Good morning, and welcome to Prosta Capital's 1st Quarter Release And Conference Call. All participants will be in listen only mode. Chania's Please note that this event is being recorded. I'd now like to turn the conference over to Mr. John Berry, Chairman and CEO.
Please go ahead.
Thank you very much, Nick. Joining me on the call today are as usual, Grier Eliasek, our President and Chief Operating Officer and Kristin Van Dask, our Chief Financial Officer.
Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward looking statements within the meaning of the securities laws that are intended to be subject due to the impact of many factors. We do not undertake to update our forward looking statements unless required by law.
For additional disclosure, see our earnings press release and our 10 Q filed previously and available on the Investor Relations tab on our website prospectstreet.com. Now I'll turn the call back over to John.
In the September quarter, our net investment income, was $57,500,000 or $0.15 per share as we continue our cautious approach to originations amidst the pandemic. Our net income was 167,700,000 or $0.45 per share as a combination of positive company specific and macro factors increased the valuation of our book. In the September quarter Our net debt to equity ratio was 69.8 percent, down 4.30 basis points from March and similar to the which has been the case for multiple quarters. Over the past two and a half years, other listed BDCs overall have increased leverage. With a typical listed BDC in September at around 115 percent debt to equity.
Or about 4.50 percentage points higher than for prospects. Prospect has not increased debt leverage instead electing lower risk from lower debt leverage with a cautious approach given macro dynamics In May, we moved our minimum 1940 act regulatory asset coverage to 150%. Equivalent to 200 percent debt to equity which increased our regulatory cushion and gave us flexibility to pursue our recently announced junior capital perpetual preferred equity issuance. Which counts toward 40 act asset coverage, but which also gets significant equity treatment by our rating agencies. We have no plans to increase our actual drawn debt leverage beyond our historical target of 0.7to0.85 debt to equity and we are currently below such target range.
Prospect's balance sheet is highly differentiated from peers, with 100% of prospects funding coming from unsecured and non recourse debt, which has been the case for over 13 years. Unsecured debt was 88.6 percent of Prospect's total debt in September compared to about half that for the typical listed BDC. Our unsecured and diversified funding profile provides us with significantly lower risk and significantly more investment strategy and balance sheet flexibility than many of our BDC peers enjoy. NAV stood at $8.40 in September of $0.20 3 percent from the prior quarter. We have outperformed our peers during the past multiple quarters of macro pressures as a direct result of our previous derisking from not chasing leverage as well as other risk management controls.
We are staying true to that strategy one that has served us well since 1988 controlling and reducing portfolio and balance sheet risk both to protect the capital entrusted to us and to protect the ability of such capital to generate earnings for our shareholders. We are pleased to report once again. We are announcing monthly cash distributions of $0.06 per share per each of November, December January. These 3 months represent the 39th, 40th, and 41st in a row $6 distributions. As we close in on the three and a half year mark for unchanged monthly cash distributions.
Consistent with past practice we plan to announce our next set of shareholder distributions in February. Our goal over the long term is to maintain and ideally grow steady monthly cash distributions as we seek to provide low volatility stability to our shareholders amidst a macro market backdrop that delivers greater volatility elsewhere. Since our IPO over 16 years ago, to January 2021 to our distribution in January 2021 at the current share count We will have paid out $8.36 per share to original shareholders aggregating over $3,200,000,000 and cumulative distributions to all shareholders. Our NII per share has aggregated per share have aggregated $2.16, resulting in our NII exceeding distributions over this period by shareholder distributions on the heels of a successful launch of our $1,000,000,000 5.5 percent preferred program. We are currently focused on multiple initiatives to enhance return on equity in NAV in an accretive fashion, including first, I recently announced $1,000,000,000 targeted perpetual preferred equity program second, a greater utilization of our cost efficient revolving credit facility with an incremental cost of approximately 1.3%.
At today's 1 month LIBOR. 3rd, retirement of higher cost liabilities and 4th, increased originations in senior secured debt and selected equity investments to deliver targeted risk adjusted yields and total returns and under invested balance sheet. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock, on the same basis as other and has never sold of prospect shares, increasing cumulative purchases to over $540,000,000. Senior Management and employee insider ownership is now over 27% of shares outstanding. Thank you.
