Good day, and welcome to the Projekt Capital Corporation Second fiscal quarter earnings release and conference call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO.
Please go ahead, sir.
Good morning, Chuck. Thank you very much. Joining me on the call today are Greer Liza, our president, and chief operating officer and Kristin Van Dask, our chief financial officer. Kristin?
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 to Safe Harbor Protect Actual outcomes and results could differ materially from those forecast 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.
Thank you, Kristin. For the December 2019 quarter, Our net investment income was $67,900,000 or $0.18 per share. Down a penny from the prior quarter. Our ratio of NII to distributions was 103%. In the December 2019 quarter, Our net debt to equity ratio was 64.1%.
Down 2.2% from the prior quarter and down 10.9% from December 2018 as we continue to maintain a prudent leverage profile and cautious approach to capital to capital deployment in the current environment. Our net loss for the quarter was $11,200,000 or $0.03 per share. A decrease of 8¢ from the prior quarter, primarily due to a decrease in portfolio valuations during the December 2019 quarter. We are announcing monthly cash distributions to shareholders of 6¢ per share for each of February, March, April. Representing 141 consecutive shareholder distributions.
We plan on announcing our next series of shareholder distributions in May 2020. Since our IPO 16 years ago, through our April 2020 distribution, at our current share count. We will have paid out $17.88 per share to original shareholders, aggregating over $3,000,000,000 in cumulative distributions to all shareholders. Our NAV stood at $8.66 per share in September, down 21¢ from the prior quarter. Consisted of 86.3 percent, floating rate interest assets, and 95.8% fixed rate liabilities.
In recent months, we have trimmed our cost of term debt issuance commensurate with reductions in treasuries. While also retiring more expensive upcoming maturities. Our percentage of total investment income from interest income was 86.9 percent in the December 2019 quarter. A decrease of 3.3% from the prior quarter and an and an increase of 2.8% from the December 2018 quarter. Thank you.
I'll now turn the call over to Greer Thank
you, John. Our scale business with over $6,000,000,000 of assets in undrawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals, which represents 1 of the largest middle market credit groups in the industry. With our scale, longevity, experience, and deep bench, we continue to focus on a diversified investment strategy. That covers 3rd party private equity sponsor related and direct non sponsor lending, prospect sponsored operating, and financial buyouts structured credit, real estate yield investing, and online lending.
As of December 2019, our controlled investments at fair values to 45.8 percent of our portfolio, up 1.8% 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 thousands 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 December 2019, our portfolio at fair value comprised 41.5% secured first lien, 24.7% secured second lien, 15% subordinated structured notes with underlying secured first lien collateral, 0.9 percent unsecured debt, and 17.9 percent equity investments resulting in 81.2 percent of our investments being assets with underlying secured debt, the benefits from borrower pledge collateral. Prospects approach is one that generates attractive risk adjusted yields. In our performing interest bearing investments, we're generating an annualized yield of 12.8 percent, as of December 2019, up ten basis points in the prior quarter. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior and secure debt with our originations to protect against downside risk.
While still achieving above market yields through credit selection, discipline, and a differentiated origination approach. As of December, we held a 120 portfolio companies down 5 from the prior quarter due to repayments and exits. With a fair value of $5,270,000,000. We also continue to invest in a diversified fashion across many different Portfolio company Industries with no significant industry concentration. The largest is 16.8%.
As of December, our asset concentration in the energy industry stood at 2.2% and our concentration in the retail industry stood at 0%. Non accruals as a percentage of total assets stood at approximately 1.6% in December a decrease of 0.8% from the prior quarter. Our weighted average portfolio net leverage stood at 4.75 times EBITDA, up 0.06 from the prior quarter. Our weighted average EBITDA per portfolio company stood at $69,500,000 in December, $127,000,000. We also experienced $432,000,000 of repayments and exits as a validation of our capital preservation objectives and sell down of larger credit exposures, resulting in net repayments of 105,000,000.
