Prospect Capital’s (PSEC) Prévisionnel 2eme trimestre 2017 (V.O.)

Prospect Capital’s (PSEC) CEO John Barry On Q2 2017 Results – Earnings Call Transcript

Version original retranscrite de la réunion du 9 février 2017.

Executives

John Barry – Chairman & Chief Executive Officer

Grier Eliasek – President & Chief Operating Officer

Brian Oswald – Chief Financial Officer & Chief Compliance Officer

Analysts

Christopher Nolan – FBR & Company

Merrill Ross – Wunderlich

Christopher Testa – National Securities Corp

Casey Alexander – Compass Research & Trading

Operator

Good morning and welcome to the Prospect Capital Second Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead.

John Barry

Thank you, Anita. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer, and Brian Oswald, our Chief Financial Officer. Brian?

Brian Oswald

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 protection. 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, our 10-Q, and our corporate presentation filed previously and available on the Investor Relations tab on our Web site, prospectstreet.com.

Now, I’ll turn the call back over to John.

John Barry

Thank you, Brian.

For the December 2016 fiscal quarter, our net investment income or NII was $84.4 million or $0.24 per share up $0.02 from the prior quarter.

Our net income was $100.9 million or $0.28 per share up $0.05 from the prior quarter. These increases from the prior quarter occurred as we made new investments and recorded unrealized appreciation of our investments.

For the six months ended December 2016, our net investment income was $163.3 million or $0.46 per share down $0.08 from the prior year. Our net income was $182.2 million or $0.51 per share up $0.70 from the prior year. With the Harbortouch sale and other significant repayments, we were under invested during the first half of fiscal 2017 carrying an average cash balance of $168 million.

In addition to deploying capital in new originations, we were also seeking to increase income to extensions and refinancings in our structured credit portfolio, realizations in our multifamily real estate portfolio, securitizations in our online lending business, drawing on our revolver to retire more expensive term debt, divesting lower yielding assets in favor of servicing fees and higher yielding assets, nursing energy-related investments and benefiting from enhanced asset returns as LIBOR potentially increases beyond four levels.

We previously announced monthly cash dividends to shareholders of $0.08333 per share for February, March and April 2017, 105 consecutive shareholder distributions. We plan on announcing our next series of shareholder distributions in May. Since our IPO 13 years ago through our April 2017 distribution at the current share count, we will have paid out $15.62 per share to initial continuing shareholders exceeding $2.2 billion in cumulative distributions to all shareholders.

Our NAV stood at $9.62 per share in December 2016, up $0.02 from the prior quarter. Our debt to equity ratio was 76.2% at December 2016 down 400 basis points from 80.2% at December 2015.

Our balance sheet as of December 31, 2016 consisted of 90.4% floating rate interest earning assets and 99.9% fixed rate liabilities positioning us to benefit from potentially significant rate increases.

 

Our recurring income as measured by our percentage of total investment income from interest income was 95% in the December 2016 quarter. We believe there is no greater alignment between management and shareholders then for management to purchase a significant amount of stock particularly when management has purchased stock in the open market paying the same prices as other shareholders.

Prospect is the largest — Prospect Management is the largest shareholder in Prospect and has never sold its share. Management on a combined basis has purchased at cost over $170 million of stock in Prospect including over $100 million since December 2015. Thank you.

I will now turn the call over to Grier.

Grier Eliasek

Thanks John.

Our scaled business with over $7 billion of assets and undrawn credit continues to deliver solid performance. Our team consists of approximately 100 professionals, representing one 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 third-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 2016, our controlled investments at fair value stood at 31.5% of our portfolio. 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 2016, our portfolio at fair value comprised 45.9% first lien, 23.6% second lien, 18.3% structured credit with underlying first lien assets, 0.2% small business whole loan, 0.8% unsecured debt and a 11.2% equity investments, resulting in 88% of our investments being assets with underlying secured debt benefiting from borrower pledged collateral.