I will now turn
$6,000,000,000 of assets and undrawn credit continues to deliver solid performance in the current challenging environment. Our experienced team consists of approximately 100 professional, which represents 1 of the largest middle market investment groups in the industry. With our scale, longevity, experience and deep bench, We continue to focus Private Equity sponsor related lending, direct non sponsor lending, prospect sponsored operating and financial buyouts, structured credit, and real estate yield Investing. Consistent with past cycles, we expect during the next downturn to see an increase in secondary opportunities coupled with wider spread primary opportunities with a pullback from other investment groups, particularly highly leveraged one. As of September 2020, our controlled investments at fair value stood at 42.8% of our portfolio.
Down 0.4% from the prior quarter. This diversity allows us to source a broad range, and high volume of opportunities. Then select in a disciplined bottoms up manner the opportunities we deem to be the most attractive on a risk adjusted basis. Our team typically evaluates 1000 of opportunities annually and invests in a disciplined manner in a low single digit percentage of such opportunities. Our non bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans.
As of September, our portfolio at fair value comprised 45.9 percent secured first lien 24.1 percent other senior secured debt, 13.6 percent subordinated structured notes with underlying secured 1st lien collateral, 1.0 percent unsecured debt, and 15.4%. Equity investments, resulting in a stable 83.6 percent of our investments being assets with underlying secured debt. Benefiting from borrower pledged collateral. Prospects approach is one that generates attractive risk adjusted yields. And are performing interest bearing investments from the prior quarter.
We achieved this increase despite a headwind from the current calendar though we expect stability now due answers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secure debt our origination approach. As of September, we held 122 portfolio companies, up 1 from the prior quarter, with a fair value of 5,390,000,000, an increase of 154,000,000 from the prior quarter. We also continue to invest in a diversified fashion across many different portfolio company industries with no centration in the energy industry stood at 1.2%, down 0.4% from the prior quarter. Our concentration in the hotel, restaurant, and leisure sector stood unchanged at 0.4%.
And our concentration in the retail industry stood unchanged at 0%. Non accruals as a percentage of total assets stood at approximately 0.7% in September, down 0.2% from the prior quarter. Our weighted average portfolio net leverage stood at 4.40 times EBITDA, down 0.11 from the prior quarter and substantially below our reporting peers. Our weighted average EBITDA per portfolio company stood at 78.5 $1,000,000 in September, an increase from $72,000,000 in the prior quarter. Originations in the virus muted September quarter aggregated 177,000,000.
We also experienced $145,000,000 of repayments and exits as a validation of our capital preservation objective and sell down of larger credit exposures resulting in net originations of $32,000,000. During the September quarter, our originations comprised 52.8% real estate, 35.8 percent agented sponsor debt, 8.5 percent corporate yield buyouts, and 2.9% rated secured structured notes. To date, we've deployed significant capital in the real estate arena, through our private REIT strategy, largely focused on multi family workforce stabilized yield acquisitions with attractive estate properties that have benefited over the last several years from rising rents, strong occupancy, high returning, value added renovation programs, and attractive financing recapitalization. Resulting in an increase in NPRC has exited completely over 30 properties at a more than 20% IRR with an objective to redeploy capital into new property acquisitions including We continue to monitor our rent collections, which are holding up well Our structured credit business has delivered attractive cash yields, demonstrating the benefits of pursuing majority stakes. Working with world class management teams, providing strong collateral underwriting through primary issuance and focusing on attractive 39 non recourse subordinated structured notes investment.
These underlying structured credit portfolios priced around 1700 loans and a total asset base of around $17,000,000,000. As of September, the structured credit portfolio experienced a trailing 12 month default rate of 220 basis points, which represents 197 basis points less than the broadly syndicated market default rate of 417 basis points. In the September quarter, this portfolio generated an annualized GAAP yield of 13.6%. As of September, our subordinated structured credit portfolio has generated 1,220,000,000 in cumulative cash distributions to us which represents around 88 percent of our original investment. Through September, we've also exited 9 investments.
Totaling 263,000,000 with an average realized IRR of 16.7 percent and cash on cash multiple of one 0.48 times. Our subordinated structured credit portfolio consists entirely a majority owned position. Such positions can enjoy significant benefits compared to position. As a majority holder, we control the ability to call a transaction in our sole discretion in the future, and we believe such fashion rather than when loan asset valuations might be temporarily low. We as majority investor can refinance liabilities, on more advantageous terms, remove bond baskets in exchange for better terms and debt investors in the deal, and extend or reset the investment period to enhance value.