During the December quarter, our originations comprised 43.7 percent Asian and sponsored debt, 31.7 percent non Asian to debt, including early look anchoring and club investments, 19.9 percent rated secured structured notes, and 4.7 percent corporate yield buyouts. To date, we deployed significant capital in the real estate arena through our private REIT strategy, largely focused on multi family workforce stabilized yield acquisitions with attractive 10 year plus financing. NPRC, our private REIT, has real estate properties that have benefited from rising rents, strong occupancies, high returning, high value added renovation programs, and attractive financing recapitalizations, resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses. NPRC has exited completely over 20 properties with an objective to redeploy capital into property acquisitions, including with repeat property manager relationships. We expect our exits to continue and have identified multiple additional properties for potential exit in calendar years 2020 and beyond.
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 risk adjusted opportunities. As of December, we held 791,000,000 across 39 non recourse subordinated structured notes investments. These underlying structured credit portfolios comprised around 1700 loans and a total asset base of around 18,000,000,000 As of December, the structured credit portfolio experienced a trailing 12 month default rate of 51 basis points. Representing 88 basis points less than the broadly syndicated market default rate of 139 basis points. In the December quarter, this portfolio generated an annualized GAAP yield of 14.6 structured credit portfolio has generated 1,160,000,000 in cumulative cash distributions to us.
Representing around 83 percent of our original investment. Through December, 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 1.48 times. Our subordinated structured credit portfolio consists entirely of majority owned positions. Such positions can enjoy significant benefits compared to minority holdings in the same trench. In many cases, we receive fee rebates because of our majority position.
As majority holder, we control the ability call a transaction in our sole discretion in the future, and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low. We as majority investor can refinance liabilities and more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal, and extend or reset the investment period to enhance value. We've completed over 25 re financings and resets over the last 2 years. So far in the current March quarter, we've booked 322,000,000 in originations and received repayments of 78,000,000.
Resulting in net originations of 245,000,000. Our originations have comprised 77% agent at sponsor debt, 16% non accented debt and 7% rated secured structured notes. Thank you. I'll now turn the call over to Krista.
Thanks, Claire. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, and waiting toward unsecured fixed rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunity. Our company has locked in We are a leader and innovator in our marketplace. 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 first. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken $4,000,000,000 of our assets as unencumbered assets, representing approximately 73% of our portfolio.
The remaining assets are pledged to Prospect Capital Funding, where in September, we completed an extension of our revolver to a refreshed 5 commitments from 30 banks with a 1,500,000,000 total size accordion feature at our option. The facility revolves until September 2023 followed by a year of amortization with interest distributions continuing to be allowed to us. Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation, including in the past 2 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 rating from Kroll, and investment grade BBB rating from Egan Jones, and investment grade BBB negative rating from S And P and an investment grade BAA3 rating from Moody's, so a total of 4 investment grade ratings.
We've 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've substantially reduced our counterparty risk over the years. In the December 2019 quarter, We repurchased 3,000,000 of our April 2020 notes, 36,000,000 of our July 2022 notes, and $96,000,000 of our program notes. We also continued our weekly programmatic intranotes issuances.
If the need should arise to decrease our leverage ratio, we believe we could slow originations and allow repayments and exits to comment during the normal ordinary course, as we demonstrated in the first half of calendar year 2016 during market volatility. We now have 8 separate unsecured debt issuances, aggregating 1,500,000,000, not including our program notes, with maturities extending to June 2029. As of December 2019, we had 6 outstanding with staggered maturities through October 2043. Now I'll turn the call back over to John.
Thank you, Kristin. Well, we're done for now. Let's see if we have any questions.
We will now begin the question and answer session. And our first question will come from Matt Jaden with Raymond James. Please go ahead. So
first question is on PGX Holdings. So a $100,000,000 second lien marked at about 85. So I guess 22 kind of questions. So first, it looks like last May, there were some regulatory issues with the CFPB. And then secondly, with that, kind of looking at the first lien more liquid debt.
That's trading in the high 40s as far as we can tell. Any commentary on the asset going forward?
