PROSPECT CAPITAL CORPORATION (All figures in this item are in thousands except share, per share and other data.)
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties. Our actual results may differ significantly from any results expressed or implied by these forward-looking statements due to the factors discussed in Part I, "Item 1A. Risk Factors" and "Forward-Looking Statements" appearing elsewhere herein.
Overview
The terms "Prospect," "the Company," "we," "us" and "our" mean
Prospect is a financial services company that primarily lends to and invests in middle-market privately-held companies. We are a closed-end investment company incorporated inMaryland . We have elected to be regulated as a business development company ("BDC") under the Investment Company Act of 1940 (the "1940 Act"). As a BDC, we have elected to be treated as a regulated investment company ("RIC"), under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). We were organized onApril 13, 2004 , and were funded in an initial public offering completed onJuly 27, 2004 . OnMay 15, 2007 , we formed a wholly owned subsidiaryProspect Capital Funding LLC ("PCF"), aDelaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Our wholly owned subsidiaryProspect Small Business Lending, LLC ("PSBL") was formed onJanuary 27, 2014 , and purchased small business whole loans from online small business loan originators, includingOn Deck Capital, Inc. ("OnDeck"). OnSeptember 30, 2014 , we formed a wholly-owned subsidiaryProspect Yield Corporation, LLC ("PYC") and effectiveOctober 23, 2014 , PYC holds a portion of our collateralized loan obligations ("CLOs"), which we also refer to as subordinated structured notes ("SSNs"). Each of these subsidiaries have been consolidated since operations commenced. We consolidate certain of our wholly owned and substantially wholly owned holding companies formed by us in order to facilitate our investment strategy. The following companies are included in our consolidated financial statements and are collectively referred to as the "Consolidated Holding Companies":CP Holdings of Delaware LLC ("CP Holdings ");Credit Central Holdings of Delaware, LLC ("Credit Central Delaware");Energy Solutions Holdings Inc. ;First Tower Holdings of Delaware LLC ("First Tower Delaware");MITY Holdings of Delaware Inc. ("MITY Delaware");Nationwide Acceptance Holdings LLC ;NMMB Holdings, Inc. ("NMMB Holdings ");NPH Property Holdings, LLC ("NPH");Prospect Opportunity Holdings I, Inc. ("POHI");SB Forging Company, Inc. ("SB Forging");STI Holding, Inc. ;UTP Holdings Group Inc. ("UTP Holdings ");Valley Electric Holdings I, Inc. ("Valley Holdings I"); andValley Electric Holdings II, Inc. ("Valley Holdings II"). We are externally managed by our investment adviser,Prospect Capital Management L.P. ("Prospect Capital Management " or the "Investment Adviser").Prospect Administration LLC ("Prospect Administration "), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary for us to operate. Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows. We currently have four primary strategies that guide our origination of investment opportunities: (1) lending to companies, including companies controlled by private equity sponsors and not controlled by private equity sponsors, and including both directly-originated loans and syndicated loans, (2) lending to companies and purchasing controlling equity positions in such companies, including both operating companies and financial services companies, (3) purchasing controlling equity positions and lending to real estate companies, and (4) investing in structured credit. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy. 91 -------------------------------------------------------------------------------- Lending to Companies - We make directly-originated agented loans to companies, including companies which are controlled by private equity sponsors and companies that are not controlled by private equity sponsors (such as companies that are controlled by the management team, the founder, a family or public shareholders). This debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. We may also purchase selected equity co-investments in such companies. In addition to directly-originated, agented loans, we also invest in senior and secured loans, syndicated loans and high yield bonds that have been sold to a club or syndicate of buyers, both in the primary and secondary markets. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to the transaction by providing anchoring orders. Historically, this strategy has comprised approximately 40%-60% of our portfolio. Lending to Companies and Purchasing Controlling Equity Positions in Such Companies - This strategy involves purchasing senior and secured yield-producing debt and controlling equity positions in operating companies across various industries. We believe this strategy provides enhanced certainty of closure to sellers and the opportunity for management to continue on in their current roles. These investments are often structured in tax-efficient partnerships, enhancing returns. Historically, this strategy has comprised approximately 15%-25% of our portfolio. Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate investment trusts ("REIT" or "REITs"). The real estate investments ofNational Property REIT Corp. ("NPRC") are in various classes of developed and occupied real estate properties that generate current yields, including multi-family properties, and student housing. NPRC seeks to identify properties that have historically significant occupancy rates and recurring cash flow generation. NPRC generally co-invests with established and experienced property management teams that manage such properties after acquisition. Additionally, NPRC makes investments in rated secured structured notes (primarily debt of structured credit). NPRC also purchases loans originated by certain consumer loan facilitators. It purchases each loan in its entirety (i.e., a "whole loan"). The borrowers are consumers, and the loans are typically serviced by the facilitators of the loans. Historically, this overall investment strategy has comprised approximately 10%-20% of our business. Investing in Structured Credit - We make investments in structured credit, often taking a significant position in subordinated structured notes (equity) and rated secured structured notes (debt). The underlying portfolio of each structured credit investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real estate, mortgages, or consumer-based credit assets. The structured credit portfolios in which we invest are managed by established collateral management teams with many years of experience in the industry. Historically, this overall strategy has comprised approximately 10%-20% of our portfolio. We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured loans generally are senior debt instruments that rank ahead of unsecured debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Our investments in structured credit are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of structured credit which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. Our structured credit investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B. We hold many of our control investments in a two-tier structure consisting of a holding company and one or more related operating companies for tax purposes. These holding companies serve various business purposes including concentration of management teams, optimization of third party borrowing costs, improvement of supplier, customer, and insurance terms, and enhancement of co-investments by the management teams. In these cases, our investment, which is generally equity in the holding company, the holding company's equity investment in the operating company and any debt from us directly to the operating company structure represents our total exposure for the investment. As ofJune 30, 2022 , as shown in our Consolidated Schedule of Investments, the cost basis and fair value of our investments in controlled companies was$2,732,906 and$3,438,317 , respectively. This structure gives rise to several of the risks described in our public documents and highlighted elsewhere in this Annual Report. We consolidate all wholly-owned and substantially wholly-owned holding companies formed by us for the purpose of holding our controlled investments in operating companies. There is no significant effect of consolidating these holding companies as they hold minimal assets other than their investments in the controlled operating companies. Investment company accounting prohibits the consolidation of any operating companies. OnJune 10, 2022 , at a special meeting of stockholders, our stockholders authorized us to sell shares of our common stock (during the next 12 months) at a price or prices below our net asset value per share at the time of sale in one or more offerings subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of its outstanding common stock immediately prior to such sale). 92 --------------------------------------------------------------------------------
Fourth Quarter Highlights
Investment Transactions
We seek to be a long-term investor with our portfolio companies. During the three months endedJune 30, 2022 , we acquired$211,761 of new investments, completed follow-on investments in existing portfolio companies totaling approximately$242,064 , funded$1,500 of revolver advances, and recorded PIK interest of$22,094 , resulting in gross investment originations of$477,420 . During the three months endedJune 30, 2022 , we received full repayments on investments totaling$98,580 , received$50,705 in partial prepayments,$1,759 in sales, and revolver paydowns of$41 , resulting in net repayments of$151,085 .
Debt Issuances and Redemptions
During the three months endedJune 30, 2022 , we repaid$337 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor's Option, as defined in the InterNotes® Offering prospectus. As a result, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the three months endedJune 30, 2022 was$8 . During the three months endedJune 30, 2022 , we issued$7,127 aggregate principal amount of Prospect Capital InterNotes® with a weighted average stated interest rate of 4.49%, to extend our borrowing base. The newly issued notes mature betweenApril 15, 2027 andMay 15, 2032 and generated net proceeds of$7,035 . Equity Issuances
On
During the three months ended
During the three months endedJune 30, 2022 , we issued 4,441,202 shares of our Series A1 Preferred Stock for net proceeds of$99,927 , and 1,258,734 shares of our Series M1 Preferred Stock for net proceeds of$30,524 , each excluding offering costs and preferred stock dividend reinvestments.
In connection with our Preferred Stock Dividend Reinvestment Plan, we issued
additional Series A1 Preferred Stock and Series M1 Preferred Stock of 1,043
shares, 2,096 shares, and 2,515 shares throughout April, May and
At
Our annualized current yield was 11.1% and 11.7% as ofJune 30, 2022 andJune 30, 2021 , respectively, across all performing interest bearing investments, excluding equity investments and non-accrual loans. Our annualized current yield was 8.7% and 9.2% as ofJune 30, 2022 andJune 30, 2021 , respectively, across all investments. In many of our portfolio companies we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns. Some of these equity positions include features such as contractual minimum internal rates of returns, preferred distributions, flip structures and other features expected to generate additional investment returns, as well as contractual protections and preferences over junior equity, in addition to the yield and security offered by our cash flow and collateral debt protections. We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, "Control Investments" are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Under the 1940 Act, "Affiliate Investments" are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person. "Non-Control/Non-Affiliate Investments" are those that are neither Control Investments nor Affiliate Investments. 93 -------------------------------------------------------------------------------- As ofJune 30, 2022 , we own controlling interests in the following portfolio companies:CP Energy Services Inc. ("CP Energy");Credit Central Loan Company, LLC ("Credit Central");Echelon Transportation, LLC ("Echelon");First Tower Finance Company LLC ("First Tower Finance");Freedom Marine Solutions, LLC ("Freedom Marine");InterDent, Inc. ("InterDent");Kickapoo Ranch Pet Resort ("Kickapoo");MITY, Inc. ("MITY"); NPRC;Nationwide Loan Company LLC ("Nationwide");NMMB, Inc. ("NMMB");Pacific World Corporation ("Pacific World ");R-V Industries, Inc. ("R-V");Universal Turbine Parts, LLC ("UTP");USES Corp. ("United States Environmental Services" or "USES"); andValley Electric Company, Inc. ("Valley Electric "). InJune 2019 ,CP Energy purchased a controlling interest of the common equity ofSpartan Energy Holdings, Inc. ("Spartan Holdings "), which owns 100% ofSpartan Energy Services, LLC ("Spartan"), a portfolio company of Prospect with$26,648 in senior secured term loans (the "Spartan Term Loan A") due to us as ofJune 30, 2022 . As a result ofCP Energy's purchase, and given Prospect's controlling interest inCP Energy , we report our investments in Spartan as control investment. Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loan A.
As of
The following shows the composition of our investment portfolio by level of
control as of
June 30, 2022 June 30, 2021
Level of Control Cost % of Portfolio Fair Value % of Portfolio Cost % of Portfolio Fair Value % of Portfolio Control Investments
$ 2,732,906 38.0 %$ 3,438,317 45.2 %$ 2,482,431 41.0 %$ 2,919,717 47.1 % Affiliate Investments 242,101 3.4 % 393,264 5.2 % 202,943 3.3 % 356,734 5.8 % Non-Control/Non-Affiliate Investments 4,221,824 58.6 % 3,770,929 49.6 % 3,372,750 55.7 % 2,925,327 47.1 % Total Investments$ 7,196,831 100.0 %$ 7,602,510 100.0 %$ 6,058,124 100.0 %$ 6,201,778 100.0 % The following shows the composition of our investment portfolio by type of investment as of June 30, 2022 and June 30, 2021: June 30, 2022 June 30, 2021 Type of Investment Cost % of Portfolio Fair Value % of Portfolio Cost % of Portfolio Fair Value % of Portfolio First Lien Revolving Line of Credit$ 39,775 0.6 %$ 39,746 0.5 %$ 27,522 0.5 %$ 27,503 0.4 % First Lien Debt 3,839,553 53.3 % 3,757,960 49.4 % 3,166,861 52.2 % 3,128,845 50.4 % 1.5 Lien Debt - - % - - % 18,164 0.3 % 18,164 0.3 % Second Lien Debt 1,588,557 22.1 % 1,471,336 19.4 % 1,047,653 17.3 % 959,311 15.5 % Third Lien Debt - - % - - % 3,950 0.1 % 3,950 0.1 % Unsecured Debt 7,200 0.1 % 7,200 0.1 % 7,200 0.1 % 3,715 0.1 % Subordinated Structured Notes 997,703 13.9 % 711,429 9.4 % 1,090,175 18.0 % 756,109 12.2 % Preferred Stock 345,602 4.8 % 47,719 0.6 % 308,713 5.1 % 23,056 0.4 % Common Stock 197,215 2.7 % 1,187,620 15.6 % 207,661 3.4 % 894,819 14.4 % Membership Interest 181,226 2.5 % 316,970 4.2 % 180,225 3.0 % 349,942 5.6 % Participating Interest(1) - - % 62,530 0.8 % - - % 36,364 0.6 % Total Investments$ 7,196,831 100.0 %$ 7,602,510 100.0 %$ 6,058,124 100.0 %$ 6,201,778 100.0 % (1)Participating Interest includes our participating equity investments, such as net profits interests, net operating income interests, net revenue interests, and overriding royalty interests.