We've completed 27 refis and resets over the last 3 years. So far in the in the current December, 2020 quarter, we have booked $89,000,000 in originations and experienced $82,000,000 of repayments, for $7,000,000 of net originations. Originations have comprised 64.4 percent, agent at sponsor debt, 19.1% non agent at debt, and 14.4% real estate. Thank you. I'll now turn the call over to Kristen.
Thank you, Greer. We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets, waiting toward unsecured fixed rate debt, avoidance of unfunded asset commitments, and lack of near term maturities demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Into the future. Today, we have 0 debt maturing until July 2022 or around 2 years from now. Our total unfunded eligible commitments to non controlled portfolio companies totals approximately 22,000,000 or less than and we were the 1st company in our industry to issue a convertible bond, develop a notes program, issue under a bond ATM, acquire another BDC, and many other lists of 1st.
Now we've added our programmatic perpetual preferred issuance to that list of 1st. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry. Which we have we held approximately $3,910,000,000 of our assets as unencumbered assets, representing approximately 72% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, where in September 2019, we completed an extension of our revolver to a refreshed 5 year maturity. We currently have $1,070,000,000 of commitments from 30 banks with a 2023 followed by a year of amortization with interest distributions continued continuing to be allowed to us.
Of our floating rate assets, 83.5 percent have LIBOR floors, with a weighted average LIBOR floor of 1 spot 66%. Outside of our revolver and benefiting from our unencumbered assets, we have issued at Prospect Capital Corporation, including in the past few years, multiple types of investment grade unsecured debt, including convertible bonds, institutional bonds, baby bonds, and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross defaults with our revolver. We enjoy an investment grade BBB negative rating from S And P. And investment grade BAA3 rating from Moody's and investment grade BBB negative rating from Kroll.
And an investment grade BBB rating from Egan Jones. With all of these recently reaffirmed. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 23 years. Our debt maturities extend through 2043. With so many banks and debt investors across so many debt tranches, we have substantially reduced our counterparty risk over the years.
In the September 2020 quarter, we completed a successful tender offering for and then just after quarter end retired through a tender process, another 6,000,000 of such notes. Thereby taking that tranche down to 2 $22,000,000 and substituting more expensive 5 percent term debt with significantly lower cost revolving credit, with an incremental 1.3% cost. We also have continued with our weekly programmatic internotes issuance. In the first half of calendar year 2016 during market volatility, we reduced our leverage ratio by slowing originations, and allowing repayments and exits to come in during the ordinary course. And we expect a similar benefit in the current dynamic environment.
We now have 7 separate unsecured debt issuances, aggregating $1,200,000,000, not including our program notes, with maturities extending to June 29. As of September 2020, we had through it to our dividend reinvestment plan, or DRIP, that allows for a 5% discount to the market price for DRIP participants. As many brokerage firms either do not make drips automatic or have their own synthetic drips with no such 5% discount benefit, We encourage any shareholder interested in your participation to contact your broker. Please make sure to specify you wish to count and obtain confirmation of the same from your broker. Now, I will turn the call back over to John.
Thank you, Kristin. I hope you've enjoyed your 12th anniversary with us getting this, 10Q out?
Hello. Thank you, John.
Okay. I thought it might have been cut off. Okay. So now we can take questions.
First question comes from Finian O'Shea of Wells Fargo Securities. Please go ahead.
Hi, everyone. Thanks for having me on. First question on the CLOs, I think Greg, you talked a little bit about maybe calling some deals. Given the cash return has come down a little bit. Is that something you're, more actively thinking about, turning over the CLO portfolio?
Thank you for your question Finney. I talked about the optionality to call deals in terms of actually calling deals in the current environment, I see that as somewhat unlikely, compared to other potential options. We've been selectively refinancing tranches for example, which again is another benefit of the position that we hold. For example, certain of our deals had fixed rate tranches as opposed to floating rate and of course in the current low interest rate environment compared to prior years, the modest cost upfront of such refinancing at extremely high internal rate of return investments attached to it triple digit, in many cases, quadruple digit IRR. So we have been pursuing that type of optimization, in general our CLO book, these deals, in my opinion, worked as advertised in the sense that when you have a dislocation in the marketplace like what we saw with a spike in defaults and stress created, especially in certain industry segments from virus, you did have a selected number of deals, that tripped their over collateralization tests and had a diversion of cash flows away from the equity tranche that we hold, but these are, they worked as advertised, I said, because these are self healing vehicles where then the deals get on size again and cash flows get restored, to said equity tranche without any foreclosure, any, problems that created by simply borrowing a loan or even a bond and we think the September quarter was and that we have already seen improvement since then.
