Standard & Poor’s Ratings Services cut ratings on Prospect Capital, citing weaker capital, leverage, and earnings metrics than sector peers and expectations that the company will continue to operate with relatively “higher portfolio risk” away from its core lending portfolio.
Standard & Poor’s cut the issuer and the unsecured debt ratings to BBB-, from BBB. The outlook is stable, in part due to an expected debt-to-equity ratio of less than 0.85x moving forward.
“Prospect Capital Corp.’s (PSEC) capital, leverage, and earnings metrics have been weaker relative to similarly rated peers over several quarters,” Standard & Poor’s analyst Olga Roman said in a Sept. 29 research note.
“Additionally, we have changed our expectations regarding the reduction of portfolio risk based on updated management guidance on the potential size of the spin-offs of certain businesses.”
Prospect Capital management plans to sell certain operations, including its CLO structured credit business, online lending, and real estate business, or roughly 10% of the company’s asset base. Standard & Poor’s had expected a larger share of spin-offs.
Prospect Capital’s largest investment holding as of June 30 was National Property REIT Corp. (NPRC), whose portfolio consisted of multifamily properties, commercial properties, and consumer online lending portfolios.
After NPRC, Prospect’s top five investments accounted for 56% of its adjusted total equity (ATE) in the last 12 months ended June 30. The share should decline to below 50% due to expected syndication of these investments.
“Although our assessment of the company’s capital, leverage, and earnings (CLE) and risk position remain unchanged, the above mentioned factors resulted in a negative one notch comparable ratings adjustment.”
Prospect Capital’s debt-to-equity was 0.81x, and asset coverage was 228% as of June 30.
“The stable rating outlook reflects our expectation that PSEC will continue to operate with debt to equity below 0.85x and will improve its realized return on average portfolio investments above 5% and its non-deal-dependent income coverage of both interest and dividend above 1x,” Roman said.
As of June 30, Prospect Capital’s investment portfolio totaled $6.6 billion, covering 131 portfolio companies, and was generating an annualized yield of 12.7%.
“Our ratings on PSEC also reflect the company’s “adequate” business position, based on its market position as the second-largest externally managed BDC; its focus on senior secured investments; and its relatively diversified portfolio.”
Prospect Capital, a BDC, lends to and invests in privately held middle-market companies. Shares trade on the Nasdaq under the ticker PSEC. – Abby Latour