The following shows our investments in interest bearing securities by type of
investment as of
June 30, 2022
Type of Investment Cost % of Portfolio Fair Value % of Portfolio Cost % of Portfolio Fair Value % of Portfolio
First Lien Debt and First Lien Revolving
Line of Credit $ 3,879,328 59.9 % $ 3,797,706 63.4 % $ 3,194,383 59.7 % $ 3,156,348 64.4 %
1.5 Lien Debt - - % - - % 18,164 0.3 % 18,164 0.4 %
Second Lien Debt 1,588,557 24.5 % 1,471,336 24.6 % 1,047,653 19.5 % 959,311 19.6 %
Third Lien Debt - - % - - % 3,950 0.1 % 3,950 0.1 %
Unsecured Debt 7,200 0.1 % 7,200 0.1 % 7,200 0.1 % 3,715 0.1 %
Subordinated Structured Notes 997,703 15.5 % 711,429 11.9 % 1,090,175 20.3 % 756,109 15.4 %
Total Interest Bearing Investments $ 6,472,788 100.0 % $ 5,987,671 100.0 % $ 5,361,525 100.0 % $ 4,897,597 100.0 %
94--------------------------------------------------------------------------------
The following shows the composition of our investment portfolio by industry as
of
June 30, 2022 June 30, 2021
Industry Cost % of Portfolio Fair Value % of Portfolio Cost % of Portfolio Fair Value % of Portfolio
Aerospace & Defense $ 108,790 1.5 % $ 65,766 0.9 % $ 98,144 1.6 % $ 84,240 1.4 %
Air Freight & Logistics 178,077 2.5 % 178,414 2.3 % 12,500 0.2 % 12,500 0.2 %
Auto Components 104,499 1.5 % 103,536 1.4 % 75,323 1.2 % 76,520 1.2 %
Building Products 35,000 0.5 % 34,697 0.5 % - - % - - %
Capital Markets 42,500 0.6 % 41,574 0.5 % - - % - - %
Chemicals - - % - - % 28,745 0.5 % 28,863 0.5 %
Commercial Services & Supplies 424,795 5.9 % 356,965 4.7 % 257,617 4.3 % 196,117 3.3 %
Communications Equipment 59,780 0.8 % 57,556 0.8 % 59,709 1.0 % 58,881 0.9 %
Construction & Engineering 68,259 0.9 % 145,983 1.9 % 69,935 1.2 % 149,695 2.4 %
Consumer Finance 568,739 7.9 % 765,168 10.1 % 531,844 8.8 % 771,601 12.4 %
Distributors 278,530 3.9 % 180,108 2.4 % 272,672 4.5 % 175,768 2.8 %
Diversified Consumer Services 250,393 3.5 % 365,669 4.8 % 211,193 3.5 % 339,633 5.5 %
Diversified Financial Services 36,878 0.5 % 36,878 0.5 % 30,165 0.5 % 30,165 0.5 %
Diversified Telecommunication Services 165,966 2.3 % 166,356 2.2 % 66,333 1.1 % 67,448 1.1 %
Energy Equipment & Services 300,496 4.2 % 126,600 1.7 % 277,227 4.6 % 83,204 1.3 %
Entertainment - - % - - % 40,585 0.7 % 40,928 0.7 %
Equity Real Estate Investment Trusts
(REITs) 647,316 9.0 % 1,399,857 18.3 % 656,911 10.8 % 1,092,955 17.7 %
Food & Staples Retailing 9,262 0.1 % 9,440 0.1 % - - % - - %
Food Products 130,998 1.8 % 127,436 1.7 % 61,409 1.0 % 61,948 1.0 %
Health Care Equipment & Supplies 7,483 0.1 % 6,966 0.1 % 7,478 0.1 % 6,721 0.1 %
Health Care Providers & Services 660,976 9.2 % 748,591 9.8 % 583,369 9.6 % 714,107 11.5 %
Health Care Technology 89,675 1.2 % 89,675 1.2 % - - % - - %
Hotels, Restaurants & Leisure 23,359 0.3 % 22,651 0.3 % 24,502 0.4 % 23,624 0.4 %
Household Durables 123,175 1.7 % 122,652 1.6 % 12,913 0.2 % 15,403 0.2 %
Household Products 20,936 0.3 % 20,936 0.3 % 21,186 0.3 % 21,186 0.3 %
Insurance 21,966 0.3 % 22,280 0.3 % 21,911 0.4 % 22,280 0.4 %
Interactive Media & Services 233,204 3.2 % 233,204 3.1 % 180,127 3.0 % 180,127 2.9 %
Internet & Direct Marketing Retail 20,212 0.3 % 17,454 0.2 % 54,677 0.9 % 56,114 0.9 %
IT Services 305,311 4.2 % 303,681 4.0 % 260,899 4.3 % 261,718 4.3 %
Leisure Products 39,015 0.5 % 38,757 0.5 % 20,242 0.3 % 20,287 0.3 %
Machinery 108,780 1.5 % 124,458 1.6 % 97,853 1.6 % 111,682 1.8 %
Media 108,062 1.5 % 161,140 2.1 % 105,958 1.7 % 107,819 1.7 %
Online Lending 29,080 0.4 % 29,080 0.4 % 6,600 0.1 % 6,600 0.1 %
Paper & Forest Products 11,445 0.2 % 4,952 0.1 % 15,847 0.3 % 15,815 0.3 %
Personal Products 260,396 3.6 % 59,179 0.8 % 249,245 4.1 % 71,097 1.1 %
Pharmaceuticals 25,557 0.4 % 25,962 0.3 % - - % - - %
Professional Services 205,032 2.8 % 203,256 2.7 % 132,015 2.2 % 132,058 2.1 %
Software 52,295 0.7 % 52,500 0.7 % 22,240 0.4 % 22,500 0.4 %
Technology Hardware, Storage & Peripherals 12,447 0.2 % 12,398 0.2 % 12,431 0.2 % 12,500 0.2 %
Textiles, Apparel & Luxury Goods 178,428 2.5 % 211,359 2.8 % 202,312 3.3 % 225,359 3.6 %
Trading Companies & Distributors 65,216 0.9 % 31,147 0.4 % 65,248 1.1 % 27,106 0.4 %
Transportation Infrastructure - - % - - % 30,384 0.5 % 30,900 0.5 %
Subtotal $ 6,012,328 83.4 % $ 6,704,281 88.3 % $ 4,877,749 80.5 % $ 5,355,469 86.4 %
Structured Finance (1) $ 1,184,503 16.6 % $ 898,229 11.7 % $ 1,180,375 19.5 % $ 846,309 13.6 %
Total Investments $ 7,196,831 100.0 % $ 7,602,510 100.0 % $ 6,058,124 100.0 % $ 6,201,778 100.0 %
95-------------------------------------------------------------------------------- (1)Our SSN investments do not have industry concentrations and as such have been separated in the tables above. As ofJune 30, 2022 andJune 30, 2021 , Structured Finance includes$186,800 and$90,200 , respectively, of first lien debt investments held through our investment in NPRC and its wholly-owned subsidiary.
Portfolio Investment Activity
Our origination efforts are focused primarily on secured lending to non-control investments to reduce the risk in the portfolio by investing primarily in first lien loans and second lien loans, though we also continue to close select equity investments. For information regarding investment activity for the year endedJune 30, 2020 , see the Company's Form 10-K for the fiscal year endedJune 30, 2021 . Our gross investment activity for the years endedJune 30, 2022 andJune 30, 2021 are presented below. Year Ended June 30, 2022 2021 Investments made in new portfolio companies$ 1,209,578 $ 622,445 Follow-on investments made in existing portfolio companies (1) 1,019,085 385,531 Revolver advances 10,500 4,316 PIK interest 83,124 75,521 Total acquisitions$ 2,322,287 $ 1,087,813 Acquisitions by portfolio composition First Lien Debt$ 1,340,094 $ 717,572 Second Lien Debt 950,509 335,429 Subordinated Structured Notes 9,518 5,399 Unsecured Debt - 2,620 Equity 22,166 26,793 Total acquisitions by portfolio composition$ 2,322,287 $ 1,087,813 Investments sold $ 6,209 $ - Partial repayments (2) 451,905 199,678 Full repayments 661,811 619,173 Revolver paydowns 1,678 3,299 Total dispositions$ 1,121,603 $ 822,150 Dispositions by portfolio composition First Lien Debt $ 707,263 $ 442,383 1.5 Lien Debt 18,164 - Second Lien Debt 337,356 327,393 Third Lien Debt 3,950 - Subordinated Structured Notes 27,304 - Unsecured Debt - 53,738 Equity 27,566 (1,364) Total dispositions by portfolio composition$ 1,121,603
$ 822,150
Weighted average interest rates for new investments by portfolio composition at the end of the respective period(3) First Lien Debt 8.87 % 9.27 % Second Lien Debt 10.37 % 8.66 %
(1)Includes follow-on investments in existing portfolio companies and refinancings, if any.
(2)Includes partial prepayments of principal, scheduled amortization payments, and refinancings, if any.
96
--------------------------------------------------------------------------------(3)Weighted average interest rates for new investments by portfolio composition is calculated with the current rate at the end of the period. In addition, Revolving Line of Credit and Delayed Draw Term Loans are excluded from the calculation.
Investment Valuation
Investments for which market quotations are readily available must be valued at
such market quotations. In order to validate market quotations, management and
the independent valuation firm look at a number of factors to determine if the
quotations are representative of fair value, including the source and nature of
the quotations. In determining the range of values for debt instruments where
market quotations are not available, except CLOs and debt investments in
controlling portfolio companies, management and the independent valuation firm
estimated corporate and security credit ratings and identified corresponding
yields to maturity for each loan from relevant market data. A discounted cash
flow technique was then applied using the appropriate yield to maturity as the
discount rate, to determine a range of values. In determining the range of
values for debt investments of controlled companies and equity investments, the
enterprise value was determined by applying a market approach such as using
earnings before interest, taxes, depreciation and amortization ("EBITDA")
multiples, net income and/or book value multiples for similar guideline public
companies and/or similar recent investment transactions and/or an income
approach, such as the discounted cash flow technique. The enterprise value
technique may also be used to value debt investments which are credit impaired.
For stressed debt and equity investments, asset recovery analysis was used.
In determining the range of values for our investments in CLOs, the independent
valuation firm uses a discounted multi-path cash flow model. The valuations were
accomplished through the analysis of the CLO deal structures to identify the
risk exposures from the modeling point of view as well as to determine an
appropriate call date (i.e., expected maturity). These risk factors are
sensitized in the multi-path cash flow model using Monte Carlo simulations,
which are simulations used to model the probability of different outcomes, to
generate probability-weighted (i.e., multi-path) cash flows for the underlying
assets and liabilities. These cash flows are discounted using appropriate market
discount rates, and relevant data in the CLO market and certain benchmark credit
indices are considered, to determine the value of each CLO investment. In
addition, we generate a single-path cash flow utilizing our best estimate of
expected cash receipts, and assess the reasonableness of the implied discount
rate that would be effective for the value derived from the corresponding
multi-path cash flow model.