So far in October, for example, the cash distributions have exceeded expectations in many cases by 10% 20% from what had been previously modeled. And we have seen an increase in our GAAP yields, and of course, expected cash yields based on, diversions ceasing and and cash flows coming in better than expected. So, we are happy with how the deals have have worked out again as advertised and we continue as I mentioned in the prepared remarks to outperform the industry with a default rate of only about half of the overall market?
Okay. That's helpful. And then just one more on the, preferred stock issuance. I know this was launched in the quarter, just I think more recently getting off the ground, correct me if I'm wrong, but just an update on how that program is going, how it's being received in the market so far?
Absolutely. We are very excited about this program, adding to our many lists of 1st as a leader in the business development industry. And this is a significant benefit from our 150 percent election from a few months ago. We view this as an accretive and ratings neutral driver for our business. It's a programmatic type of offering in which we expect to raise this $1,000,000,000 of capital in an accretive fashion over a multi year period, which is fine because that allows for Much like with our programmatic debt issuance that we do through in capital today, we have just in time cash capital that comes in to, to fund our capital needs and originations and transactions that we are doing in the marketplace.
And obviously this would enhance and grow our balance sheet. It also provides, cap, another capital source for us that isn't as dependent on the more volatile traded capital markets that's highly beneficial when you go through bouts of volatility. It's nice to have a valve that's turned on where capital is flowing in, that we can then utilize to fund deals think everybody in the credit space wishes they could go back to March and buy everything they can. Some of those discounts were were quite fleeting, indeed. So, the process as is typical for a non traded programmatic issuance as you go through a period of materials preparation.
3rd party due diligence report generation selling agreement signing and then you get a capital raises that start. We've had a modest influx of capital today, but we are really, I would say, laid the groundwork in the last several weeks with some excellent work done by our team and our distributor, preferred capital securities. That then puts us in a position to start bringing in greater capital. So our hope is that you will see increases here in the December quarter with more of a significant impact from an accretion and number standpoint. Calendar year 2020.
Is that helpful Finian?
Very much so. And that's all for me. Thank you.
Thank you. Next question is from Robert Dow of Raymond James. Please go ahead.
You said that the target leverage for the overall business would remain debt to equity 0.7to0.85. I mean, can you clarify with this this preferred, would be treated as as equity in that calculation. And if that the case? Do you have a target, regulatory, leverage that you'd you'd like to get to separate from, you know, because obviously, to your point, the preferred counters as as debt in the regulatory leverage calculation, but it's treated differently from for for rating agencies. So could you clarify that for us?
Sure, Robert. The first part of your, speaking, got cut off, but I think you were asking about whether or not the preferred is part of the 0.7.85 leverage that was quoted and where we would get to after giving effect to the preferred. So the preferred is not part of the 0.7to0.85. It's not a substitute for historical drawn leverage, but in addition to in a ratings neutral from a ratings neutral standpoint because it is a perpetual instrument, where there is not a cash drain requirement. So, this is attractive from a risk management and liquidity standpoint.
For our business as well. If you take the $1,000,000,000 of target issuance and then assume that in full, Robert, it would add about call it 0.3 to a, prefer to common, so 0.3 on top of the wherever we are on the debt side of 0.7to0.85. That's approximately where we would end up.
Got it. Done it. Very helpful. Thank you. Just just one more on on dividend income in in the quarter.
Obviously, you know, not that I wanna necessarily focus on one portfolio company, but Valley Electric has historically been a good dividend payer for you. This quarter, it didn't pay a dividend, but the equity got marked up. So can you give us any color on on why no dividend from that source and what the prospects are for for dividend income from that source or or some other portfolio companies. To to return, maybe the in in the latter part of this year or more likely next calendar year. Can you give us any color there?
Sure. I mean, in general, we have, over the years, I would say, transition a bit more from the dividend distribution strategy, where we hold deeper into the capital structure and have greater equity and economic ownership of businesses. That we have looked for income drivers more through what we hold on the debt side as opposed to equity. Valley has been a strong contributor over the years. For those that may not be aware, this is an infrastructure services provider in the Pacific Northwest in particular Washington state that's involved in, both corporate as well as governmental institutional installations, there is quite the tech boom that continues in Seattle and surrounding areas and valley as a beneficiary of that growth and has grown substantially over the years of our ownership in conjunction with management, which has done a terrific job as well.
