------- | :------------- | | First Lien Debt | $3,561,170 | 47.9% | | Second Lien Debt | $1,373,240 | 18.5% | | Subordinated Structured Notes | $728,833 | 9.8% | | Preferred Stock | $62,826 | 0.8% | | Common Stock | $1,223,201 | 16.5% | | Membership Interest | $373,551 | 5.0% | Portfolio Investment Activity This section details the company's investment acquisitions, dispositions, and related activities Investment Acquisitions and Dispositions (Nine Months Ended March 31) | Activity (in thousands) | 2022 | 2021 | | :---------------------- | :----------- | :----------- | | Investments made in new portfolio companies | $997,817 | $459,277 | | Follow-on investments made in existing portfolio companies | $777,022 | $259,111 | | PIK interest | $61,030 | $58,750 | | Total acquisitions | $1,844,869 | $781,138 | | Investments sold | $4,451 | $— | | Partial repayments | $401,201 | $148,951 | | Full repayments | $545,333 | $513,636 | | Total dispositions | $952,621 | $665,878 | Weighted Average Interest Rates for New Investments (Nine Months Ended March 31, 2022) | Investment Type | Weighted Average Interest Rate | | :-------------- | :----------------------------- | | First Lien Debt | 8.30% | | Second Lien Debt | 9.54% | Investment Valuation This section explains the methodologies used to value the company's investments and discusses significant changes in fair value - Investment valuation primarily uses discounted cash flow, enterprise value, net asset value, and asset recovery techniques, with most investments classified as Level 3[540] - The fair value of the investment in National Property REIT Corp. (NPRC) increased to $1,528,576 thousand as of March 31, 2022, a premium of $784,580 thousand over amortized cost, driven by compression of capitalization rates and growth in net operating income[566] - The fair value of the investment in NMMB, Inc. increased to $80,268 thousand as of March 31, 2022, a premium of $50,508 thousand over amortized cost, due to strong financial performance[568] - Affiliate investments, including Progrexion, had a total fair value of $417,652 thousand as of March 31, 2022, representing a premium of $179,807 thousand over combined amortized cost, primarily due to Progrexion's strong financial performance[572] - The CLO investment portfolio is valued at a $287,447 thousand discount to amortized cost as of March 31, 2022[573] Capitalization This section describes the company's capital structure, including debt and equity components, and asset coverage ratios - The company capitalizes its business with a combination of debt (Revolving Credit Facility, Convertible Notes, Public Notes, Prospect Capital InterNotes®) and equity (common and preferred)[575] Outstanding Debt as of March 31, 2022 | Debt Type | Principal Outstanding (in thousands) | | :------------------------ | :----------------------------------- | | Revolving Credit Facility | $699,440 | | Convertible Notes | $216,669 | | Public Notes | $1,365,459 | | Prospect Capital InterNotes® | $340,774 | | Total | $2,622,342 | - The company's asset coverage ratio under the 1940 Act is 150%, allowing it to borrow $2 for every $1 of investor equity[746] Contractual Maturities of Debt as of March 31, 2022 | Debt Type | Total (in thousands) | Less than 1 Year (in thousands) | 1 – 3 Years (in thousands) | 3 – 5 Years (in thousands) | After 5 Years (in thousands) | | :------------------------ | :------------------- | :------------------------------ | :------------------------- | :------------------------- | :--------------------------- | | Revolving Credit Facility | $699,440 | $— | $— | $699,440 | $— | | Convertible Notes | $216,669 | $60,501 | $156,168 | $— | $— | | Public Notes | $1,365,459 | $284,219 | $81,240 | $700,000 | $300,000 | | Prospect Capital InterNotes® | $340,774 | $— | $2,161 | $88,361 | $250,252 | | Total Contractual Obligations | $2,622,342 | $344,720 | $239,569 | $1,487,801 | $550,252 | Net Asset Value Applicable to Common Stockholders This section analyzes the changes in net asset value per common share and its contributing factors - Net asset value per common share increased by $1.00, from $9.81 at June 30, 2021, to $10.81 at March 31, 2022[643][644] Net Asset Value Calculation (in thousands) | Metric | March 31, 2022 | June 30, 2021 | | :----- | :------------- | :------------ | | Net assets available to common stockholders | $4,236,011 | $3,808,477 | | Shares of