With respect to our online consumer and SME lending initiative, we invest
primarily in marketplace loans through marketplace lending platforms. We do not
conduct loan origination activities ourselves. Therefore, our ability to
purchase consumer and SME loans, and our ability to grow our portfolio of
consumer and SME loans, are directly influenced by the business performance and
competitiveness of the marketplace loan origination business of the marketplace
lending platforms from which we purchase consumer and SME loans. In addition,
our ability to analyze the risk-return profile of consumer and SME loans is
significantly dependent on the marketplace platforms' ability to effectively
evaluate a borrower's credit profile and likelihood of default. If we are unable
to effectively evaluate borrowers' credit profiles or the credit decisioning and
scoring models implemented by each platform, we may incur unanticipated losses
which could adversely impact our operating results.
The Board of Directors looked at several factors in determining where within the
range to value the asset including: recent operating and financial trends for
the asset, independent ratings obtained from third parties, comparable multiples
for recent sales of companies within the industry and discounted cash flow
models for our investments in CLOs. The composite of all these various valuation
techniques, applied to each investment, was a total valuation of $7,602,510 .
Our portfolio companies are generally lower middle-market companies, outside of
the financial sector, with less than $100,000 of annual EBITDA. We believe our
investment portfolio has experienced less volatility than others because we
believe there are more buy and hold investors who own these less liquid
investments.
Impact of the coronavirus (the "COVID-19") pandemic
As ofJune 30, 2022 , there remains to be global uncertainty surrounding the COVID-19 pandemic, which has caused severe disruptions in the global economy and has negatively impacted the fair value and performance of certain investments since the pandemic began. For the year endedJune 30, 2022 , the aggregate increases in fair value and net unrealized depreciation on investments were driven by the expansion of comparable company trading multiples and/or tightened credit spreads as the level of market volatility generated by the COVID-19 pandemic declined over the twelve month period. For certain investments in our portfolio, the valuations continue to reflect factors such as specific industry concerns, uncertainty about the duration of business shutdowns and near-term liquidity needs. 97 --------------------------------------------------------------------------------
Control Company Investments
Control investments offer increased risk and reward over straight debt investments. Operating results and changes in market multiples can result in dramatic changes in values from quarter to quarter. Significant downturns in operations can further result in our looking to recoveries on sales of assets rather than the enterprise value of the investment. Equity positions in our portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results and market multiples. Our controlled companies discussed below experienced such changes and we recorded corresponding fluctuations in valuations during the year endedJune 30, 2022 .CP Energy Services, Inc. Prospect owns 100% of the equity ofCP Holdings , aConsolidated Holding Company .CP Holdings owns 99.8% of the equity ofCP Energy , and the remaining equity is owned byCP Energy management.CP Energy provides oilfield flowback services and fluid hauling and disposal services through its subsidiaries. InJune 2019 ,CP Energy purchased a controlling interest in the common equity ofSpartan Energy Holdings, Inc. ("Spartan Holdings "), which owns 100% ofSpartan Energy Services, LLC ("Spartan") a portfolio company of Prospect with$26,648 in first lien term loans (the "Spartan Term Loans") due to us as ofJune 30, 2022 . As a result ofCP Energy's purchase, and given Prospect's controlling interest inCP Energy , our Spartan Term Loans are presented as control investments underCP Energy beginningJune 30, 2019 . Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loans. The fair value of our investment inCP Energy increased to$112,701 as ofJune 30, 2022 , which is a discount of$142,303 from its amortized cost, compared to a fair value of$71,487 as ofJune 30, 2021 , representing a discount of$161,248 to its amortized cost. The decrease in discount to amortized cost resulted from improved performance and increased activity in the oil and gas industry.Echelon Transportation, LLC Prospect owns 100% of the equity of Echelon, a consolidated holding company. Echelon owns 60.7% of the equity of AerLift. Echelon is an aircraft leasing company. The fair value of our investment in Echelon decreased to$65,766 as ofJune 30, 2022 , representing a discount of$43,024 to its amortized cost basis, compared to a fair value of$84,240 as ofJune 30, 2021 , representing a discount of$13,904 to its amortized cost basis. The increase in discount to amortized cost resulted from lower aircraft residual values.
Prospect owns 100% of the equity of First Tower Delaware, a consolidated holding company. First Tower Delaware owns 80.03% of First Tower Finance. First Tower Finance owns 100% ofFirst Tower, LLC ("First Tower"), a multiline specialty finance company. The fair value of our investment inFirst Tower increased to$607,283 as ofJune 30, 2022 , representing a premium of$219,912 to its amortized cost basis compared to a fair value of$592,356 as ofJune 30, 2021 , a premium of$236,502 to its amortized cost. The decrease in premium to amortized cost resulted from a decline in financial performance.
During the year endedJune 30, 2018 , Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of InterDent and to appoint a new Board of Directors of InterDent, all the members of which are our Investment Adviser's professionals. As a result, Prospect's investment in InterDent is classified as a control investment. InterDent is a dental support organization ("DSO"). InterDent provides business and administrative support services to a regionally-diversified set of dental practices so that dentists can focus on delivering high-quality clinical care and patient satisfaction.
The fair value of our investment in InterDent decreased to
NPRC is aMaryland corporation and a qualified REIT for federal income tax purposes. NPRC is held for purposes of investing, operating, financing, leasing, managing and selling a portfolio of real estate assets and engages in any and all other activities 98 -------------------------------------------------------------------------------- that may be necessary, incidental, or convenient to perform the foregoing. NPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-family properties, self-storage, and student housing properties. NPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity. Additionally, through its wholly owned subsidiaries, NPRC invests in online consumer loans and RSSNs. As ofJune 30, 2022 , we own 100% of the fully-diluted common equity of NPRC. During the year endedJune 30, 2022 , we received partial repayments of$301,382 of our loans previously outstanding with NPRC, and provided$395,247 of debt financing and$15,620 of equity financing to NPRC for the acquisition of real estate properties, to fund capital expenditures for existing real estate properties, to provide working capital, to fund purchases of rated secured structured notes, and to support the purchase of high yield corporate debt. The online consumer loan investments held by certain of NPRC's wholly-owned subsidiaries are unsecured obligations of individual borrowers that are issued in amounts ranging from$1 to$50 , with fixed terms ranging from 36 to 84 months. As ofJune 30, 2022 , the outstanding investment in online consumer loans by certain of NPRC's wholly-owned subsidiaries was comprised of 464 individual loans, residual interest in three securitizations, and one high yield corporate bond, and had an aggregate fair value of$31,773 . The average outstanding individual loan balance is approximately$3 and the loans mature on dates ranging fromJuly 1, 2022 toApril 19, 2025 with a weighted-average outstanding term of 13 months as of June 30, 2022. Fixed interest rates range from 6.0% to 36.0% with a weighted-average current interest rate of 19.6%. As ofJune 30, 2022 , our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair value of$29,080 . As ofJune 30, 2022 , based on outstanding principal balance, 26.7% of the online consumer loan portfolio held by certain of NPRC's wholly-owned subsidiaries was invested in super prime loans (borrowers with a Fair Isaac Corporation ("FICO") score, of 720 or greater), 39.9% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 33.4% of the portfolio in near prime loans (borrowers with a FICO score of 580 to 659, a portion of which are considered sub-prime). Outstanding Principal Weighted Average Loan Type Balance Fair Value Interest Rate Range Interest Rate* Super Prime $ 386$ 384 8.0% - 20.5% 12.3% Prime 577 545 6.0% - 25.0% 18.5% Near Prime 483 477 19.5% - 36.0% 26.8%
*Weighted by outstanding principal balance of the online consumer loans.
The rated secured structured note investments held by certain of NPRC's wholly owned subsidiaries are subordinated debt interests in broadly syndicated loans managed by established collateral management teams with many years of experience in the industry. As ofJune 30, 2022 , the outstanding investment in rated secured structured notes by certain of NPRC's wholly owned subsidiaries was comprised of 78 investments with a fair value of$380,580 and face value of$398,440 . The average outstanding note is approximately$5,108 with an expected maturity date ranging fromApril 2026 toOctober 2032 and weighted-average expected maturity of 6 years as ofJune 30, 2022 . Coupons range from three-month LIBOR ("3ML") plus 5.31% to 9.23% with a weighted-average coupon of 3ML + 6.94%. As ofJune 30, 2022 , our investment in NPRC and its wholly-owned subsidiaries relating to rated secured structured notes had a fair value of$186,800 . As ofJune 30, 2022 , based on outstanding notional balance, 14% of the portfolio was invested in Single - B rated tranches and 86% of the portfolio in BB rated tranches. As ofJune 30, 2022 , our investment in NPRC and its wholly-owned subsidiaries had an amortized cost of$863,196 and a fair value of$1,615,737 , including our investment in online consumer lending and rated secured structured notes as discussed above. The fair value of$1,399,857 related to NPRC's real estate portfolio was comprised of forty-seven multi-family properties, eight student housing properties, four senior living properties, and three commercial properties. The following table shows the location, acquisition date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as ofJune 30, 2022 : Acquisition Purchase Mortgage No. Property Name City Date Price Outstanding 1 Filet of Chicken Forest Park, GA 10/24/2012$ 7,400 $ - 2 Arlington Park Marietta, LLC Marietta, GA 5/8/2013 14,850 13,496 3 Taco Bell, OK Yukon, OK 6/4/2014 1,719 - 4 Taco Bell, MO Marshall, MO 6/4/2014 1,405 - 5 Abbie Lakes OH Partners, LLC Canal Winchester, OH 9/30/2014 12,600 15,080 99
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Acquisition Purchase Mortgage
No. Property Name City Date Price Outstanding
6 Kengary Way OH Partners, LLC Reynoldsburg, OH 9/30/2014 11,500 15,245
7 Lakeview Trail OH Partners, LLC Canal Winchester, OH 9/30/2014 26,500 29,083
8 Lakepoint OH Partners, LLC Pickerington, OH 9/30/2014 11,000 16,549