Prospect’s approach is one that generates attractive risk-adjusted yields and our debt investments were generating an annualized yield of 13.2% as of December 2016, up 40 basis points from 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 have continued to prioritize first lien senior and secured debt with our originations to protect against downside risk while still achieving above-market yields through credit selection disciplines and a differentiated origination approach.

As of December 2016, we held 123 portfolio investments with a fair value of $5.94 billion. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is 9.3%. As of December 2016, our asset concentration in the energy industry stood at 2.6%, including our first lien senior secured loans where third parties bear first loss capital risk.

Non-accruals as a percentage of total assets stood at approximately 1.5% in December 2016, with approximately 0.4% residing in the energy industry. Our weighted average portfolio net leverage stood at 4.77x EBITDA. Our weighted average EBITDA per portfolio company stood at $51.6 million in December 2016.

The majority of our portfolio consists of sole agented and self-originated middle-market loans. In recent years, we have perceived the risk adjusted reward to be higher for agented, self-originated and anchor investor opportunities, compared to the non-anchor broadly syndicated market, causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business. Originations in the December 2016 quarter aggregated $470 million.

 

We also experienced $645 million of repayments and exits as a validation of our capital preservation objective resulting in net repayments of $175 million.

During the December 2016 quarter, our originations comprised 54% syndicated debt including early look anchoring investments and club investments, 15% third-party sponsored deals, 15% online lending, 7% structured credit, 4% aircraft leasing, 3% real estate and 2% operating buyouts.

Today we have made multiple investments in the real estate arena through our private REITs largely focusing on multifamily stabilized yield acquisitions with attractive 10-year financing. In the June 2016 quarter, we consolidated our REITs into NPRC. Our real estate portfolio is benefiting from raising rents and strong occupancies and our cash yields have increased.

In the past year, we have recapitalized many of our properties with attractive financing and exited completely certain properties including Vista, Abbington and Bexley, so we can redeploy capital into other return enhancing avenues.

We expect both recapitalizations and exits to continue. We also recently closed our first portfolio investments in student housing an attractive segment similar to multifamily residential, where we have analyzed many opportunities for several years.

Over the past few years, we have grown our online lending portfolio directly as well as within NPRC with a focus on super prime and near prime consumer and small business borrowers. We and NPRC currently have exposure to approximately $847 million today of loans directly and through securitization interests across multiple origination and underwriting platforms.

Our online business, which includes attractive advance rate financing for certain assets is currently delivering a mid-teens levered yield net of all costs and expected losses. In the past three years, we and NPRC have closed an upsized five bank credit facilities and two securitizations including in the December 2016 quarter, our first consumer securitization to support our online business with more credit facilities and securitizations expected in the future.

Our structured credit business performance has exceeded our underwriting expectations demonstrating the benefits of pursuing majority stakes working with world-class management team providing strong collateral underwriting through primary issuance and focusing on attractive risk adjusted opportunities.

As of December 2016, we held $1.1 billion across 41 non-recourse structured credit investments; the underlying structured credit portfolio is comprised over 2800 loans and a total asset base of over $20 billion.

As of December 2016, our structured credit portfolio experienced a trailing 12-month default rate of 1.16% a decline of 23 basis points from the prior quarter and 42 basis points less than the broadly syndicated market default rate of 1.58%. And the December 2016 quarter, this portfolio generated an annualized cash yield of 21.5% and a GAAP yield of 14.8%.

As of December 2016, our existing structured credit portfolio has generated $813 million in cumulative cash distributions to us representing 62% of our original investments. We have also exited seven investments totaling $154 million with an average realized IRR of 16.8% and cash-on-cash multiple of 1.42x.