Sure. John, do you want to take that? Well, I
I have a bunch of things to say, but I Greer is always a better person to go first, Matt.
Okay. So, so, Matt, first of all, a clarification. If you're examining the services like market, oftentimes, the that those services, that one particular, will have a price, which actually, is a result of 0 trades. So my understanding is there have been 0 trades in in the last, 9 months in in that paper. So that's not not a real price on the first lien.
Secondly, pertaining to the business and its outlook, we've been a lender to that company for many years. The company provides a valuable service, to consumers, to really correct errors in their credit reports, which of course helps consumers and, helps them, improve access to and in terms of credit as a result of improving their credit scores through that error correction process. So it's a viable consumer service This is not a debt collection company. It's a it's a service for, primarily individuals. The company is dealing with some regulatory issues, right now, that are somewhat technical in nature and will take a very long time to resolve.
We understand it. But we understand folks in the picture are positively disposed. No guarantees, of course, for a positive outcome for the business. And the company continues in the meanwhile. Business as usual to, provided services to consumers.
Consumers subscribe. They get the benefits from the company of, credit score error fixing and, the follow on benefits to their, to their credit. And again, we've been a lender this company for many, many years. From Windows a much smaller business and I've seen a lot of organic growth over the years. So those are some of my comments.
John, you wanna add to that?
Yeah. Well, Matt, thanks for asking, because, we, the value of each security in our portfolio is set either precisely by an outside valuation firm in this case, Lincoln or within a within a range, which is also set by Lincoln. And I can I think it's accurate, weird to say that the deal team and, HIG and other people were amazed? At the valuation that low put on this, security, but we can't do anything about it because We are limited unless there's a range, in which case we can be within the range. So, that's the first thing to know.
Our opinions on on how these things, if we disagree with Lincoln, those opinions, I guess, are interesting. The first problem is, this CPFB. Is that what it's called? The unit of the Fed that did did is a Consumer Protection Bureau has a beef with the company. I'm trying to remember what it is.
What is what is in fact the assertion that the CPF B is making?
Well, it's a technical aspect associated with whether or not one is allowed to, charge a it's a fairly modest subscription relative to benefits received. At the beginning of the subscription versus at the end after, definitive benefits have been, delivered. So that that's the layman's gist of it.
Right. And Greer, would I be misstating if I if I said the lawyers and the business people view this as, one of these regulatory actions that will take time to resolve, but not one that will end up requiring a substantial change to the company's business model? Correct. Right. That's my impression.
Number 2, we were quite surprised, Matt, to see a I don't know if it's a single trade at market, allegedly in the 40s, who would sell in the 40s, somehow is factored into the valuation of the entire company. You couldn't, you couldn't go buy that 1st lien at $40,000,000, go out there and try it. You couldn't buy it at $50,000,000 or 6 or 70 or 8. Well, we're told you can't buy it at a 100. No.
I I haven't conducted my own investigation, but that's what I've been told. And then number 3, there is, reason for concern, but it's not those 2 things. It's the fact that Google is a very big a portal has been. I think if we were clear, was it 18% or 20% of the revenue? And I forget the EBITDA.
And Google now has a new, a stricture, that allegedly does not allow company credit repair companies to, to advertise through Google. A paid advertisement. But if you go on Google, you'll see plenty of paid apps. By credit repair companies. So you wonder, well, what is this stricture?
And is it only impacting progression. Further, if you go on Google, you'll notice that progression comes up on the first page. And the non paid area. So what is the impact? And what we've heard is it the impact is yet to be seen.
It's not going to be positive. It's not clear how, how impactful or how long any impact will occur. But in my mind, that is the substantive reason Well, that that that is a, how would I put it, a proper reason? Poor concern. Whereas these other 2 this market thing is absolutely in my mind.
It's not. And then as far as this CPFB claim, from what I've been told, that is of a lesser concern as well. So it's this this Google item. And, Greer, do you wanna comment more on this Google item?