9 Sunbury OH Partners, LLC Columbus, OH 9/30/2014 13,000 16,781
10 Heatherbridge OH Partners, LLC Blacklick, OH 9/30/2014 18,416 23,988
11 Jefferson Chase OH Partners, LLC Blacklick, OH 9/30/2014 13,551 18,672
12 Goldenstrand OH Partners, LLC Hilliard, OH 10/29/2014 7,810 11,382
13 SSIL I, LLC Aurora, IL 11/5/2015 34,500 25,377
14 Vesper Tuscaloosa, LLC Tuscaloosa, AL 9/28/2016 54,500 42,576
15 Vesper Iowa City, LLC Iowa City, IA 9/28/2016 32,750 24,554
16 Vesper Corpus Christi, LLC Corpus Christi, TX 9/28/2016 14,250 10,682
17 Vesper Campus Quarters, LLC Corpus Christi, TX 9/28/2016 18,350 14,020
18 Vesper College Station, LLC College Station, TX 9/28/2016 41,500 31,708
19 Vesper Kennesaw, LLC Kennesaw, GA 9/28/2016 57,900 50,499
20 Vesper Statesboro, LLC Statesboro, GA 9/28/2016 7,500 7,480
21 Vesper Manhattan KS, LLC Manhattan, KS 9/28/2016 23,250 14,679
22 9220 Old Lantern Way, LLC Laurel, MD 1/30/2017 187,250 153,580
23 7915 Baymeadows Circle Owner, LLC Jacksonville, FL 10/31/2017 95,700 90,768
24 8025 Baymeadows Circle Owner, LLC Jacksonville, FL 10/31/2017 15,300 15,784
25 23275 Riverside Drive Owner, LLC Southfield, MI 11/8/2017 52,000 54,548
26 23741 Pond Road Owner, LLC Southfield, MI 11/8/2017 16,500 18,914
27 150 Steeplechase Way Owner, LLC Largo, MD 1/10/2018 44,500 36,668
28 Olentangy Commons Owner LLC Columbus, OH 6/1/2018 113,000 92,876
29 Villages of Wildwood Holdings LLC Fairfield, OH 7/20/2018 46,500 58,393
30 Falling Creek Holdings LLC Richmond, VA 8/8/2018 25,000 25,374
31 Crown Pointe Passthrough LLC Danbury, CT 8/30/2018 108,500 89,400
32 Lorring Owner LLC Forestville, MD 10/30/2018 58,521 47,680
33 Hamptons Apartments Owner, LLC Beachwood, OH 1/9/2019 96,500 79,520
34 5224 Long Road Holdings, LLC Orlando, FL 6/28/2019 26,500 21,200
35 Druid Hills Holdings LLC Atlanta, GA 7/30/2019 96,000 79,104
36 Bel Canto NPRC Parcstone LLC Fayetteville, NC 10/15/2019 45,000 42,793
37 Bel Canto NPRC Stone Ridge LLC Fayetteville, NC 10/15/2019 21,900 21,545
38 Sterling Place Holdings LLC Columbus, OH 10/28/2019 41,500 34,196
39 SPCP Hampton LLC Dallas, TX 11/2/2020 36,000 27,590
40 Palmetto Creek Holdings LLC North Charleston, SC 11/10/2020 33,182 25,865
41 Valora at Homewood Holdings LLC Homewood, AL 11/19/2020 81,250 63,844
42 NPRC Fairburn LLC Fairburn, GA 12/14/2020 52,140 43,900
43 NPRC Grayson LLC Grayson, GA 12/14/2020 47,860 40,500
44 NPRC Taylors LLC Taylors, SC 1/27/2021 18,762 14,075
45 Parkside at Laurel West Owner LLC Spartanburg, SC 2/26/2021 57,005 42,025
46 Willows at North End Owner LLC Spartanburg, SC 2/26/2021 23,255 19,000
47 SPCP Edge CL Owner LLC Webster, TX 3/12/2021 34,000 25,496
48 Jackson Pear Orchard LLC Ridgeland, MS 6/28/2021 50,900 38,175
49 Jackson Lakeshore Landing LLC Ridgeland, MS 6/28/2021 22,600 16,950
50 Jackson Reflection Pointe LLC Flowood, MS 6/28/2021 45,100 31,050
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Acquisition Purchase Mortgage
No. Property Name City Date Price Outstanding
51 Jackson Crosswinds LLC Pearl, MS 6/28/2021 41,400 33,825
52 Elliot Apartments Norcross, LLC Norcross, GA 11/30/2021 128,000 99,760
53 Orlando 442 Owner, LLC (West Vue Orlando, FL 12/30/2021
Apartments) 97,500 73,000
54 NPRC Wolfchase LLC Memphis, TN 3/18/2022 82,100 60,000
55 NPRC Twin Oaks LLC Hattiesburg. MS 3/18/2022 44,850 33,830
56 NPRC Lancaster LLC Birmingham, AL 3/18/2022 37,550 28,350
57 NPRC Rutland LLC Macon, GA 3/18/2022 29,750 22,500
58 Southport Owner LLC (Southport Indianapolis, IN 3/29/2022
Crossing) 48,100 36,075
59 TP Cheyenne, LLC Cheyenne, WY 5/26/2022 27,500 17,656
60 TP Pueblo, LLC Pueblo, CO 5/26/2022 31,500 20,166
61 TP Stillwater, LLC Stillwater, OK 5/26/2022 26,100 15,328
62 TP Kokomo, LLC Kokomo, IN 5/26/2022 20,500 12,753
$ 2,631,326 $ 2,185,907
The fair value of our investment in NPRC increased to $1,615,737 as of June 30,
2022 , a premium of $752,541 from its amortized cost basis compared to a fair
value of $1,189,755 as of June 30, 2021 , representing a premium of $436,044 . The
increase in premium is primarily driven by compression of capitalization rates
and, increase in market interest rates, and to a lesser extent, growth in net
operating income in our real estate portfolio.
Prospect owns 100% of the equity ofNMMB Holdings, Inc. ("NMMB Holdings "), aConsolidated Holding Company .NMMB Holdings owns 90.42% and 94.82% of the fully-diluted equity ofNMMB, Inc. (f/k/aNMMB Acquisition, Inc. ) ("NMMB") as ofJune 30, 2022 andJune 30, 2021 , respectively, withNMMB management owning the remaining equity.NMMB owns 100% ofRefuel Agency, Inc. ("Refuel Agency ").Refuel Agency owns 100% ofArmed Forces Communications, Inc. ("Armed Forces").NMMB is an advertising media buying business. The fair value of our investment inNMMB increased to$109,943 as ofJune 30, 2022 , representing a premium of$80,220 to its amortized cost basis, compared to a fair value of$46,888 as ofJune 30, 2021 , representing a premium of$29,145 to its amortized cost basis. The increase to the premium was driven by strong financial performance.Pacific World Corporation OnMay 29, 2018 , Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock ofPacific World Corporation ("Pacific World ") and to appoint a new Board of Directors ofPacific World . As a result, as ofJune 30, 2018 , Prospect's investment inPacific World is classified as a control investment.Pacific World supplies nail and beauty care products to food, drug, mass, and value retail channels worldwide. The fair value of our investment inPacific World decreased to$59,179 as ofJune 30, 2022 , representing a discount of$201,217 to its amortized cost basis, compared to a fair value of$71,097 as ofJune 30, 2021 , representing discount of$178,148 to its amortized cost. The increase in discount to amortized cost resulted from a decline in financial performance.
Prospect owns 99.96% of the equity of
The fair value of our investment in USES decreased to$22,395 as ofJune 30, 2022 , a discount of$45,823 from its amortized cost basis, compared to a fair value of$33,815 as ofJune 30, 2021 , representing a discount of$34,404 to it amortized cost. The increase in discount to amortized cost resulted from a decline in financial performance.
Our controlled investments, including those discussed above, are valued at
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--------------------------------------------------------------------------------Affiliate and Non-Control Company Investments
We hold four affiliate investments atJune 30, 2022 (PGX Holdings, Inc. ("Progrexion"),Nixon, Inc. ,RGIS Services, LLC ("RGIS"), andTargus Cayman HoldCo Limited ("Targus")) with a total fair value of$393,264 , a premium of$151,163 from their combined amortized cost compared to a fair value of$356,734 as ofJune 30, 2021 , representing a$153,791 premium to its amortized cost. The decrease in premium is primarily driven by our investment inProgrexion , which is valued at a premium of$114,940 atJune 30, 2022 compared to a premium of$126,933 as ofJune 30, 2021 . The decrease inProgrexion's premium to amortized cost resulted from a decline in financial performance. With the non-control/non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments, the fair value is generally limited on the high side to each loan's par value, plus any prepayment premium that could be imposed. However, as ofJune 30, 2022 , three of our non-control/non-affiliate investments,Engine Group, Inc. ("Engine"),United Sporting Companies, Inc. ("USC"), and Curo Group Holdings Corp. ("Curo") are valued at discounts to amortized cost of$27,142 and$97,623 , and$16,479 , respectively. As ofJune 30, 2022 , our CLO investment portfolio is valued at a$286,278 discount to amortized cost. Excluding Engine,USC , Curo and the CLO investment portfolio, the fair value of our non-control/non-affiliate investments atJune 30, 2022 are valued at$23,373 below their amortized cost and did not experience significant changes in operating performance or value. Our largest non-control/non-affiliate investment isPeopleConnect Holdings, LLC ("PeopleConnect"), which has a fair value equal to its amortized cost basis of$233,204 and represents approximately 5.7% of our Net Asset Value as ofJune 30, 2022 .PeopleConnect is an online information commerce company.
Capitalization
Our investment activities are capital intensive and the availability and cost of capital is a critical component of our business. We capitalize our business with a combination of debt and equity. Our debt as ofJune 30, 2022 consists of: a Revolving Credit Facility availing us of the ability to borrow debt subject to borrowing base determinations; Convertible Notes which we issued inApril 2017 (with a follow-on issuance inMay 2018 ) andMarch 2019 ; Public Notes which we issued inMarch 2013 ,October 2018 ,January 2021 ,May 2021 , andSeptember 2021 ; and Prospect Capital InterNotes® which we issue from time to time. As ofJune 30, 2022 , our equity capital is comprised of common and preferred equity.
The following table shows our outstanding debt as of
Unamortized
Principal Discount & Debt Net Carrying Effective Interest
Outstanding Issuance Costs Value Fair Value RateRevolving Credit Facility$ 839,464 $ 10,801$ 839,464 $ 839,464 1ML+2.05% 2022 Notes 60,501 18 60,483 60,753 5.63 % 2025 Notes 156,168 2,459 153,709 158,094 6.63 % Convertible Notes 216,669 214,192 218,847 2023 Notes 284,219 600 283,619 286,101 6.07 % 6.375% 2024 Notes 81,240 299 80,941 82,084 6.57 % 2026 Notes 400,000 7,134 392,866 355,316 3.98 % 3.364% 2026 Notes 300,000 6,026 293,974 254,931 3.60 % 3.437% 2028 Notes 300,000 8,222 291,778 229,866 3.64 % Public Notes 1,365,459 1,343,178 1,208,298 Prospect Capital InterNotes® 347,564 7,122 340,442 285,822 5.71 % Total$ 2,769,156 $ 2,737,276 $ 2,552,431 102
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The following table shows our outstanding debt as of
Unamortized
Principal Discount & Debt Net Carrying Effective Interest
Outstanding Issuance Costs Value Fair Value RateRevolving Credit Facility$ 356,937 $ 11,141$ 356,937 $ 356,937 1ML+2.05% 2022 Notes 111,055 825 110,230 113,799 5.69 % 2025 Notes 156,168 3,298 152,870 171,590 6.63 % Convertible Notes 267,223 263,100 285,389 2023 Notes 284,219 1,397 282,822 302,616 6.07 % 6.375% 2024 Notes 81,389 467 80,922 88,996 6.57 % 2026 Notes 400,000 8,768 391,232 413,032 3.94 % 3.364% 2026 Notes 300,000 7,279 292,721 300,693 3.57 % 2029 Notes 69,170 2,150 67,020 71,336 7.38 % Public Notes 1,134,778 1,114,717 1,176,673 Prospect Capital InterNotes® 508,711 10,496 498,215 591,013 6.17 % Total$ 2,267,649 $ 2,232,969 $ 2,410,012 The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as ofJune 30, 2022 :
Payments Due by Fiscal Year
Total 2023 2024 2025 2026 2027 Thereafter
Revolving Credit
Facility $ 839,464 $ - $ - $ - $ 839,464 $ - $ -
Convertible Notes 216,669 60,501 - 156,168 - - -
Public Notes 1,365,459 284,219 81,240 - 400,000 300,000 300,000
Prospect Capital
InterNotes® 347,564 - 662 1,499 30,293 75,176 239,934
Total Contractual
Obligations $ 2,769,156 $ 344,720 $ 81,902 $ 157,667 $ 1,269,757 $ 375,176 $ 539,934
We may from time to time seek to cancel or purchase our outstanding debt through
cash purchases and/or exchanges, in open market purchases, privately negotiated
transactions or otherwise. The amounts involved may be material. In addition, we
may from time to time enter into additional debt facilities, increase the size
of existing facilities or issue additional debt securities, including secured
debt, unsecured debt and/or debt securities convertible into common stock. Any
such purchases or exchanges of outstanding debt would be subject to prevailing
market conditions, our liquidity requirements, contractual and regulatory
restrictions and other factors.