Be episodic and not quite as recurring as one might like, which is a reason for, having a preference for it and prioritizing the debt side of the equation, because equity distributions as you might and probably know are capped at whatever tax based earnings profits are for a particular portfolio company, and you can have other in many cases, not to economics factors that can change the tax characteristics of a particular business. I'm sometimes just a timing related aspect as well. So, we are happy with how Valley is doing from a valuation standpoint. There are many factors that go into the value of a business. Part of it is company specific for how a business is performing.
Part of it is macro, specific in terms of overall interest rates and multiples and credit spreads and risk on and risk off and in other drivers. And in general, I think you've seen in our book and of course many other portfolios out there in the September quarter, in general, a macro, uptick, just about every, well, every business segment within our book, whether you're talking about corporate credit, control deals, non control deals, structured credit, real estate, the small online lending book that we hold, every single line of business was up this quarter. And, the vast, vast bulk of the companies as well were up this quarter as well. So, in general, an uptick in the market and some factors, you have a little bit more quote, quote, control over in terms of helping to drive individual company performance versus other factors, but so we are always measured in that and take a long term view, Robert. That helpful.
The
That that that is helpful and it actually ties into kind of the the the the next question. I mean, historically, my last question, for instance, historically, you know, you've made more control investments, haven't recently made, a lot of incremental new control investments is, you know, given that the the status of the market, and companies that are out there and the M and E markets rebounding, etcetera. But would you expect over, say, the next 18 months to to 2 years, your control book as a percent of say the overall book to grow or decline in size or stay the same? I mean, any appetite for increase in the control exposure right now?
Well, it's an interesting, and highly relevant question, Robert, because that's discussion and debate we have frequently, as you can imagine, as a dividend payer as company focused squarely on principal protection, downside protection and primarily a lender, we are simply focused on that preservation of capital. At the same time, when you are in the par of lending business, absent special dislocated periods where you can buy, assets at discount. In general, a parlender is one direction to go down through through default. So is nice to have, offsetting equity upside to compensate, hopefully more than and compensate for what might happen on the straight lending side of things, we have seen that primarily in our business and where we've been that upside through our real estate business, which is an equity. In any case, is preferred equity with upside type of business because we have 1st lost subordination by a third party property management team.
But we get ups from that and that's how we've delivered north of 20% internal rates of return, on more than 30 exits. But we have had a very active discussion on the corporate side of things because we have had nice successes there. It's been a frothy market, of course, for M And A. The multiples that we desire to pay and seek to pay in general tend to be lower than where deals clear the market because we are trying to find deals and structure deals where we have both downside protection and upside and generate and attractive current yields. So, we are trying to balance the short term, medium term and long term at the same time and only a small percentage deals will pass muster.
You have seen an increase in size in our portfolio companies we're up to, I think, a record level of $79,000,000 of average EBITDA in general and credit figure is better, but We are selectively looking at smaller companies in that where we could potentially be a one stop buyer as we've done historically, add a low multiple of cash flow, leading with a debt instrument, also holding equity, ideally not all of the equity, but having a significant ownership of the management team as well for good alignment. And that is an active part of our business, Robert. I would just say it's it's episodic. You don't know when you're going to connect on a deal, but we have a lot of dry powder at the moment and particularly when you have markets that get seized up and volatile time period. So, I mean, here in 20 20.
There was a relatively rapid healing on the lender side, mainly because the credit markets and capital gets recovered swiftly. Otherwise, you saw a lot of folks that simply stopped doing deals. If you have another period like that, and it's just a question of of when, not if, and a pullback, then sponsors won't be able to get their deals financed and the power of the one stop. Becomes much stronger and the connectivity or connect rate, if you will, of our deals and our capital is likely to go up. So it's hard to predict.
To answer your question, we will be higher, we will be lower 18 months from now, not really sure. Kind of depends on market conditions what we find. We have got a pretty attractive pipeline right now of deals a real estate is active right now. We have got some corporate control deals, in the pipeline, right now and and on talking new platforms and not just add ons to existing companies, which have been another, of course, driver for us over the years. So it's a vibrant and very much active part of our business, Robert, and appreciate the question.
Okay. Thank you.
John, anything you'd add to that?
No. I think said everything that there was to be said, but thank you.
This concludes our question and answer session. Now like to turn the conference back over to Mr. John Berry for closing remarks.
Okay. Thank you, everyone. Have a wonderful afternoon. Bye now.
Thanks all. Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.