UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2013
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 814-00659
PROSPECT CAPITAL CORPORATION (Exact name of registrant as specified in its charter)
Maryland
43-2048643
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
10 East 40th Street
44th Floor
New York, New York
10016
(Address of principal executive offices)
(Zip Code)
(212) 448-0702
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). oYes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). oYes x No
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of November 4, 2013 was 284,192,312.
PROSPECT CAPITAL CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013 TABLE OF CONTENTS
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements
Consolidated Statements of Assets and Liabilities – September 30, 2013 (Unaudited) and June 30, 2013 (Audited)
Consolidated Statements of Operations (Unaudited) – For the Three Months Ended September 30, 2013 and 2012
4
Consolidated Statements of Changes in Net Assets (Unaudited) – For the Three Months Ended September 30, 2013 and 2012
5
Consolidated Statements of Cash Flows (Unaudited) – For the Three Months Ended September 30, 2013 and 2012
6
Consolidated Schedule of Investments – September 30, 2013 (Unaudited) and June 30, 2013 (Audited)
7
Notes to Consolidated Financial Statements (Unaudited)
42
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
67
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
97
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
98
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales in Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
106
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES September 30, 2013 and June 30, 2013 (in thousands, except share and per share data)
September 30, 2013
June 30, 2013
(Unaudited)
(Audited)
Assets (Note 4)
Investments at fair value:
Control investments (amortized cost of $970,400 and $830,151, respectively)
$
947,572
811,634
Affiliate investments (amortized cost of $49,324 and $49,189, respectively)
37,425
42,443
Non-control/Non-affiliate investments (amortized cost of $3,622,564 and $3,376,438, respectively)
3,568,139
3,318,775
Total investments at fair value (amortized cost of $4,642,288 and $4,255,778, respectively) (Note 3)
4,553,136
4,172,852
Investments in money market funds
151,995
143,262
Cash
10,399
59,974
Receivables for:
Interest, net
21,470
22,863
Other
1,995
4,397
Prepaid expenses
382
540
Deferred financing costs
44,194
44,329
Total Assets
4,783,571
4,448,217
Liabilities
Credit facility payable (Notes 4 and 8)
69,000
124,000
Senior convertible notes (Notes 5 and 8)
847,500
Senior unsecured notes (Notes 6 and 8)
347,762
347,725
Prospect Capital InterNotes® (Notes 7 and 8)
461,977
363,777
Due to broker
87,662
43,588
Dividends payable
29,916
27,299
Due to Prospect Administration (Note 12)
55
1,366
Due to Prospect Capital Management (Note 12)
1,734
5,324
Accrued expenses
3,000
2,345
Interest payable
18,687
24,384
Other liabilities
6,523
4,415
Total Liabilities
1,873,816
1,791,723
Net Assets
2,909,755
2,656,494
Components of Net Assets
Common stock, par value $0.001 per share (500,000,000 common shares authorized; 271,404,289 and 247,836,965 issued and outstanding, respectively) (Note 9)
271
248
Paid-in capital in excess of par (Note 9)
2,999,878
2,739,864
Undistributed net investment income
72,745
77,084
Accumulated realized losses on investments
(73,987)
(77,776)
Unrealized depreciation on investments
(89,152)
(82,926)
Net Asset Value Per Share (Note 14)
10.72
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For The Three Months Ended September 30, 2013 and 2012 (in thousands, except share and per share data) (Unaudited)
For The Three Months Ended September 30,
2013
2012
Investment Income
Interest income:
Control investments
32,633
17,919
Affiliate investments
1,496
1,651
Non-control/Non-affiliate investments
78,112
45,027
CLO Fund securities
26,180
13,713
Total interest income
138,421
78,310
Dividend income:
7,075
33,250
2,955
Money market funds
11
Total dividend income
7,089
36,208
Other income: (Note 10)
9,221
8
6,301
9,108
Total other income
15,524
9,118
Total Investment Income
161,034
123,636
Operating Expenses
Investment advisory fees:
Base management fee (Note 12)
23,045
13,228
Income incentive fee (Note 12)
20,584
18,507
Total investment advisory fees
43,629
31,735
Interest and credit facility expenses
27,407
13,511
Legal fees
219
622
Valuation services
439
376
Audit, compliance and tax related fees
623
432
Allocation of overhead from Prospect Administration (Note 12)
3,986
2,184
Insurance expense
93
Directors’ fees
75
Excise tax
1,000
—
Other general and administrative expenses
1,226
581
Total Operating Expenses
78,697
49,609
Net Investment Income
82,337
74,027
Net realized gain on investments (Note 3)
3,789
1,775
Net change in unrealized depreciation on investments (Note 3)
(6,226
)
(28,553
Net Increase in Net Assets Resulting from Operations
79,900
47,249
Net increase in net assets resulting from operations per share (Notes 11 and 15)
0.31
0.29
Dividends declared per share
0.33
0.30
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS For The Three Months Ended September 30, 2013 and 2012 (in thousands, except share data) (Unaudited)
Increase in Net Assets from Operations:
Net investment income
Net realized gain on investments
Net change in unrealized depreciation on investments
(6,226)
(28,553)
Dividends to Shareholders:
Distribution of net investment income
(86,676)
(51,380)
Distribution of return of capital
Total Dividends to Shareholders
Capital Share Transactions:
Proceeds from capital shares sold, net of underwriting costs
256,836
372,083
Less: Offering costs of public share offerings
(793)
(631)
Reinvestment of dividends
3,994
4,031
Net Increase in Net Assets Resulting from Capital Share Transactions
260,037
375,483
Total Increase in Net Assets
253,261
371,352
Net assets at beginning of period
1,511,974
Net Assets at End of Period
1,883,326
Capital Share Activity:
Shares sold
21,293,338
33,161,977
Shares issued to acquire controlled investments
1,918,342
Shares issued through reinvestment of dividends
355,644
355,871
Net increase in capital share activity
23,567,324
33,517,848
Shares outstanding at beginning of period
247,836,965
139,633,870
Shares Outstanding at End of Period
271,404,289
173,151,718
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Three Months Ended September 30, 2013 and 2012 (in thousands, except share data) (Unaudited)
Cash Flows from Operating Activities:
Net increase in net assets resulting from operations
(3,789
(1,775
6,226
28,553
Amortization of discounts and premiums, net
9,954
(6,708
Amortization of deferred financing costs
2,471
1,774
Payment-in-kind interest
(4,581
(1,873
Structuring fees
(8,660
(8,959
Change in operating assets and liabilities
Payments for purchases of investments
(522,595
(737,105
Proceeds from sale of investments and collection of investment principal
164,167
158,123
Net increase of investments in money market funds
(8,733
(63,789
Decrease (increase) in interest receivable, net
1,393
(17,150
Decrease in other receivables
2,402
10
Increase (decrease) in prepaid expenses
158
(458
Increase in due to broker
44,074
101,213
Decrease in due to Prospect Administration
(1,311
(348
(Decrease) increase in due to Prospect Capital Management
(3,590
3,822
Increase in accrued expenses
655
4,615
Decrease in interest payable
(5,697
Increase in other liabilities
2,108
Net Cash Used In Operating Activities
(245,448
(491,413
Cash Flows from Financing Activities:
Borrowings under credit facility (Note 4)