Our structured credit portfolio consist entirely a majority-owned position, such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases, we receive fee rebates because of our majority position. As a majority holder, we control the ability to call a transaction in our sole discretion in the future and we believe such options as substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than win loan asset valuations might be temporarily low. We as majority investor can refinance liabilities on more advantageous terms remove bond baskets and exchange for better terms from debt investors in the deal and extend or reset the investment period to enhance the value.

 

Our structured credit equity portfolio as paid us an average 24.4% cash yield in the 12 months ended December 31, 2016. So far in the current March 2017 quarter, we have booked $273 million in originations and received repayments of $26 million resulting in net originations of $247 million. Our originations have comprised 66% third-party sponsored deals, 15% real estate, 8% online lending, 6% operating buyout and 5% syndicated debt. Thank you.

I will now turn the call over to Brian.

Brian Oswald

Thanks Grier.

We believe our prudent leverage diversified access to matched-book funding, substantial majority of unencumbered assets and wading towards unsecured fixed rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities.

Our company has locked in a ladder of fixed rate viabilities extending over 25 years into the future. While the significant majority of our loans float with LIBOR, providing prudential upside to shareholders as interest rates rise.

We are leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond, acquire another BDC and many other first.

Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry which we have taken towards the construction of the right-hand side of our balance sheet.

As of December 2016, we held approximately $4.8 billion of our assets as unencumbered assets representing approximately 78% of our portfolio. The remaining assets are pledged to Prospect Capital Funding LLC, which as a AA rated $885 million revolver with 21 banks and with a $1.5 billion total size accordion feature at our option.

The revolvers priced at LIBOR plus 225 basis points and we have also till March 2019 followed by one-year of amortization with interest distributions continuing to be allowed to us.

Outside of our revolver and benefiting from our unencumbered assets, we issued at Prospect Capital Corporation 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 an investment grade BBB- rating from S&P. We have now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration made more than 25 years.

Our debt maturities extend through 2043 with so many banks and debt investors across so many debt tranches; we substantially reduced our counter-party risk over the years.

We have refinanced three debt maturities in the past two years including our $100 million baby bond in May 2015, $150 million convertible note in December 2015 and our $167.5 million convertible note in August 2016.

We have no liability maturities exceeding $5 million for the remainder of fiscal 2017. Our $885 million revolver is currently undrawn, if the need should arrive to decrease our leverage ratio, we believe we could slow originations and allow repayments and exits to come during the ordinary course as we demonstrated during the first half of calendar year 2016.

On December 10, 2015, we issued $160 million of six and a quarter percent senior unsecured notes due June 2024. We increased that bond by $39 million under an ATM program from June to August 2016. We now have seven separate unsecured debt issuances aggregating $1.7 billion, not including our program notes with maturities ranging from October 2017 to June 2024. As of December 31, 2016, we had $962 million of program notes outstanding with staggered maturities through October 2043.

 

Now I’ll turn the call back over to John.

John Barry

Okay. Thank you very much, Grier and Brian. We can now answer any questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. [Operator Instructions]

Our first question comes from Christopher Nolan with FBR & Company. Please go ahead.

Christopher Nolan

Hi guys, thanks for taking my questions. Grier, what’s the strategy here, it sounds you guys are going further down the capital stack in terms of the percentage make-ups of the second lien and so forth, is that the case?

Grier Eliasek

So we did have an up tick in second lien and I would describe it as a strategy change Chris, more of a timing effect associated with having a couple of substantial first lien repayments in the December quarter coupled with some deals with our — were attracted that did happen to be second lien. We just closed our recently — just under $140 million first lien investment, they’re just increased our first lien mix inter quarter and the current March quarter. And in general, all things being equal, we do prefer first liens over second. The second lien book is going to be much more weighted towards the larger credits and you saw an increase in our average EBITDA per portfolio company as a result between September 30 and December 31.

Christopher Nolan

Great. And then was there an increase in this syndicated in club deck originations, is that reflect a new origination pipeline?