Historically, we have funded a portion of our cash needs through borrowings from
banks, issuances of senior securities, including secured, unsecured and
convertible debt securities, or issuances of common equity. For flexibility, we
maintain a universal shelf registration statement that allows for the public
offering and sale of our debt securities, common stock, preferred stock,
subscription rights, and warrants and units to purchase such securities up to an
indeterminate amount. We may from time to time issue securities pursuant to the
shelf registration statement or otherwise pursuant to private offerings. The
issuance of debt or equity securities will depend on future market conditions,
funding needs and other factors and there can be no assurance that any such
issuance will occur or be successful.
Each of our Convertible Notes, Public Notes and Prospect Capital
InterNotes® (collectively, our "Unsecured Notes") are our general, unsecured
obligations and rank equal in right of payment with all of our existing and
future unsecured indebtedness and will be senior in right of payment to any of
our subordinated indebtedness that may be issued in the future. The Unsecured
Notes are effectively subordinated to our existing secured indebtedness, such as
our credit facility, and future secured indebtedness to the extent of the value
of the assets securing such indebtedness and structurally subordinated to any
existing and future liabilities and other indebtedness of any of our
subsidiaries.
103
--------------------------------------------------------------------------------Revolving Credit Facility
OnMay 15, 2007 , we formed our wholly owned subsidiary,Prospect Capital Funding LLC ("PCF"), aDelaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Since origination of the revolving credit facility, we have renegotiated the terms and extended the commitments of the revolving credit facility several times. Most recently, onApril 28, 2021 , we amended and closed an expanded five year revolving credit facility (the "2021 Facility" or the "Revolving Credit Facility"). The lenders have extended commitments of$1,500,000 as ofJune 30, 2022 . The 2021 Facility includes an accordion feature which allows commitments to be increased up to$1,500,000 in the aggregate. The Revolving Credit Facility matures onApril 27, 2026 . It includes a revolving period that extends throughApril 27, 2025 , followed by an additional one-year amortization period, with distributions allowed to Prospect after the completion of the revolving period. During such one-year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one-year amortization period, the remaining balance will become due, if required by the lenders. As ofJune 30, 2022 andJune 30, 2021 , we had$660,536 and$640,853 , respectively, available to us for borrowing under the Revolving Credit Facility, net of$839,464 and$356,937 outstanding borrowings as of the respective balance sheet dates. Refer to Note 4. Revolving Credit Facility within our consolidated financial statements for additional details.
Convertible Notes
OnApril 11, 2017 , we issued$225,000 aggregate principal amount of convertible notes that mature onJuly 15, 2022 (the "Original 2022 Notes"), unless previously converted or repurchased in accordance with their terms. The Original 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually onJanuary 15 andJuly 15 each year, beginningJuly 15, 2017 . Total proceeds from the issuance of the Original 2022 Notes, net of underwriting discounts and offering costs, were$218,010 . OnMay 18, 2018 , we issued an additional$103,500 aggregate principal amount of convertible notes that mature onJuly 15, 2022 (the "Additional 2022 Notes," and together with the Original 2022 Notes, the "2022 Notes"), unless previously converted or repurchased in accordance with their terms. The Additional 2022 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2022 Notes and bear interest at a rate of 4.95% per year, payable semi-annually onJanuary 15 andJuly 15 each year, beginningJuly 15, 2018 . Total proceeds from the issuance of the Additional 2022 Notes, net of underwriting discounts and offering costs, were$100,749 .
As of
OnMarch 1, 2019 , we issued$175,000 aggregate principal amount of senior convertible notes that mature onMarch 1, 2025 (the "2025 Notes"), unless previously converted or repurchased in accordance with their terms. We granted the underwriters a 13-day over-allotment option to purchase up to an additional$26,250 aggregate principal amount of the 2025 Notes. The underwriters fully exercised the over-allotment option onMarch 11, 2019 and we issued$26,250 aggregate principal amount of 2025 Notes at settlement onMarch 13, 2019 . The 2025 Notes bear interest at a rate of 6.375% per year, payable semi-annually onMarch 1 andSeptember 1 each year, beginningSeptember 1, 2019 . Total proceeds from the issuance of the 2025 Notes, net of underwriting discounts and offering costs, were$198,674 . As ofJune 30, 2022 andJune 30, 2021 , the outstanding aggregate principal amount of the 2025 Notes were$156,168 and$156,168 , respectively. Refer to Note 5. Convertible Notes within our consolidated financial statements for additional details. Public Notes OnMarch 15, 2013 , we issued$250,000 aggregate principal amount of unsecured notes that mature onMarch 15, 2023 (the "Original 2023 Notes"). The Original 2023 Notes bear interest at a rate of 5.875% per year, payable semi-annually onMarch 15 andSeptember 15 of each year, beginningSeptember 15, 2013 . Total proceeds from the issuance of the Original 2023 Notes, net of underwriting discounts and offering costs, were$243,641 . OnJune 20, 2018 , we issued an additional$70,000 aggregate principal amount of unsecured notes that mature onMarch 15, 2023 (the "Additional 2023 Notes", and together with the Original 2023 Notes, the "2023 Notes"). The Additional 2023 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2023 Notes and bear interest at a rate of 5.875% per year, payable semi-annually onMarch 15 andSeptember 15 of each year, beginningSeptember 15, 2018 . Total proceeds from the issuance of the Additional 2023 Notes, net of underwriting discounts, were$69,403 .
As of
104
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On December 10, 2015 , we issued $160,000 aggregate principal amount of unsecured
notes that mature on June 15, 2024 (the "2024 Notes"). The 2024 Notes bore
interest at a rate of 6.25% per year, payable quarterly on March 15 , June 15 ,
September 15 and December 15 of each year, beginning March 15, 2016 . Total
proceeds from the issuance of the 2024 Notes, net of underwriting discounts and
offering costs, were $155,043 . On June 16, 2016 , we entered into an
at-the-market ("ATM") program with FBR Capital Markets & Co. through which we
could sell, by means of ATM offerings, from time to time, up to $100,000 in
aggregate principal amount of our existing 2024 Notes ("Initial 2024 Notes
ATM"). Following the Initial 2024 Notes ATM, the aggregate principal amount of
the 2024 Notes issued was $199,281 for net proceeds of $193,253 , after
commissions and offering costs. On July 2, 2018 , we entered into a second ATM
program with B. Riley FBR, Inc. and BB&T Capital Markets , and on August 31, 2018
with Comerica Securities, Inc. , through which we could sell, by means of ATM
offerings, up to $100,000 in aggregate principal amount of the 2024 Notes
("Second 2024 Notes ATM"). Prior to our February 2021 full redemption, the 2024
Notes were listed on the New York Stock Exchange ("NYSE") and traded thereon
under the ticker "PBB".
Following our redemption during the year ended
OnOctober 1, 2018 , we issued$100,000 aggregate principal amount of unsecured notes that mature onJanuary 15, 2024 (the "6.375% 2024 Notes"). The 6.375% 2024 Notes bear interest at a rate of 6.375% per year, payable semi-annually onJanuary 15 andJuly 15 of each year, beginningJanuary 15, 2019 . Total proceeds from the issuance of the 6.375% 2024 Notes, net of underwriting discounts and offering costs, were$98,985 .
As of
OnDecember 5, 2018 , we issued$50,000 aggregate principal amount of unsecured notes that mature onJune 15, 2029 (the "2029 Notes"). The 2029 Notes bear interest at a rate of 6.875% per year, payable quarterly onMarch 15 ,June 15 ,September 15 , andDecember 15 of each year, beginningMarch 15, 2019 . Total proceeds from the issuance of the 2029 Notes, net of underwriting discounts and offering costs, were$48,057 . OnFebruary 9, 2019 , we entered into an ATM program withB. Riley FBR, Inc. ,BB&T Capital Markets , andComerica Securities, Inc. , through which we could sell, by means of ATM offerings, up to$100,000 in aggregate principal amount of our existing 2029 Notes ("2029 Notes ATM" or "2029 Notes Follow-on Program"). Prior to ourDecember 2021 full redemption, the 2029 Notes were listed on the NYSE and traded thereon under the ticker "PBC."
As of
OnJanuary 22, 2021 , we issued$325,000 aggregate principal amount of unsecured notes that mature onJanuary 22, 2026 (the "Original 2026 Notes"). The Original 2026 Notes bear interest at a rate of 3.706% per year, payable semi-annually onJuly 22 , andJanuary 22 of each year, beginning onJuly 22, 2021 . Total proceeds from the issuance of the 2026 Notes, net of underwriting discounts and offering costs, were$317,720 . OnFebruary 19, 2021 , we issued an additional$75,000 aggregate principal amount of unsecured notes that mature onJanuary 22, 2026 (the "Additional 2026 Notes", and together with the Original 2026 Notes, the "2026 Notes"). The Additional 2026 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2026 Notes and bear interest at a rate of 3.706% per year, payable semi-annually onJuly 22 andJanuary 22 of each year, beginningJuly 22, 2021 . Total proceeds from the issuance of the Additional 2026 Notes, net of underwriting discounts and offering costs, were$74,061 .
As of both
OnMay 27, 2021 , we issued$300,000 aggregate principal amount of unsecured notes that mature onNovember 15, 2026 (the "3.364% 2026 Notes"). The 3.364% 2026 Notes bear interest at a rate of 3.364% per year, payable semi-annually onNovember 15 , andMay 15 of each year, beginning onNovember 15, 2021 . Total proceeds from the issuance of the 3.364% 2026 Notes, net of underwriting discounts and offering costs, were$293,283 .
As of both
OnSeptember 30, 2021 , we issued$300,000 aggregate principal amount of unsecured notes that mature onOctober 15, 2028 (the "3.437% 2028 Notes"). The 3.437% 2028 Notes bear interest at a rate of 3.437% per year, payable semi-annually onApril 15 andOctober 15 of each year, beginning onApril 15, 2022 . Total proceeds from the issuance of the 3.437% 2028 Notes, net of underwriting discounts and offering costs, were$291,798 . 105 --------------------------------------------------------------------------------
As of
The 2023 Notes, the 6.375% 2024 Notes, 2026 Notes, the 3.364% 2026 Notes, and the 3.437% 2028 Notes (collectively, the "Public Notes") are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding. Refer to Note 6. Public Notes within our consolidated financial statements for additional details.
Prospect Capital InterNotes®
OnFebruary 13, 2020 , we entered into a new selling agent agreement withInspereX LLC (formerly known as "Incapital LLC ")(the "Selling Agent Agreement"), authorizing the issuance and sale from time to time of up to$1,000,000 of Prospect Capital InterNotes® (collectively with previously authorized selling agent agreements, the "InterNotes® Offerings"). Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement. We have, from time to time, repurchased certain notes issued through the InterNotes® Offerings and, therefore, as ofJune 30, 2022 andJune 30, 2021 ,$347,564 and$508,711 aggregate principal amount of Prospect Capital InterNotes® were outstanding, respectively. Refer to Note 7. Prospect Capital InterNotes® within our consolidated financial statements for additional details.
