Prospect Capital(PSEC) - 2026 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - For the December quarter, the company's net investment income was $91 million, or $0.19 per common share, with a net asset value (NAV) of approximately $3 billion, or $6.21 per common share [3] - The net debt-to-total assets ratio stood at 28.2%, with unsecured debt plus unsecured perpetual preferred accounting for 85.3% of total debt plus preferred [3] - Monthly common shareholder distributions of $0.04 per share were announced for February, March, and April, bringing total distributions since the IPO to $4.7 billion, or $21.93 per share [3] Business Line Data and Key Metrics Changes - The company is focusing on new investments in companies with less than $50 million of EBITDA, with the first lien mix increasing by 728 basis points to 71.4% since June 2024 [3][4] - The second lien mix decreased by 371 basis points to 12.7%, and the subordinated structured notes mix decreased by 818 basis points to near zero since June 2024 [4] - The portfolio included 91 companies across 32 industries, with an aggregate fair value of $6.4 billion, and the EBITDA to interest coverage for middle market lending is about 210% [8][10] Market Data and Key Metrics Changes - The company’s portfolio at cost included only 2.8% of investments in software companies, significantly lower than the 22% average across business development companies [9] - The real estate property portfolio at National Property REIT Corp. (NPRC) totaled 14% of investments at cost, with an unlevered investment-level gross cash IRR of 24% since inception [10][11] - Interest income for the 12-month period ending December 2025 was 92% of total investment income, reflecting a strong recurring revenue profile [11] Company Strategy and Development Direction - The company is enhancing portfolio company operations, focusing on first lien senior secured loans, and exiting subordinated structured notes and targeted equity-linked assets [4][10] - The strategy includes a prudent expansion into new states and offices, with significant opportunities identified in Florida and Tennessee [22] - The company aims to redeploy future real estate property exit proceeds primarily into more first lien senior secured loans [11] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the company's balance sheet strength and liquidity, highlighting a diversified access to funding and a strong lender community [13][15] - The company noted that tax refunds are not expected to create significant headwinds for loan balances, and consumer demand remains strong [22][23] - Management emphasized the importance of existing customer credit history in determining future financing, which helps mitigate risks associated with new borrowers [24] Other Important Information - The company has successfully completed the exit of its subordinated structured notes portfolio, which now represents only 0.2% of the investment portfolio at cost [10] - The weighted average cost of unsecured debt financing was 4.68% as of December 31, 2025, with a ladder of liabilities extending 26 years into the future [16] Q&A Session Summary Question: Impact of tax refunds on loan balances and strategy regarding Tower - Management indicated that they plan to continue working with First Tower, which has been a strong performer, and noted the tax advantages of holding it as a tax partnership [20][21] Question: Stability of convertible prep product line amid market changes - Management stated that interest rates are a significant factor, and the current environment may lead investors to prefer fixed-rate investments over floating-rate ones [26][28] Question: Consideration of pivoting into enterprise SaaS software - Management expressed a focus on their own investment strategy and noted that they have avoided software investments due to perceived risks, maintaining a low exposure compared to industry averages [36][37]