Sure. And we analyze quote, quote, unquote Google risk quite frequently, increasingly with information based, companies that originate customers online starting with whether or not, Google itself is a potential competitor. We view that as very unlikely in this area of offering error correction services It's quite legal in nature. You have to have law firms involved in the back and forth with the credit bureaus It seems to be pretty far field from the type of businesses information based that Google's focused on. That's number 1.
Number 2 is, from an origination standpoint, as with many direct marketers, there's multiple channels in which customers get originated, referrals from existing customers, paid search, free search, direct mail, many different channels as you can imagine. So one of those many different origination channels, which is the paid search mechanism. There seems to be a somewhat visceral blanket, new policy. It's catching up a bunch of companies in it including progression. But when you type in credit repair and and do various keyword searches along the lines of what the company offers, it it shows up, very close to the top anyway on a free search basis.
So it remains to be seen what type of financial impact, that'll have on the company, if any, but there are multiple levers and and mitigants with how the company originates customer. So what is a very clear, consumer need that the company addresses as, the the market leader in this space.
And I had one other thing, Greer, that and Matt did, I guess, remembered too. I think the our attachment point, if I'm not mistaken, Greer, is around 3, less than 3. Is that right?
A little bit higher than that. We'd have to check check-in the precise number, but it's, it's in a comfortable range of underwriting.
It's under 4. And if you and if you took out if you said, oh, well, 20% I think I heard it was 18% to 20% of the revenue or the, or the increase. We're coming from through Google So if you take all that out, you're still at a low, relatively low attachment point for a pretty steady Eddie business. So, Matt, I'm you you asked a question about a company that, amongst others, caught my attention as being how would I put it as a evaluation that seems to be, in my mind, oblivious to some fundamental, business, things going on there. And If you were to talk to the deal team, you'd hear you'd hear a earful about that.
So that's progression. No one can predict the future. You never know with these litigations. Right? They scare people.
But, yeah, hey, Matt, go out and try and buy the first lien at 40 or at 50. Or at 60 or at 70 or at 80 or at 90. Okay? And give us a call if you're able to get any. Okay.
Alright. Were there any other questions, Matt?
Yeah. 2 more. Thanks again on the That's all. I like your question. Okay.
Okay. By the way, if you could buy any for below par, I'll pay you a commission. I hope it's legit. Okay? I'm not gonna do anything that's not permitted, but we'll be very surprised if you're able to buy anything even in par.
Okay. Where do you next?
Okay. So the next two kind of similar to questions I asked last quarter. So an update on interdents. So it looks like 11% markdown on the term b. Any update there given sides
of that.
That's the line.
Here, why don't I what yeah. Why don't I see how well I do if I go ahead, Edgar, and then you can go after me. So it entered in, as, as, Matt, I'm sure you know, you seem quite well acquainted with our portfolio, has 100 of 1,000,000 of dollars of revenue, and anywhere from 10 to $30,000,000 of EBITDA, depending on how things are going. So Internet lost. Internet had I wouldn't call it a black swan event, although that jumps to mind.
Intervent had a whole set of customers diversified. Some higher margin than others. The 22 of the largest or the largest customers merged then, those that ended up being, it happened to be also the 2 of the highest margin customers. So your 2 high margin customers merge, 1 big high margin customer, and you lose that contract. That's called bad news at Internet corporate headquarters.
We've changed the management there. We have 2 great people running this company. They are indefatigable, they are determined. They are, improving the company from top to bottom. We had a salesperson, maybe it's 9 months ago whose job it was to improve sales.
He did as far as far as I know a good job, but he also spent a lot of money doing it. And that all hit the bottom line. In the last 9 months. Some people felt this this salesperson was carried away I haven't yet gotten the, the manifest on whether, you know, what the return was on this sales expenditure, series of expenditures. And as you know, Matt, you spend a lot of money on sales.
Well, they don't the sales and the profit don't all come in the next morning. So that money was spent. That hit the bottom line. That has hurt the company's EBITDA in the last quarter and the last year? As well, the company is behind plan.