Net Asset Value Applicable to Common Stockholders
During the year endedJune 30, 2022 , our net asset value applicable to common shares increased by$310,646 , or$0.67 per common share. The increase was primarily attributable to an increase in net realized and net change in unrealized gains of$238,684 , or$0.61 per basic weighted average common share. During the year endedJune 30, 2022 , net investment income of$343,900 , or$0.88 per basic weighted average common share, also exceeded distributions to common and preferred stockholders of$307,329 (including distributions classified as return of capital distributions to common stockholders), or$0.78 per basic weighted average common share, resulting in a net increase of$0.10 per basic weighted average common share. The increase was partially offset by$0.05 of dilution per common share related to common stock issuances through our dividend reinvestment program for the year endedJune 30, 2022 . The following table shows the calculation of net asset value per common share as ofJune 30, 2022 andJune 30, 2021 : June 30, 2022 June 30, 2021 Net assets$ 4,119,123 $ 3,945,517 Preferred Stock - (137,040) Net assets applicable to common stockholders$ 4,119,123 $ 3,808,477 Shares of common stock issued and outstanding 393,164,437
388,419,573
Net asset value per common share$ 10.48 $ 9.81 Results of Operations
For information regarding results of operations for the year ended
106
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Operating results for the years ended June 30, 2022 and 2021 were as follows:
Years ended June 30,
2022 2021
Investment Income $ 710,904 $ 631,967
Operating Expenses 367,004 346,230
Net Investment Income 343,900 285,737
Net Realized Gains (Losses) from Investments (13,184) 7,537
Net Change in Unrealized Gains (Losses) from Investments 262,025 694,044
Net Realized Losses on Extinguishment of Debt (10,157) (23,511)
Net Increase (Decrease) in Net Assets Resulting from Operations
$ 582,584 $ 963,807 Preferred Stock Dividend (25,935) (1,711)
Net Increase (Decrease) in Net Assets Resulting from Operations applicable to Common Shareholders
$ 556,649
While we seek to maximize gains and minimize losses, our investments in portfolio companies can expose our capital to risks greater than those we may anticipate. These companies typically do not issue securities rated investment grade, and have limited resources, limited operating history, and concentrated product lines or customers. These are generally private companies with limited operating information available and are likely to depend on a small core of management talents. Changes in any of these factors can have a significant impact on the value of the portfolio company. These changes, along with those discussed in Investment Valuation above, can cause significant fluctuations in our net change in unrealized gains (losses) from investments, and therefore our net increase (decrease) in net assets resulting from operations applicable to common stockholders, quarter over quarter.
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees generated from the structuring of new deals. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies' assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including prepayment penalties and possibly consulting fees. Any such fees generated in connection with our investments are recognized as earned. Investment income consists of interest income, including accretion of loan origination fees and prepayment penalty fees, dividend income and other income, including settlement of net profits interests, overriding royalty interests and structuring fees.
The following table describes the various components of investment income and the related levels of debt investments:
Year Ended June 30,
2022 2021
Interest income $ 584,685 $ 554,263
Dividend income 15,025 5,101
Other income 111,194 72,603
Total investment income $ 710,904 $ 631,967 Average debt principal of performing interest bearing investments(1)
9.42 % 10.15 %
Average debt principal of all interest bearing investments(2)
9.00 % 9.56 %
investments(2)
(1) Excludes equity investments and non-accrual loans.
(2) Excludes equity investments.
107-------------------------------------------------------------------------------- The average interest earned on interest bearing performing assets decreased from 10.15% for the year endedJune 30, 2021 to 9.42% for the year endedJune 30, 2022 . The average interest earned on all interest bearing assets decreased from 9.56% for the year endedJune 30, 2021 to 9.00% for the year endedJune 30, 2022 . The decrease is primarily due to decreases in interest income as a result of reduced returns from our structured credit investments, declining from$111,628 to$77,496 , for the years endedJune 30, 2021 and 2022, respectively. The decrease is offset by an increase in interest income from an increase in LIBOR/SOFR above our floors amongst our interest-bearing investments, increasing from$442,635 to$507,189 , for the years endedJune 30, 2021 and 2022, respectively. Investment income is also generated from dividends and other income which is less predictable than interest income. The following table describes dividend income earned for the years endedJune 30, 2022 andJune 30, 2021 , respectively: Year Ended June 30, 2022 2021 Dividend income NMMB, Inc.$ 8,383 $ - Valley Electric Company, Inc. 3,150 2,261 Nationwide Loan Company LLC 2,650 2,381 R-V Industries, Inc. 441 Other, net 401 459 Total dividend income$ 15,025 $ 5,101 108
-------------------------------------------------------------------------------- Other income is comprised of structuring fees, advisory fees, amendment fees, royalty interests, settlement of net profits interests, settlement of residual profits interests, administrative agent fees and other miscellaneous and sundry cash receipts. The following table describes other income earned for the years endedJune 30, 2022 andJune 30, 2021 , respectively: Year Ended June
30,
2022 2021
Structuring, advisory and amendment fees
First Tower Finance Company LLC $ 7,898 $21,081
PGX Holdings, Inc. 3,779
-
National Property REIT Corp. 3,648
3,176
Magnate Worldwide, LLC 3,516 -
PeopleConnect Intermediate, LLC 2,495 -
Broder 2,239 -
DRI Holding Inc. 2,488 -
BCPE Osprey Buyer, Inc. 1,812 -
Belnick, LLC 1,850 -
Global Tel*Link Corporation 1,500 -
DTI Holdco, Inc. 1,500 -
BCPE North Star US Holdco 2, Inc. 1,463 -
SEOTownCenter, Inc. 1,040 -
USG Intermediate, LLC 1,034 -
Ahead Data Blue, LLC - 1,725
Interventional Management Services, LLC -
1,510
Eze Castle Integration, Inc. -
1,250
Enseo Acquisition, Inc. -
1,200
Other, net 7,421 4,733
Total structuring, advisory and amendment fees
Royalty and net revenue interests
National Property REIT Corp. $ 66,124 $36,748
Other, net 695 669
Total royalty and net revenue interests 66,819 37,417
Administrative agent fees
Other, net $ 692 $ 511
Total administrative agent fees 692 511
Total other income $ 111,194 $ 72,603
The $38,591 increase in other income is a direct result of increased origination
and amendment activity during the fiscal year ended June 30, 2022 compared to
the prior year, as well as a $29,376 increase in net revenue interests from
NPRC, primarily driven by the sale of real estate assets.
Operating Expenses
Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees, overhead-related expenses and other operating expenses. These expenses include our allocable portion of overhead under the Administration Agreement withProspect Administration under whichProspect Administration provides administrative services and facilities for us. Our investment advisory fees compensate the Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions. 109 -------------------------------------------------------------------------------- The following table describes the various components of our operating expenses: Years ended June 30, 2022 2021 Base management fee$ 140,370 $ 114,622 Income incentive fee 79,491 71,227
Interest and credit facility expenses 117,416 130,618
Allocation of overhead from
14,262
Audit, compliance and tax related fees 3,107 3,861
Directors' fees 491 450
Other general and administrative expenses 12,332
11,190
Total Operating Expenses $ 367,004 $ 346,230
Total gross and net base management fee was $140,370 and $114,622 for the years
ended June 30, 2022 and 2021, respectively. The increase in total gross base
management fee is directly related to an increase in average total assets.
For the years ended June 30, 2022 and 2021, we incurred $79,491 and $71,227 of
income incentive fees, respectively. This increase was driven by a corresponding
increase in pre-incentive fee net investment income (net of preferred stock
dividends) to $397,456 from $354,779 for the years ended June 30, 2022 , and
2021, respectively. No capital gains incentive fee has yet been incurred
pursuant to the Investment Advisory Agreement. Income incentive fee for the
years ended June 30, 2022 and June 30, 2021 includes a $264 adjustment for fees
earned in prior periods that were neither expensed nor paid to the Investment
Adviser.
During the years ended June 30, 2022 and 2021, we incurred $117,416 and
$130,618 , respectively, of interest and credit facility expenses related to our
Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital
InterNotes® (collectively, our "Notes"). These expenses are related directly to
the leveraging capacity put into place for each of those periods and the levels
of indebtedness actually undertaken in those periods.
The table below describes the various expenses of our Notes and the related indicators of leveraging capacity and indebtedness during these years.
Year Ended June 30,
2022 2021
Interest on borrowings $ 101,803 $ 115,336
Amortization of deferred financing costs 8,024 7,251
Accretion of discount on unsecured debt 2,815 1,264
Facility commitment fees 4,774 6,767
Total interest and credit facility expenses $
117,416
Average principal debt outstanding $
2,554,571
3.99 % 4.94 %
Annualized weighted average interest rate on borrowings(2) 4.60 % 5.59 %
(1)Includes only the stated interest expense.
(2)Includes the stated interest expense, amortization of deferred financing
costs, accretion of discount on Public Notes and commitment fees on the undrawn
portion of our Revolving Credit Facility.
Interest expense decreased from $130,618 year ended June 30, 2021 to $117,416
for the year ended June 30, 2022 . The weighted average stated interest rate on
borrowings (excluding amortization, accretion and undrawn facility fees)
decreased from 4.94% for the year ended June 30, 2021 to 3.99% for the year
ended June 30, 2022 . This decrease is primarily due to redemptions of our
Prospect Capital InterNotes® with a weighted average interest rate of 5.45%,
increased utilization of our Revolving Credit Facility, and repurchases of our
Convertible Notes, June 2024 Baby Bond, June 2028 Baby Bond and June 2029 Baby
Bond. In addition to Prospect Capital InterNotes®, the 2026 Notes and 3.364%
2026 Notes, and the 2028 Bond were issued at lower rates.
The allocation of net overhead expense from Prospect Administration was $13,797
and $14,262 for the years ended June 30, 2022 and 2021, respectively. Prospect
Administration received estimated payments of $6,381 and $1,572 directly from
our
110
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portfolio companies and certain funds managed by the Investment Adviser for
legal services during the years ended June 30, 2022 and 2021, respectively. In
addition, we were given a credit in the amount of $3,522 for legal expenses
incurred on behalf of our portfolio companies that were remitted to Prospect
Administration during the year ended June 30, 2021 . We were given a credit for
these payments as a reduction of the administrative services cost payable by us
to Prospect Administration . Had Prospect Administration not received these
payments, Prospect Administration's charges for its administrative services
would have increased by this amount.
Total operating expenses, excluding investment advisory fees, interest and
credit facility expenses, and allocation of overhead from Prospect
Administration ("Other Operating Expenses"), net of any expense reimbursements,
were $15,930 and $15,501 for the years ended June 30, 2022 and 2021,
respectively. The increase was primarily attributable to a increase in legal
fees offset by a decrease in general and administrative expenses.
Net Realized Gains (Losses)
The following table details net realized gains (losses) from investments for the
years ended
Years Ended June 30,
Portfolio Company 2022 2021
NMMB, Inc. $ 3,946 $ -
Edmentum Ultimate Holdings, LLC 176 4,469
Spartan Energy Services, LLC - Term Loan B - 2,832
K&N Parent, Inc. (79) -
Dunn Paper, Inc. (385) -
Brookside Mill CLO (7,683) -
Sudburry Mill CLO, Ltd. (8,582) -
Other, net (577) 236
Net realized (losses) gains $ (13,184) $7,537
Net Realized Losses from Extinguishment of Debt
During the years ended
Change in Unrealized Gains (Losses)
The following table details net change in unrealized gains (losses) for our
portfolio for the for the years ended
Years ended June 30,
2022 2021
Control investments $ 268,126 $ 464,719
Affiliate investments (2,629) 129,738
Non-control/non-affiliate investments (3,472) 99,587
Net change in unrealized gains (losses) $ 262,025 $ 694,044
111--------------------------------------------------------------------------------
The following table reflects net change in unrealized gains (losses) on
investments for the year ended
Net Change in Unrealized Gains (Losses)
National Property REIT Corp. $
316,497
NMMB, Inc.
51,076
Subordinated Structured Notes
47,792
CP Energy Services Inc.
18,945
Targus Cayman HoldCo Limited
9,802
MITY, Inc.
5,363
Universal Turbine Parts, LLC
4,074
8th Avenue Food & Provisions, Inc.
(4,451)
Dunn Paper, Inc.
(6,461)
Credit Central Loan Company, LLC (9,392)USES Corp. (11,420)PGX Holdings, Inc. (11,995)First Tower Finance Company LLC (16,589) Other, net (17,863) Curo Group Holdings Corp. (19,142)Pacific World Corporation (23,069)Echelon Transportation, LLC
(29,120)
InterDent, Inc.
