Company Overview

Prospect Capital Corporation is a financial services company that provides financing solutions to middle-market companies. The company’s main business activities include:

• Lending to companies through directly-originated, agented loans in the form of first lien, second lien, unitranche or unsecured debt. Prospect may also purchase equity investments in these companies.
• Purchasing debt and controlling equity positions in operating companies across various industries. This strategy aims to provide enhanced certainty of closing to sellers and allow management to continue in their current roles.
• Purchasing debt and controlling equity positions in real estate investment trusts (REITs) that invest in multi-family, student housing, and senior living properties. Prospect also invests in rated secured structured notes and consumer loans.
• Investing in subordinated structured credit, often taking a significant equity position. The underlying portfolios are diversified across broadly syndicated corporate loans.

Prospect classifies its investments as control, affiliate, or non-control/non-affiliate based on the level of influence it has over the portfolio company. As of December 31, 2024, 52.9% of the portfolio was in control investments, 0.3% was in affiliate investments, and 46.8% was in non-control/non-affiliate investments.

Second Quarter Highlights

During the three months ended December 31, 2024, Prospect:

• Acquired $45.7 million of new investments and completed $65.6 million of follow-on investments in existing portfolio companies.
• Received $258.1 million in full repayments, $26.0 million in sales, and $99.3 million in partial prepayments, scheduled amortization, and return of capital.
• Repaid $1.2 million of Prospect Capital InterNotes® and issued $41.8 million of new InterNotes®.
• Repurchased $11.4 million of the 2026 Notes, recognizing a $0.3 million net realized gain.
• Issued 612,816, 685,674, and 573,973 shares of common stock through the dividend reinvestment plan.
• Converted 314,776 shares of Series A1 Preferred Stock, 1,000 shares of Series A2 Preferred Stock, 150,948 shares of Series A3 Preferred Stock, 48,100 shares of Series M1 Preferred Stock, and 194,880 shares of Series M3 Preferred Stock into 3,418,387 shares of common stock.
• Issued 1,227,329 shares of Series A4 Preferred Stock and 194,885 shares of Series M4 Preferred Stock.

Investment Portfolio

As of December 31, 2024, Prospect had $7.1 billion, or 207.4% of net assets, invested in 114 long-term portfolio investments and collateralized loan obligations (CLOs). The portfolio had an annualized current yield of 11.2% on performing interest-bearing investments and 9.1% across all investments.

Prospect’s investment portfolio is concentrated in the following industries: Consumer Finance (11.1%), Residential Real Estate Investment Trusts (20.0%), Health Care Providers & Services (10.0%), Commercial Services & Supplies (7.0%), and Consumer Finance (11.1%).

The company’s control investments, which make up 52.9% of the portfolio, experienced fluctuations in valuation during the period due to changes in operating results and market multiples. Significant investments include:

• First Tower Finance Company LLC: Valued at $665.1 million, a 43.1% premium to amortized cost, driven by improved financial performance and increased comparable trading multiples.
• InterDent, Inc.: Valued at $406.6 million, a 8.4% premium to amortized cost, due to a decline in financial performance and increased debt.
• National Property REIT Corp. (NPRC): Valued at $1.6 billion, a 48.5% premium to amortized cost, primarily due to growth in net operating income offset by decreased market interest rates and increased debt.

The company’s affiliate and non-control/non-affiliate investments are generally less volatile, with the non-control/non-affiliate portfolio valued at a 1.9% discount to amortized cost as of December 31, 2024.

Capitalization

Prospect funds its operations through a combination of debt and equity. As of December 31, 2024, the company’s debt consisted of:

• $301.5 million outstanding on the Revolving Credit Facility
• $156.0 million of Convertible Notes
• $966.2 million of Public Notes
• $634.5 million of Prospect Capital InterNotes®

The company may from time to time seek to issue additional debt or equity, including through its universal shelf registration, to fund new investments and refinance existing obligations.

Prospect has also issued various series of preferred stock, including 5.50%, 6.50%, floating rate, and 7.50% preferred shares. The preferred stock ranks senior to the common stock and junior to the company’s debt. Certain series of preferred stock are redeemable at the option of the holder, while others are redeemable at Prospect’s option.

Results of Operations

For the three months ended December 31, 2024, Prospect reported:

• Investment income of $185.5 million, down from $210.9 million in the prior-year period. The decrease was primarily due to lower interest income and income from structured credit investments.
• Operating expenses of $99.0 million, down from $114.0 million in the prior-year period. The decrease was mainly driven by lower investment advisory fees and overhead allocation.
• Net investment income of $86.4 million, down from $96.9 million in the prior-year period.
• Net realized and unrealized losses of $46.7 million and $40.1 million, respectively, compared to gains of $0.1 million and losses of $124.7 million in the prior-year period.
• A net decrease in net assets resulting from operations of $31.0 million, compared to a $51.4 million decrease in the prior-year period.

For the six months ended December 31, 2024, Prospect reported:

• Investment income of $381.8 million, down from $447.2 million in the prior-year period.
• Operating expenses of $205.5 million, down from $224.6 million in the prior-year period.
• Net investment income of $176.3 million, down from $222.5 million in the prior-year period.
• Net realized and unrealized losses of $147.0 million and $163.8 million, respectively, compared to losses of $207.4 million and gains of $73.9 million in the prior-year period.
• A net decrease in net assets resulting from operations applicable to common stockholders of $196.1 million, compared to a $42.6 million increase in the prior-year period.

The decrease in investment income was primarily due to lower interest rates and repayments, while the decrease in operating expenses was driven by lower investment advisory fees and overhead. The net realized and unrealized losses were largely attributable to valuation changes in the company’s control investments.

Financial Condition, Liquidity, and Capital Resources

Prospect’s primary uses of funds have been to invest in portfolio companies, repay outstanding borrowings, and make distributions to stockholders. The company’s sources of funds have historically included debt and equity issuances, as well as repayments and sales of existing investments.

During the six months ended December 31, 2024, Prospect’s operating activities provided $452.2 million in cash, while financing activities used $478.3 million in cash, primarily for dividend payments and debt repayments.

As of December 31, 2024, the company had $1.0 billion available for borrowing under its Revolving Credit Facility, with $301.5 million outstanding. Prospect also had $156.0 million of Convertible Notes, $966.2 million of Public Notes, and $634.5 million of Prospect Capital InterNotes® outstanding.

In addition to its debt financing, Prospect has issued various series of preferred stock, including 5.50%, 6.50%, floating rate, and 7.50% preferred shares. The preferred stock is generally redeemable at the option of the holder or Prospect, subject to certain limitations.

Outlook

Prospect’s investment portfolio and financial condition remain stable, though the company’s control investments are susceptible to fluctuations in valuation due to changes in operating performance and market conditions. The company continues to focus on directly-originated, secured lending to non-control investments to reduce risk, while also selectively investing in equity positions.

Prospect’s ability to maintain its investment income and net investment income will depend on its success in originating new investments at attractive yields, managing its leverage, and controlling operating expenses. The company’s financial results may also be impacted by changes in interest rates, credit quality of its portfolio, and broader economic conditions.

Overall, Prospect appears to be navigating the current environment effectively, though investors should be aware of the potential volatility in the company’s control investments and the risks associated with its leveraged capital structure.