common stock issued and outstanding | 391,718,136 | 388,419,573 | | Net asset value per common share | $10.81 | $9.81 | Results of Operations This section provides a detailed analysis of the company's revenues, expenses, and net income for the reporting period Consolidated Statements of Operations (Selected Data) | Metric (in thousands) | Nine Months Ended March 31, 2022 | Nine Months Ended March 31, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | | Total Investment Income | $526,281 | $474,628 | | Total Operating Expenses | $272,350 | $262,120 | | Net Investment Income | $253,931 | $212,508 | | Net Realized (Losses) Gains from Investments | $(12,082) | $7,451 | | Net Change in Unrealized Gains from Investments | $398,340 | $518,577 | | Net Increase in Net Assets Resulting from Operations | $630,040 | $720,121 | - The average interest rate earned on performing interest-bearing investments decreased from 10.08% to 9.35% for the nine months ended March 31, 2022, primarily due to reduced returns from structured credit investments[649] Other Income Components (Nine Months Ended March 31) | Income Type (in thousands) | 2022 | 2021 | | :------------------------- | :------ | :------ | | Structuring, advisory and amendment fees | $38,963 | $26,293 | | Royalty and net revenue interests | $43,579 | $27,638 | | Administrative agent fees | $529 | $381 | | Total other income | $83,071 | $54,312 | Operating Expenses (Nine Months Ended March 31) | Expense Type (in thousands) | 2022 | 2021 | | :-------------------------- | :------- | :------- | | Base management fee | $102,472 | $83,866 | | Income incentive fee | $59,296 | $53,354 | | Interest and credit facility expenses | $86,952 | $100,549 | | Allocation of overhead from Prospect Administration | $10,891 | $10,768 | | Total operating expenses | $272,350 | $262,120 | - Net realized losses from investments were $12,082 thousand for the nine months ended March 31, 2022, compared to net realized gains of $7,451 thousand in the prior year[666] - Net change in unrealized gains from investments decreased to $398,340 thousand for the nine months ended March 31, 2022, from $518,577 thousand in the prior year[668] Financial Condition, Liquidity and Capital Resources This section assesses the company's overall financial health, cash flow, and ability to meet its financial obligations - Global uncertainties, including the COVID-19 pandemic and the Russia-Ukraine conflict, continue to impact financial markets and the company's operations[181][732] - The transition from LIBOR to alternative reference rates like SOFR introduces uncertainty regarding its impact on LIBOR-linked securities, loans, and financial obligations[672][674][738][740][741][742][743][744] Cash Flow Summary (Nine Months Ended March 31) | Activity (in thousands) | 2022 | 2021 | | :---------------------- | :----------- | :----------- | | Net cash (used in) provided by operating activities | $(589,727) | $131,003 | | Net cash provided by (used in) financing activities | $562,519 | $(74,575) | - The company has a universal shelf registration statement for flexible capital raising through debt securities, common stock, preferred stock, subscription rights, warrants, and units[680] - The company's asset coverage ratio under the 1940 Act decreased to 150% from 200% effective May 6, 2020, allowing for increased leverage[746] Recent Developments This section highlights significant events and transactions that occurred after the reporting period - On April 26, 2022, the company made a new $18,500 thousand First Lien Term Loan and a $75,000 thousand Second Lien Term Loan investment in DTI Holdco, Inc[710] - Monthly dividends of $0.114583 per share for 5.50% Preferred Stock and $0.0600 per share for common stock were declared for June, July, and August 2022[712] - Quarterly dividends of $0.334375 per share for 5.35% Preferred Stock were declared for May-July 2022[712] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate fluctuations and the LIBOR transition - The company is subject to interest rate risk, with 87.20% of interest-earning investments bearing floating rates as of March 31, 2022[715][718] - The Revolving Credit Facility is also based on floating LIBOR rates (one-month LIBOR plus 205 basis points)[719] - The discontinuation of LIBOR and transition to SOFR introduces significant uncertainty and potential adverse impacts on the value of LIBOR-indexed