(42,022)
Net change in unrealized gains $
262,025
The following table reflects net change in unrealized gains (losses) on
investments for year ended
Net Change in Unrealized Gains (Losses)
National Property REIT Corp. $ 168,730 InterDent, Inc. 165,945 PGX Holdings, Inc. 126,754First Tower Finance Company LLC
86,252
Subordinated Structured Notes
46,052
Other, net
30,595
Valley Electric Company, Inc. 19,338USES Corp. 14,490NMMB, Inc. 13,372R-V Industries, Inc. 11,128Nationwide Loan Company LLC 10,198Pacific World Corporation 8,648Securus Technologies Holdings, Inc. 7,973Engine Group, Inc. 5,448ACE Cash Express, Inc. 5,080Targus Cayman HoldCo Limited
4,997
RGIS Services, LLC
4,528
Edmentum Ultimate Holdings, LLC (5,471)CP Energy Services Inc. (8,408)MITY, Inc. (10,283)Echelon Transportation, LLC
(11,322)
Net change in unrealized gains $ 694,044
112--------------------------------------------------------------------------------
Financial Condition, Liquidity and Capital Resources
For the years endedJune 30, 2022 and 2021, our operating activities used$795,339 and provided$31,019 of cash, respectively. The change in our operating activities is primarily driven by a$1,235,868 increase in net originations and a$432,019 decrease in unrealized gains for the year endedJune 30, 2022 , compared to the year endedJune 30, 2021 . Financing activities provided$767,093 and used$11,970 of cash during the years endedJune 30, 2022 andJune 30, 2021 , respectively, which included dividend payments of$270,295 and$195,574 , respectively. The change in our financing activities is primarily driven by an increase in net originations which has been financed primarily through borrowings under our revolving credit facility and proceeds from issuance of preferred stock for the year endedJune 30, 2022 .
Our primary uses of funds have been to continue to invest in portfolio companies, through both debt and equity investments, repay outstanding borrowings and to make cash distributions to our stockholders.
Our primary sources of funds have historically been issuances of debt and equity. We have and may continue to fund a portion of our cash needs through repayments and opportunistic sales of our existing investment portfolio. We may also securitize a portion of our investments in unsecured or senior secured loans or other assets. Our objective is to put in place such borrowings in order to enable us to expand our portfolio. During the year endedJune 30, 2022 , we borrowed$2,151,121 and we made repayments totaling$1,668,594 under the Revolving Credit Facility. As ofJune 30, 2022 , our outstanding balance on the Revolving Credit Facility was$839,464 . As ofJune 30, 2022 , we had, net of unamortized discount and debt issuance costs,$214,192 outstanding on the Convertible Notes,$1,343,178 outstanding on the Public Notes, and$340,442 outstanding on the Prospect Capital InterNotes® (See "Capitalization" above). Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 7.25%. As ofJune 30, 2022 andJune 30, 2021 , we had$43,934 and$67,385 , respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as ofJune 30, 2022 andJune 30, 2021 . OnFebruary 13, 2020 , we filed a registration statement on Form N-2 (File No. 333-236415) that was effective upon filing pursuant to Rule 462(e) under the Securities Act as permitted under the Small Business Credit Availability Act. The registration statement permits us to issue, through one or more transactions, an indeterminate amount of securities, consisting of common stock, preferred stock, debt securities, subscription rights to purchase our securities, warrants representing rights to purchase our securities or separately tradeable units combining two or more of our securities.
Preferred Stock
OnAugust 3, 2020 , we entered into a Dealer Manager Agreement withPreferred Capital Securities, LLC ("PCS"), amended onJune 9, 2022 , pursuant to which PCS has agreed to serve as the Company's agent, principal distributor and dealer manager for the Company's offering of up to 60,000,000 shares, par value$0.001 per share, of preferred stock, with a liquidation preference of$25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series A1 Preferred Stock ("Series A1 Preferred Stock"), 5.50% the Series M1 Preferred Stock ("Series M1 Preferred Stock"), and the 5.50% Series M2 Preferred Stock ("Series M2 Preferred Stock"). In connection with such offering, onAugust 3, 2020 and onJune 9, 2022 , we filed Articles Supplementary with theState Department of Assessments and Taxation of Maryland ("SDAT"), reclassifying and designating 120,000,000 and 60,000,000 shares, respectively, of the Company's authorized and unissued shares of common stock into shares of preferred stock as "Convertible Preferred Stock." OnOctober 30, 2020 , and amended onFebruary 18, 2022 , we entered into a Dealer Manager Agreement withInspereX LLC , pursuant to whichInspereX LLC has agreed to serve as the Company's agent and dealer manager for the Company's offering of up to 10,000,000 shares, par value$0.001 per share, of preferred stock, with a liquidation preference of$25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series AA1 Preferred Stock (the "Series AA1 Preferred Stock") and the 5.50% Series MM1 Preferred Stock (the "Series MM1 Preferred Stock" and together with the Series M1 Preferred Stock and the Series M2 Preferred Stock, the "Series M Preferred Stock"). In connection with such offering, onOctober 30, 2020 andFebruary 17, 2022 , we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 40,000,000 shares of the Company's authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock. OnMay 19, 2021 , we entered into an Underwriting Agreement withUBS Securities LLC , relating to the offer and sale of 187,000 shares, par value$0.001 per share, of 5.50% Series A2 Preferred Stock, with a liquidation preference of$25.00 per share (the "Series A2 Preferred Stock", and together with the Series A1 Preferred Stock, Series M1 Preferred Stock, Series M2 Preferred Stock, Series AA1 Preferred Stock, and Series MM1 Preferred Stock, the "5.50% Preferred Stock"). The issuance of the Series A2 Preferred Stock settled onMay 26, 2021 . In connection with such offering, onMay 19, 2021 , we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 1,000,000 shares of the Company's authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock. 113 -------------------------------------------------------------------------------- In connection with the offerings of the 5.50% Preferred Stock, we adopted and amended, respectively, a preferred stock dividend reinvestment plan (the "Preferred Stock Plan" or the "Preferred Stock DRIP"), pursuant to which holders of the 5.50% Preferred Stock will have dividends on their 5.50% Preferred Stock automatically reinvested in additional shares of such 5.50% Preferred Stock at a price per share of$25.00 , if they elect. Each series of 5.50% Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities. At any time prior to the listing of the 5.50% Preferred Stock on a national securities exchange, shares of the 5.50% Preferred Stock are convertible, at the option of the holder of the 5.50% Preferred Stock (the "Holder Optional Conversion"). We will settle any Holder Optional Conversion by paying or delivering, as the case may be, (A) any portion of the Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the Settlement Amount, minus (b) any portion of the Settlement Amount that we elect to pay in cash, divided by (2) the arithmetic average of the daily volume weighted average price of shares of our common stock over each of the five consecutive trading days ending on the Holder Conversion Exercise Date (such arithmetic average, the "5-day VWAP"). For the Series A1 Preferred Stock, the Series AA1 Preferred Stock, and the Series A2 Preferred Stock, "Settlement Amount" means (A)$25.00 per share (the "Stated Value"), plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable 5.50% Holder Optional Conversion Fee for the respective Holder Conversion Deadline. For the Series M Preferred Stock, "Settlement Amount" means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable Series M Clawback, if any, "Series M Clawback", if applicable, means an amount equal to the aggregate amount of all dividends, whether paid or accrued, on such share of Series M Stock in the three full months prior to the Holder Conversion Exercise Date. Subject to certain limited exceptions, we will not pay any portion of the Settlement Amount in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction. The right of holders to convert a share of 5.50% Preferred Stock will terminate upon the listing of such share on a national securities exchange. Subject to certain limited exceptions allowing earlier redemption, beginning on the earlier of the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued, or, for listed shares of 5.50% Preferred Stock, five years from the earliest date on which any series that has been listed was first issued (the earlier of such dates, the "Redemption Eligibility Date"), such share of 5.50% Preferred Stock may be redeemed at any time or from time to time at our option (the "Issuer Optional Redemption"), at a redemption price of 100% of the Stated Value of the shares of 5.50% Preferred Stock to be redeemed plus unpaid dividends accrued to, but not including, the date fixed for redemption. Subject to certain limitations, each share of 5.50% Preferred Stock may be converted at our option (the "Issuer Optional Conversion"). We will settle any Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of theIOC Settlement Amount that we elect to pay in cash, divided by (2) the 5-day VWAP, subject to our ability to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value if the 5-day VWAP represents a discount to our net asset value per share of common stock. For the 5.50% Preferred Stock, "IOC Settlement Amount" means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the date fixed for conversion. In connection with an Issuer Optional Conversion, we will use commercially reasonable efforts to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value and the 5-day VWAP is at a discount to our net asset value per share of common stock, we will settle any conversions in connection with an Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the NAV per share of common stock at the close of business on the business day immediately preceding the date of conversion. We will not pay any portion of the IOC Settlement Amount from an Issuer Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the Redemption Eligibility Date. Beginning on the Redemption Eligibility Date, we may elect to settle any Issuer Optional Conversion in cash without limitation or restriction. In the event that we exercise an Issuer Optional Conversion with respect to any shares of 5.50% Preferred Stock, the holder of such 5.50% Preferred Stock may instead elect a Holder Optional Conversion with respect to such 5.50% Preferred Stock provided that the date of conversion for such Holder Optional Conversion would occur prior to the date of conversion for an Issuer Optional Conversion. 114 -------------------------------------------------------------------------------- OnJuly 12, 2021 , we entered into an underwriting agreement by and among us,Prospect Capital Management, L.P. ,Prospect Administration LLC , and Morgan Stanley & Co.LLC, RBC Capital Markets, LLC andUBS Securities LLC , as representatives of the underwriters, relating to the offer and sale of 6,000,000 shares, or$150,000 in aggregate liquidation preference, of our 5.35% Series A Fixed Rate Cumulative Perpetual Preferred Stock, par value$0.001 per share (the "Series A Preferred Stock" or "5.35% Preferred Stock"), at a public offering price of$25.00 per share. Pursuant to the Underwriting Agreement, we also granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of Series A Preferred Stock solely to cover over-allotments. The offer settled onJuly 19, 2021 , and no additional shares of Series A Preferred Stock were issued pursuant to the option. In connection with such offering, onJuly 15, 2021 , we filed Articles Supplementary with SDAT, reclassifying and designating 6,900,000 shares of the Company's authorized and unissued shares of Common Stock into shares of Series A Preferred Stock. The Series A Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities. Subject to certain limited exceptions allowing earlier redemption, at any time after the close of business onJuly 19, 2026 (any such date, an "Optional Redemption Date"), at our sole option, we may redeem the Series A Preferred Stock in whole or, from time to time, in part, out of funds legally available for such redemption, at a price per share equal to the liquidation preference of$25.00 per share, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for redemption. We may also redeem the Series A Preferred Stock at any time, in whole or, from time to time, in part, including prior to the Optional Redemption Date, pro rata, based on liquidation preference, with all other series of our then outstanding preferred stock, in the event that our Board determines to redeem any series of our preferred stock, in whole or, from time to time, in part, because such redemption is deemed necessary by the Board to comply with the asset coverage requirements of the 1940 Act or for us to maintain RIC status. In the event of a Change of Control Triggering Event (as defined below), we may, at our option, exercise our special optional redemption right to redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control Triggering Event has occurred by paying the liquidation preference, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for such redemption. To the extent that we exercise our optional redemption right or our special optional redemption right relating to the Series A Preferred Stock, the holders of Series A Preferred Stock will not be permitted to exercise the conversion right described below in respect of their shares called for redemption. Except to the extent that we have elected to exercise our optional redemption right or our special optional redemption right by providing notice of redemption prior to the Change of Control Conversion Date (as defined below), upon the occurrence of a Change of Control Triggering Event, each holder of Series A Preferred Stock will have the right to convert some or all of the Series A Preferred Stock held by such holder on the Change of Control Conversion Date into a number of our shares of common stock per Series A Preferred Stock to be converted equal to the lesser of: •the quotient obtained by dividing (i) the sum of the Liquidation Preference per share plus an amount equal to all unpaid dividends thereon (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a Record Date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividends will be included in this sum) by (ii) the Common Stock Price (as defined below); and
•6.03865, subject to certain adjustment,
subject, in each case, to provisions for the receipt of alternative consideration upon conversion as described in the applicable prospectus supplement.