Grier Eliasek

Well, we’ve always had a pipeline that includes syndicated in club investments, our strategy there is to play a meaningful role in the deal by rolling up our sleeves and getting starting with our work early in the process to not only get our credit work done which of course is very important. But also to make sure it’s a meaningful size as well, not all syndications are credited equal and the word syndicated debt certainly do not mean the same thing from deal-to-deal. You can have smaller tranches that are quite illiquid. There maybe only three holders in the tranche. We label that syndicated debt, but it’s really much more of a club deal and a dealing which we’re playing a vital and an anchoring role to the transaction. So this is something we’ve always had for many years in place.

Christopher Nolan

Also on the CLOs, your yields have gone down from 26% to 21.5% on a cash basis and the GAAP yields down also, what is driving that?

Grier Eliasek

I think the biggest driver is we did have an increase in the valuation in the quarter, so that’s a metric at least as Brian reported on a fair market value basis. So that’s the biggest aspect of that number.

Christopher Nolan

Great. Thanks for taking my questions.

Grier Eliasek

Thank you.

John Barry

Thank you, Chris.

Operator

Our next question comes from Merrill Ross with Wunderlich. Please go ahead.

Merrill Ross

Hi, good morning. John, you mentioned a laundry list of ways that you could increase or if you will the intensity of earnings? And you first mentioned the CLOs and the ability to refinance and is that representing the lowest hanging fruit? The most readily available if not the highest return or if you could identify the lowest hanging fruit that will be interesting?

John Barry

Merrill, I love that question and I wish I could instantly answer it with a prioritization of the — what fruit is lower hanging than what other fruit. First, let me share with you that our saying at the company is the constant pressure method meaning, we are looking at every asset and every liability on a continuing basis both from a risk point of view and a return point of view. And as Grier mentioned that Christopher Nolan, we really do prepare our first lien transactions if it’s syndicated, we want to be the agent. At this point in the cycle, we are very focused on risk.

 

Now, with respect to intensifying earnings and I like your phrase, I hope you don’t mind if I use it. It is true that the CLOs opt for low hanging fruit because with the compression spreads, we can refinance work eventually called deals and realize gains or reduce liability costs.

So, what we have done is, we have looked at our entire fleet of CLOs and starting about a year ago, map down which ones we could refinance, which ones we could redeem, which ones we could consider calling all within an eye to getting a calendar up and running that would enable us to refinance, I think its nine deals. I think we maybe — Grier and Brian will have the exact — more exact number. We had maybe nine key in a day that were accretive. We may have done seven at this point. Yes, we start with the deals that from amount of capital at risk point of view from a dollars that can be saved point of view, from a calendar point of view, fit into a lineup because what happens is, everybody can’t refinance on the same day. There is only so much capacity to refinance these liabilities. I have been very happy with our CLO team mapping out all the opportunities in our portfolio and methodically and sequentially refinancing where it was worthwhile i.e., accretive.

Elsewhere, I said a second and people are going, at our company everyone has a different opinion which I greatly encourage and you are about to hear some more in just a minute. I guess, if someone asked me where else is the low hanging fruits. And I would say we have it our real estate book, I think. Why? Because interest rates have come down since we’ve made many of those multifamily investments. We were fortunate with 2020 hindsight to focused on a very strong area in the market over the last five years. We have felt that multifamily is stable that we are running lesser credit risks than with single tenant investments than with office than with industrial.

Fortunately, the election returns of bonus out in real estate and I think some of our portfolio is worth more than we paid maybe all of it. So, that is another area of fruit.

By the way, none of it comes across to me as low hanging, I wish I could say, we just have to reach out and grab it. We do have to do lots of analysis to identify these opportunities.

Brian, what do you see as low hanging fruit?

Brian Oswald

Yes. Merrill, I think the biggest driver of earnings intensity would be deploying the cash that’s on the balance sheet and being able to further deploy to use some portion of the credit facility. I think those are the two things I can have a short-term immediate effect that it’s just a matter of finding transactions that meet our return parameters and that we think are good credit risks.