securities and net investment income[720][738] Annual Impact on Net Investment Income from Interest Rate Changes (as of March 31, 2022) | Basis Point Change | Interest Income (in thousands) | Interest Expense (in thousands) | Net Investment Income (in thousands) | Net Investment Income (after incentive fees) (in thousands) | | :----------------- | :----------------------------- | :------------------------------ | :----------------------------------- | :------------------------------------------ | | Up 300 | $103,049 | $20,983 | $82,066 | $65,653 | | Up 200 | $60,529 | $13,989 | $46,540 | $37,232 | | Up 100 | $25,411 | $6,994 | $18,417 | $14,734 | | Down 100 | $(3,047) | $(3,161) | $114 | $91 | Item 4. Controls and Procedures This section assesses the effectiveness of the company's disclosure controls and internal control over financial reporting - Disclosure controls and procedures were deemed effective as of March 31, 2022[725] - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[726] PART II OTHER INFORMATION Item 1. Legal Proceedings This section discloses any material legal proceedings the company is involved in - The company is not aware of any material legal proceedings as of March 31, 2022[730] Item 1A. Risk Factors This section outlines significant risks, including geopolitical events, ESG, inflation, LIBOR transition, and leverage - The Russian invasion of Ukraine and associated sanctions could materially impact global financial markets, supply chains, and the value/liquidity of investments, potentially leading to an economic downturn[732][733] - Risks related to corporate social responsibility (ESG) include potential damage to brand/reputation and adverse effects from new regulatory initiatives[734] - Inflation can adversely impact the cost of capital and the value of portfolio investments, potentially reducing returns to common stockholders and decreasing asset coverage[735][736] - The discontinuation of LIBOR and transition to SOFR creates significant uncertainties, potentially impacting the value of LIBOR-indexed securities, increasing market volatility, and leading to interest rate mismatches in CLOs[737][738][739][740][741][742][743][744] - The use of senior securities and leverage (asset coverage ratio of 150%) exposes the company to increased volatility in net asset value, diminished operating flexibility, and potential forced liquidation of investments[745][746][748][749] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section addresses unregistered sales of equity securities and the use of their proceeds - This section is not applicable[756] Item 3. Defaults Upon Senior Securities This section reports any defaults on senior securities - This section is not applicable[757] Item 4. Mine Safety Disclosures This section provides disclosures related to mine safety - This section is not applicable[758] Item 5. Other Information This section provides additional information, including common stock trading, NAV performance, and expense details - Common stock (PSEC) trades on NASDAQ Global Select Market and historically trades at prices both above and below its net asset value[760] Stock Price vs. NAV (Third Quarter Ending March 31, 2022) | Metric | NAV | High Stock Price | Low Stock Price | Premium (Discount) of High to NAV | Premium (Discount) of Low to NAV | | :----- | :------ | :--------------- | :-------------- | :-------------------------------- | :------------------------------- | | Value | $10.81 | $8.89 | $7.86 | (17.8)% | (27.3)% | - Stockholders have authorized the company to sell common stock below NAV, and the company is seeking re-authorization for the next 12 months[763][765] - The total annual expenses (after preferred stock dividends) are estimated at 12.03% of net assets attributable to common stock, assuming certain leverage and dividend payments[769] Item 6. Exhibits This section lists all exhibits accompanying the report, including corporate documents and certifications - The exhibits include various corporate governance documents (Articles of Amendment, Bylaws), debt-related documents (Supplemental Indentures for InterNotes®), and certifications (CEO/CFO)[787][788][790][793][795] SIGNATURES This section contains the official signatures of the company's principal executive and financial officers - The report was signed by John F. Barry III (Chairman & CEO) and Kristin L. Van Dask (CFO) on May 9, 2022[803]