If we have provided or provide a redemption notice with respect to some or all
of the Series A Preferred Stock, holders of any Series A Preferred Stock that we
have called for redemption will not be permitted to exercise their Change of
Control Conversion Right in respect of any of their Series A Preferred Stock
that have been called for redemption, and any Series A Preferred Stock
subsequently called for redemption that have been tendered for conversion will
be redeemed on the applicable date of redemption instead of converted on the
Change of Control Conversion Date.
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--------------------------------------------------------------------------------For purposes of the foregoing discussion of a redemption upon the occurrence of a Change of Control Triggering Event, the following definitions are applicable:
"Change of Control Triggering Event" means the occurrence of any of the following:
•the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation and other than an Excluded Transaction) in one or a series of related transactions, of all or substantially all of the assets of the Company and its Controlled Subsidiaries taken as a whole to any "person" or "group" (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than to any Permitted Holders); provided that, for the avoidance of doubt, a pledge of assets pursuant to any of our secured debt instruments or the secured debt instruments of our Controlled Subsidiaries shall not be deemed to be any such sale, lease, transfer, conveyance or disposition; or •the consummation of any transaction (including, without limitation, any merger or consolidation and other than an Excluded Transaction) the result of which is that any "person" or "group" (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than any Permitted Holders) becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock, measured by voting power rather than number of shares. Notwithstanding the foregoing, the consummation of any of the transactions referred to in the bullet points above will not be deemed a Change of Control Triggering Event if we or the acquiring or surviving consolidated entity has or continues to have a class of common securities (or ADRs representing such securities) listed on the NYSE, the NYSE American or NASDAQ, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American or NASDAQ, or is otherwise listed or quoted on a national securities exchange. The "Change of Control Conversion Date" is the date the shares of Series A Preferred Stock are to be converted, which will be a business day selected by us that is no fewer than 20 days nor more than 35 days after the date on which we provide the notice described above to the holders of Series A Preferred Stock. The "Common Stock Price" will be (i) if the consideration to be received in the Change of Control Triggering Event by the holders of our common stock is solely cash, the amount of cash consideration per share of our common stock or (ii) if the consideration to be received in the Change of Control Triggering Event by holders of our common stock is other than solely cash (x) the average of the closing sale prices per share of our common stock (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event as reported on the principalU.S. securities exchange on which our common stock is then traded, or (y) the average of the last quoted bid prices for our common stock in the over-the-counter market as reported by OTC Markets Group, Inc. or similar organization for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event, if our common stock is not then listed for trading on aU.S. securities exchange. "Controlled Subsidiary" means any of our subsidiaries, 50% or more of the outstanding equity interests of which are owned by us and our direct or indirect subsidiaries and of which we possess, directly or indirectly, the power to direct or cause the direction of the management or policies, whether through the ownership of voting equity interests, by agreement or otherwise. "Excluded Transaction" means (i) any transaction that does not result in any reclassification, conversion, exchange or cancellation of all or substantially all of the outstanding shares of our Voting Stock; (ii) any changes resulting from a subdivision or combination or a change solely in par value; (iii) any transaction where the shares of our Voting Stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving "person" (as the term is used in Section 13(d)(3) of the Exchange Act) or any direct or indirect parent company of the surviving "person" (as that term is used in Section 13(d)(3) of the Exchange Act) immediately after giving effect to such transaction; (iv) any transaction if (A) we become a direct or indirect wholly-owned subsidiary of a holding company and (B)(1) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (2) immediately following that transaction no "person" (as that term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company; or (v) any transaction primarily for the purpose of changing our jurisdiction of incorporation or form of organization. "Permitted Holders" means (i) us, (ii) one or more of our Controlled Subsidiaries and (iii)Prospect Capital Management or any affiliate ofProspect Capital Management that is organized under the laws of a jurisdiction located inthe United States of America and in the business of managing or advising clients. 116 -------------------------------------------------------------------------------- "Voting Stock" as applied to stock of any person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such person having ordinary voting power for the election of the directors (or the equivalent) of such person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.
Except as provided above in connection with a Change of Control Triggering Event, the Series A Preferred Stock is not convertible into or exchangeable for any other securities or property.
For so long as the Series A Preferred Stock is outstanding, we will not exercise any option we have to convert any other series of our outstanding preferred stock to common stock, including the Issuer Optional Conversion, or any other security ranking junior to such preferred stock. As a result, and in accordance with ASC 480, we have presented both our 5.50% Preferred Stock and Series A Preferred Stock within temporary equity on our Consolidated Statement of Assets and Liabilities as ofJune 30, 2022 . We determined the estimated value as ofJune 30, 2022 of our 5.50% Preferred Stock, with a$25.00 stated value per share. We engaged a third-party valuation service to assist in our determination based on the calculation resulting from the total equity on our Consolidated Statements of Assets and Liabilities in our Annual Report on Form 10-K for the quarter endedJune 30, 2022 (the "Form 10-K"), which was prepared in accordance withU.S. generally accepted accounting principles inthe United States of America , adjusted for the fair value of our investments (i.e. from our Consolidated Schedule of Investments) and total liabilities, divided by the number of shares of our Preferred Stock outstanding. Based on this methodology and because the result from the calculation above is greater than the$25.00 per share stated value of our 5.50% Preferred Stock, the estimated value of our 5.50% Preferred Stock as ofJune 30, 2022 is$25.00 per share. Common Stock Our common stockholders' equity accounts as ofJune 30, 2022 andJune 30, 2021 reflect cumulative shares issued, net of shares previously repurchased, as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters, our dividend reinvestment plan, in connection with the acquisition of certain controlled portfolio companies and in connection with our 5.50% Preferred Stock Holder Optional Conversion and Optional Redemptions Following Death of a Holder. When our common stock is issued, the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
We did not repurchase any shares of our common stock for the years ended
Recent Developments
During the period fromJuly 7, 2022 throughAugust 18, 2022 , we issued a total of 8,354,350 shares of our 5.50% Series A1 Preferred Stock and 937,652 shares of our 5.50% Series M1 Preferred Stock, excluding shares issued via the Preferred Stock Dividend Reinvestment Plan, for net proceeds of$210,711 .
On
OnAugust 29, 2022 , we announced the declaration of monthly dividends for our 5.50% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.50% of the Stated Value of$25.00 per share as set forth in the Articles Supplementary for the 5.50% Preferred Stock, from the date of issuance or, if later, from the most recent dividend payment date (the first business day of the month, with no additional dividend accruing in October as a result), as follows:
Monthly Amount ($ per share),
Monthly Cash 5.50% Preferred Shareholder
before pro ration for partial
Distribution Record Date Payment Date periods
September 2022 9/21/2022 10/3/2022 $0.114583
October 2022 10/19/2022 11/1/2022 $0.114583
November 2022 11/16/2022 12/1/2022 $0.114583
117-------------------------------------------------------------------------------- OnAugust 29, 2022 , we announced the declaration of quarterly dividends for our 5.35% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.35% of the Stated Value of$25.00 per share as set forth in the Articles Supplementary for the 5.35% Preferred Stock, from the date of issuance or, if later from the most recent dividend payment date, as follows:
Quarterly Cash 5.35% Preferred Shareholder
Distribution Record Date Payment Date Amount ($ per share)
August 2022 - October 2022 10/19/2022 11/1/2022 $0.334375 On
Monthly Cash Common Shareholder Distribution Record Date Payment Date Amount ($ per share)
September 2022 9/28/2022 10/20/2022 $0.06
October 2022 10/27/2022 11/17/2022 $0.06 Critical Accounting Policies and Estimates
Investment Valuation
As a BDC, and in accordance with the 1940 Act, we fair value our investment
portfolio on a quarterly basis, with any unrealized gains and losses reflected
in net increase (decrease) in net assets resulting from operations on our
Consolidated Statement of Operations. To value our investments, we follow the
guidance of ASC 820, Fair Value Measurement ("ASC 820"), that defines fair
value, establishes a framework for measuring fair value in conformity with GAAP,
and requires disclosures about fair value measurements. In accordance with ASC
820, the fair value of our investments is defined as the price that we would
receive upon selling an investment in an orderly transaction to an independent
buyer in the principal or most advantageous market in which that investment is
transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, due to factors such as volume and frequency of price quotes, our Board of Directors has approved a multi-step valuation process each quarter, as described below.
1.Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.
2.The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.
3.The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment.
118
--------------------------------------------------------------------------------4.The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.
Our non-CLO investments that are classified as Level 3 are valued utilizing a
yield technique, enterprise value ("EV") technique, net asset value technique,
asset recovery technique, discounted cash flow technique, or a combination of
techniques, as appropriate. The yield technique uses loan spreads for loans and
other relevant information implied by market data involving identical or
comparable assets or liabilities. Under the EV technique, the EV of a portfolio
company is first determined and allocated over the portfolio company's
securities in order of their preference relative to one another (i.e.,
"waterfall" allocation). To determine the EV, we typically use a market
(multiples) valuation approach that considers relevant and applicable market
trading data of guideline public companies, transaction metrics from precedent
merger and acquisitions transactions, and/or a discounted cash flow technique.
The net asset value technique, an income approach, is used to derive a value of
an underlying investment (such as real estate property) by dividing a relevant
earnings stream by an appropriate capitalization rate. For this purpose, we
consider capitalization rates for similar properties as may be obtained from
guideline public companies and/or relevant transactions. The asset recovery
technique is intended to approximate the net recovery value of an investment
based on, among other things, assumptions regarding liquidation proceeds based
on a hypothetical liquidation of a portfolio company's assets. The discounted
cash flow technique converts future cash flows or earnings to a range of fair
values from which a single estimate may be derived utilizing an appropriate
discount rate. The fair value measurement is based on the net present value
indicated by current market expectations about those future amounts.
In applying these methodologies, additional factors that we consider in valuing
our investments may include, as we deem relevant: security covenants, call
protection provisions, and information rights; the nature and realizable value
of any collateral; the portfolio company's ability to make payments; the
principal markets in which the portfolio company does business; publicly
available financial ratios of peer companies; the principal market; and
enterprise values, among other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities
under ASC 820 and are valued using a discounted multi-path cash flow model. The
CLO structures are analyzed to identify the risk exposures and to determine an
appropriate call date (i.e., expected maturity). These risk factors are
sensitized in the multi-path cash flow model using Monte Carlo simulations,
which is a simulation used to model the probability of different outcomes, to
generate probability-weighted (i.e., multi-path) cash flows from the underlying
assets and liabilities. These cash flows are discounted using appropriate
market discount rates, and relevant data in the CLO market as well as certain
benchmark credit indices are considered, to determine the value of each CLO
investment. In addition, we generate a single-path cash flow utilizing our best
estimate of expected cash receipts, and assess the reasonableness of the implied
discount rate that would be effective for the value derived from the multi-path
cash flows. We are not responsible for and have no influence over the asset
management of the portfolios underlying the CLO investments we hold, as those
portfolios are managed by non-affiliated third-party CLO collateral managers.
The main risk factors are default risk, prepayment risk, interest rate risk,
downgrade risk, and credit spread risk.
Recent Accounting Pronouncements
For discussion of recent accounting pronouncements, refer to Note 2. Significant Accounting Policies within the accompanying notes to the consolidated financial statements.
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