John Barry

How about you Grier?

Grier Eliasek

I would add to that the [indiscernible] went to earlier in that stay in a paragraph, I will say in a relative basis lower hanging we think about a reasonable visibility to get something done in the first half of 2017. So deploying capital is one of those as Brian just mentioned. On the structure credit front, I think we have — I think it’s about 10 deals approximately working on the refi front that we hope to get done reasonably expeditiously and I believe prior to quarter end.

On the multifamily side, I think we had at least three sell side processes going on in the book, possibly more and then I know we’ve got the securitization teed up, another one in our consumer book following on the yields of the one we just did in December. So those we stated first, they are quite visible in front of us some of the other elements we’re also working on, but there is definitely multiple drivers here at play Merrill.

John Barry

I would add, Grier mentioning on the online business, Merrill, what we’ve learned in the online business, I think we’ve been doing as long as I think the only person I can think of is — buying those loans longer than we have is our friend, [Bob Conrad] [ph]. Bob is on the call, hi Bob, you are doing the online lending inevitably provides an education to the people who haven’t been doing it may not have. I think we — our underwriting has improved with online. I think our ability to project returns has improved. We — I think I said this two years ago we have — I believe the largest — certainly the most experienced and maybe the largest online lending team buying loans from originators and that team has become steadily more expertise at underwriting, projecting, very importantly arranging financing which should never be taking for granted. And doing securitizations, all of which I think lower whatever risk has extend in online lending. And number two, increase our expected returns and number three, enhance our visibility with respect to what those expected returns are going to be, which is a risk mitigate.

 

Merrill Ross

Sort of as an unrelated follow-up maybe just a little bit related, do you mentioned that you sold seven CLO positions source in the quarter didn’t really say and they were good returns I just wondered where they were sold relative to the most recent…

John Barry

Brian, could you address that because I’m not even sure if seven — there is so many they were working on it any given time, I’m not sure seven is the great time to refinance Merrill as you have observed. Brian, how many — looking at the Merrill…

Brian Oswald

Those were prior period sales. We didn’t sell any CLOs during the quarter.

Merrill Ross

Okay, thank you.

John Barry

But Brian how many have we completed, I guess we shouldn’t be talking about the numbers that we’re still working on, we should — that’s — will you?

Brian Oswald

It’s an earnings release, John.

John Barry

Okay.

Brian Oswald

Okay, hey Merrill, thank you very much.

Merrill Ross

Sure.

John Barry

Thank you, Merrill. Next question please. Merrill, do you have anymore questions?

Merrill Ross

No, I’m good. Thank you very much.

John Barry

Okay. Thank you.

Operator

Our next question is from Christopher Testa with National Securities Corp. Please go ahead.

Christopher Testa

Hi, good morning guys. Thanks for taking my questions. Just curious on the real-estate portfolio and you start to get into student housing. Do you think that now was a better time how things — how we call to be in that seller a multi-family and should we expect more of a shift in the real-estate portfolio going forward?

John Barry

Let me take that and then I’m sure, Brian who is an expert in real-estate and Grier will have — watch that. What I’ve learned I quote came from time-to-time. There are only two opinions on interest rates, those who come from people, who don’t know where interest rates are going and those who come from people who don’t know that they don’t know where interest rates are going. So I’m staying out of the prediction business, macro predictions interest rates is student housing going to perform well in the future versus multifamily office and the like. Rather my preference is to look at each investments primarily from a bottoms up basis, what is the return, what is the risk of this specific investment. And of course, we evaluate macro factors to the extent we can foresee them as possibilities into our risk analysis.