So the company has a plan. It's ambitious. No one should be surprised that ambitious plans, often take longer to achieve than the management hopes. We'd rather have people be ambitious and shoot for the stars, than than except low levels of revenue and EBITDA. So the company's plan, the company is behind plan.
Then, when it comes to, We have, actually given the company more money than the company needs because we see high internal rates of return on expenditures such as leasing, purchasing, leasing, new equipment, new drills, new digital equipment, refurbishing reception areas, hiring new dental hygienist paying them more. I don't know if I don't know how many people on this phone call saw the, quartile of the labor force have been growing faster than wage gains for the top 3 quartiles, something the Washington Post editorial writer said has never occurred in our economy. Well, that's impacting a company like Internet. Frankly, we're glad to see those wage gains. Across the bottom quartile of the waiver force, real, real dollar, wage gains.
But it means that our, our expenses for hygienist receptionists and lower, lower paid personnel across the board have exceeded our projections. So, the turnaround at the, really, the recovery and turnaround at Internet is taking longer. But I think, you know, Matt, that that these are prized companies. And, we feel that we're on the right track there.
Just to add to that, an incident. So recall Matt, We may have covered some of this in the past, but as an update, Internet has 2 primary current businesses, which is its Oregon based Medicaid and it's a fee for services business, in in other largely contiguous, primarily contiguous states. The business grew substantially in the Oregon Medicaid business and then gave a bunch of step back with a surprising contract loss that John referenced before. An annual contracting period that just wrapped up and, internet actually regained, some of its lost volumes, not all of it, but but some of in Oregon, which is encouraging. And they're laying the groundwork to win more in the future, basically putting up quality of care positive statistics, for for payers there.
Outside of Oregon, a lot of blocking and tackling pertaining to, getting customers to come in for their every 6 month of hygiene visits managing doctor and hygienist retention, boosting same store, same office revenues. The company's been positively trending in all those areas. In in recent months. So we're we're happy with that progress. They're also looking to potentially grow in California in the Medicaid business there and leverage its core expertise in Oregon.
That could be a pretty nice needle mover in the future. Over the next couple of years. Sean mentioned these are highly valued businesses, strategically and private equity backed as recurring revenue companies. We also feel like we've got a nice recession resilient business because the Medicaid rolls intend to go up, when you have a downturn in the economy and that helps a business like this. So those are some additional points for consideration about Enerdet, Matt.
Okay.
Last kind of asset specific question would be on a non accrual specifically Pacific World Corp. So about, as I can tell, a $38,000,000 write down there, was that a a specific calendar 4Q19 event? Is that a reflection of kind of future assumptions? Any color you can provide there?
So P PwC Pacific World, has been impacted by company specific issues as well as sector related issues, a confluence of events. And it's a pretty significant write down versus original cost at this point. You know, that write down your references on the heels of of of several quarters actually. It's it's been a very tough situation there involving, change out of management and really a failed strategy an execution of the prior business owner and prior management that charged into low margin slash no margin, private label and then failed to execute pay vendors on time, wasn't able to fulfill orders, make customers unhappy. So in taking over the company, we've encountered tremendous challenges to in conjunction with new management to rebuild, customer relationships, to refocus on profitable lines of and to re examine potential profit pro profit drivers for the future, including, 3rd party, brands distribution as opposed to trying to be all things to all people with a large fixed cost structure.
So the company is going through a process of rationalizing It's it's cost structure becoming much more asset light. But it's been also hampered by macro factors and including some of the private label trends, tariffs in China, some of which continues. Coronavirus, more recently, just a lot of a lot of issues on the macro side on top of the company specific ones to deal with. So we have, you know, intense focus internally and externally with the management team on improving the company, but it's going to continue to take additional time and capital to
Hey, Matt. Thanks very much.
Thank you, Matt.
This concludes our question and answer session. I would like to turn the conference back over to John Berry for any closing remarks. Please go ahead, sir.
Okay, everyone. Thank you for joining the call. Have a wonderful afternoon. Bye now.
Thanks all.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.