Monday, February 3, 2014

PSEC: February 2014 Report

Prospect Capital (PSEC) is many investors first BDC investment due to its high-yield, overall size, liquidity and growth.  I consider PSEC a ‘Buy’ and a component in my suggested ‘High-Yield’, ‘General’ and ‘Value’ portfolios.  It has higher projected returns than the average BDC but along with higher amounts of risk and I still believe that it is underpriced.  PSEC is the most innovative company in the industry and was the first to issue a convertible bond, conduct an ATM program, develop a notes program, issue an institutional bond and acquire a competitor. 

After digesting the recently reported results and listening to the earnings call I believe that management has a clear view regarding the multiple strategic directions and sources of income to support dividends in the future.  Currently it is operating with limited amounts of leverage but management has committed to increasing this by the end of the year.  This will be driven in large part by new equity issuances and originations.  At this point PSEC has enough liquidity to actively pursue investments that other BDCs cannot as well as having the flexibility to invest in all levels of a company compared to a typical bank.  This is a key differentiator in the overall lending environment.

Some of my key concerns are related to how PSEC will continue to cover dividends.  I am 100% certain they will never cut dividends unless there is a serious economic downturn.  However my concerns are mostly related to risk and the potential for net asset value (“NAV”) impairment issues.  Also I believe that investors are currently discounting PSEC shares based on a lack of disclosure around some of the new platforms as well as overall risk levels.  This has a direct impact on shareholders who may not benefit from increases in stock values as discussed further on Page 14.  Its at-the-market (“ATM”) program also has an effect on share prices keeping them within a certain range.

This article discusses the pros and cons of investing in PSEC along with earnings projections, dividend sustainability and growth potential over the coming quarters including best and worst case scenarios as well as key risk considerations, updated rankings/pricing compared to the other 25 BDCs that I follow.

Also included:
  • Interest rate sensitivity analysis
  • Timing for future share issuances
  • Projected total returns compared to the other BDCs
  • Price target based on expected total returns
  • Pricing based on multiples of NAV and projected earnings
  • Overall rankings and recommendations

This report is not publicly available, will not be published on Seeking Alpha. If you would like to become a premium subscriber please visit “Premium Subscriber”.

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