So why do we do multifamily so much relative to single tenant and office because on a deal by deal by deal basis we like the tent diversity. The fact that people do need a place to sleep at night. The fact that people are motivated to pay their rent so they don’t have to worry about being evicted. The fact that there are low occupancies, I mean low vacancy rates. The fact that where we invest, there are multiple strong and employers and a strong and stable economy, you notice many of our investments are south of the Mason Dickson line. So, that’s why we’ve liked and continued to like multifamily. But, when a storage facility or a student housing transaction comes our way with a strong sponsor with an inside track at a good price with good risk controls and a budget that presents to us minimum uncertainty with respect to vacancies, rents, the cost to upgrade which is a big part of these investments both multifamily and student, the return on the investment that we might be making in refurbishment and upgrades.

If all those factors and there is many more line-up, then we will do student housing. Are we going to do more? I don’t know it depends on — when we next see a good transaction. Brian with all your decades of your experience in real estate, what would you add to that, and Grier?

Brian Oswald

John, I think that we monitor all of our real estate holdings get to see what they look like on a quarterly basis and we evaluate whether we think there is enough upside potential in them to keep them around or we look to sell them. We have monetized three properties in the last, I believe six to eight months and continuing to look at properties that are good candidates for sale at substantial profits and where that we see limited upside potential because we have already done the refurbishments which is our strategy to move them to higher rent but rate. Clear?

 

Grier Eliasek

Two pieces, one, student housing, there are similarities with multifamily, there are some differences as well. We have only pulled the trigger on one portfolio transaction over many years for a reason. And that is, if you look at the demographic trends, we are not having significant population growth and that includes overall college enrollments. There is school shutting down. There is schools with shrinking enrollments, you want to be very careful about that. There are other schools, usually the larger ones, larger state schools et cetera that are not experiencing declines. And so logically if you want to prioritize that and analyze the supply and demand characteristics very carefully.

Multifamily more broadly speaking is the much bigger market where we have made many more investments. And on the question of exiting versus new investments, the answer — we conclude is both. That it’s a bottoms up analysis on any individual property on how to optimize it including the exit which has come to-date in two forms. One, by recapitalizing the asset and taking a substantial distribution to ourselves based on performance of the asset and the growth, then the value of the junior capital account.

It’s driven by two things. One, rising rents — really three things. Rising rents, rising occupancies and three the refurbishment value-add program because we are generally focusing on Class B properties with some A’s to them and therefore upside through our CapEx refurbishment program. So, we see on a macro basis, positive factors, there has not been a significant over build of work force housing in our country, the multifamily supply additions had been largely skewed towards luxury, high rent end of things that’s just not where we’ve focused. And then, you have dynamics coming out on alternatives for home purchases for multifamily migration and increasing costs there, difficult to getting financing, difficulty with supply et cetera.

And then, the demographic trends of seniors who want to downsize into apartments as well as an increasing trend. So there is a lot of positive — and if you see any pick-up in inflation that seem to be a positive for rents.

So, we see a lot of things there, we monitor it carefully but it’s really much more of a bottoms up individual property basis and we benefit from having dozens and dozens of properties and making the best decisions we determine in conjunction with our management team co-investor for each one.

Christopher Testa

Okay. That’s great detail. Thank you, guys. I’m just wondering if you could discuss just touching on the sale of equity again to ask another question on this. Given that you have, I think you said 10 CLOs during the process of refinancing, but on the flip side there is so much less in terms of reinvestment opportunities, where do you see this shaking out in terms of future cash on cash yields?

Grier Eliasek

To be determined. There is two positive effects and one negative. The two positives are bringing down our cost of liabilities and a decline in defaults. The energy wave has largely crashed — energy commodities wave of the credit issue of late 2014 and 2015 is largely crashed through much of the syndicated loan sector and done its damage and are using LTM default rates decline again. So those are the two positives. The negative is pressure on the asset side.

So two positives, one negative and we don’t know yet what the net effect will be instead we are focusing on the things that are controllable or more controllable in front of us by working on these refinancings and as we are holding a majority stake to be very important because we can pivot swiftly, we don’t need anyone else’s vote. And we can get executions done expeditiously which in a deal where no one holds the majority equity and therefore no one is in-charge and no one is quite as organized that might be done quite sub-optimally late if at all in other situations. So, we like that that optimization in capital protection.

 

Christopher Testa

Got it. Just looking at the fourth quarter a lot of the CLOs refis, the AAAs were — [prices aren’t going to help us] [ph] below 140s, is that relative to similar to what you are seeing today on the refis or as it come in cheaper, gone up a bit?

Grier Eliasek

It’s changing real-time. It’s really hard to generalize and each deal is little different. The quality of a particular collateral manager perception will be different, the folks that we team up with are general deemed to be a high quality. That information that’s pretty readily available out there and I believe that two other data sources.

Christopher Testa

Okay, great. And I’m just wondering if you could comment on what you are seeing on the structures on the second wins today versus what you are seeing a year ago, obviously the pricing is tied, just curious what you are seeing from sponsors in terms of how their structuring is?

Grier Eliasek

Well, there is a wide variety out there. And we are being careful. I think generally we have seen an up tick in unattractive capital structures and it’s not just increasing over the years leverage, it’s multiple of what and a lot of the action comes down to the add backs, the adjustments, it’s the real digging and that’s where we’ve got significant advantages because we have such a large team. We have individuals at Prospect dedicated towards carrying through accounting and add backs and coming up with their own underwriting view as opposed to blindly accepting what’s promoter on the other side of the table, once you say a deal happened, is trying to push across to whether that’s response to our banker what have you.

So underwriting is always critical and it’s got even trickier in recent years because add backs have got more aggressive. So we focus very hard on that. And we are disciplined and that’s why you saw exits exceed repayments in the quarter we just ended. In the quarter to-date we are ahead, we found some attractive deals. It’s all going to be in a bottoms up basis and we are happy to go with — we are happy with the investments we have made. But many others are swimming by that we are saying no to.

John Barry

But, one of the advantages that we have is Reid Parmelee who works for Brian, who is our quality of earnings expert with a CPA and significant experience reviewing quality of earnings reports. So it’s not just the MBAs and transaction leads and those teams, investment professionals report through these financial and these quality of earnings reports.

We also have Reid in other, I call them green eye shades in Brian’s department, who often are more rigorous than an MBA might be and we think when it comes to reviewing quality of earnings report and we think that discipline and rigor has helped keep our non-accruals as low as they have been.

Christopher Testa

Okay, great. That’s all for me. Thank you for taking my questions.

John Barry

Thank you.

Operator

Our next question comes from Casey Alexander at Compass Research & Trading. Please go ahead.

Casey Alexander

Hi, good morning. Most have been asked and answered. But, can you share with us what the unlevered yield of the online portfolio is?

John Barry

Grier.

Grier Eliasek

Sure. It’s in the range of — and I’m quoting net of expected losses because analyzing it otherwise this anti-conservative. The range of 10% to 11%.

Casey Alexander

Okay. That’s great. Thank you. And secondly, I mean, I see you’ve set up another vehicle to invest in the online business. Would that be a vehicle that then would be co-investing with the BDC in loan packages that you would be buying from originators?

Grier Eliasek

Oh, boy. That is very early stage and kind of years in the future for any impact. So, I’m not sure it’s even worthwhile to discuss at this point.

Casey Alexander

Okay. I wasn’t sure when you intended to actually launch it. All right, great. Thank you for answering my questions. Everything else had been answered already.

Grier Eliasek

Okay. Thank you.

John Barry

Thank you, Casey.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

John Barry

All right. Thank you, everyone. Have a wonderful afternoon and of course, if you are in the New York area, don’t go outside without a coat and boots. Thank you. Bye now.

Grier Eliasek

Thank you all.

Operator

This conference as now concluded. Thank you for attending today’s presentation. You may now disconnect.

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