96,000
58,000
Principal payments under credit facility (Note 4)
(151,000
(154,000
Issuance of Senior Convertible Notes (Note 5)
200,000
Issuance of Prospect Capital InterNotes® (Note 7)
98,200
67,879
Financing costs paid and deferred
(2,300
(8,424
Proceeds from issuance of common stock, net of underwriting costs
235,830
Offering costs from issuance of common stock
(793
(631
Dividends paid
(80,064
(43,932
Net Cash Provided By Financing Activities
195,873
490,975
Total Decrease in Cash
(49,575
(438
Cash balance at beginning of period
2,825
Cash Balance at End of Period
2,387
Cash Paid For Interest
30,165
6,983
Non-Cash Financing Activity:
Amount of shares issued in connection with dividend reinvestment plan
Amount of shares issued in conjunction with controlled investments
21,006
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS September 30, 2013 (Unaudited) and June 30, 2013 (Audited) (in thousands, except share data)
September 30, 2013 (Unaudited)
Portfolio Company
Locale / Industry
Investments(1)
Principal Value
Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS:
Control Investments (greater than 25.00% voting control)(40)
AIRMALL USA, Inc.(27)
Pennsylvania / Property Management
Senior Secured Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor), due 6/30/2015)(3), (4)
$ 28,600
1.0%
Senior Subordinated Term Loan (12.00% plus 6.00% PIK, due 12/31/2015)
12,500
0.4%
Convertible Preferred Stock (9,919.684 shares)
9,920
8,920
0.3%
Common Stock (100 shares)
1,391
0.1%
51,020
51,411
1.8%
Ajax Rolled Ring & Machine, Inc.
South Carolina / Manufacturing
Senior Secured Note — Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/30/2018) (4)
19,636
0.7%
Subordinated Unsecured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 6.00% PIK, due 3/30/2018)(4)
20,008
8,448
Convertible Preferred Stock — Series A (6,142.6 shares)
6,057
0.0%
Unrestricted Common Stock (6 shares)
45,701
28,084
APH Property Holdings, LLC(32)
Georgia / Real Estate
Senior Secured Note (6.00% (LIBOR + 4.00% with 2.00% LIBOR floor) plus 5.50% PIK, due 10/24/2020)(4)
127,374
4.4%
Common Stock (148,951 shares)
26,648
0.9%
154,022
5.3%
AWCNC, LLC(19)
North Carolina / Machinery
Members Units — Class A (1,800,000 units)
Members Units — Class B-1 (1 unit)
Members Units — Class B-2 (7,999,999 units)
Borga, Inc.
California / Manufacturing
Revolving Line of Credit — $1,150 Commitment (5.00% (PRIME + 1.75%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4), (25)
1,150
1,095
562
Senior Secured Term Loan B (8.50% (PRIME + 5.25%) plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)(4)
1,612
1,501
Senior Secured Term Loan C (12.00% plus 4.00% PIK plus 3.00% default interest, in non-accrual status effective 03/02/2010, past due)
9,839
707
Common Stock (100 shares)(21)
Warrants (33,750 warrants)(21)
3,303
CCPI Holdings Inc.(33)
Ohio / Manufacturing
Senior Secured Note (10.00%, due 12/31/2017)(3)
17,550
0.6%
Senior Secured Note (12.00% plus 7.00% PIK, due 6/30/2018)
7,933
8,581
8,012
Net Revenue Interest (4% of Net Revenue)
428
34,064
33,923
1.2%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED) September 30, 2013 (Unaudited) and June 30, 2013 (Audited) (in thousands, except share data)
CP Holdings of Delaware LLC(38)
Oklahoma / Oil & Gas Production
Senior Secured Note (9.00% (LIBOR + 7.00% with 2.00% LIBOR floor) plus 9.00% PIK, due 8/2/2018) (4)
$ 58,773
2.0%
Senior Secured Note (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor), due 8/2/2018) (4)
22,500
0.8%
12,741
10,750
94,014
92,023
3.2%
Credit Central Holdings of Delaware, LLC (22), (34)
Ohio / Consumer Finance
Senior Secured Revolving Credit Facility — $60,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 12/31/2022)(4), (25)
38,082
1.3%
9,581
12,237
Net Revenue Interest (5% of Net Revenue)
3,040
47,663
53,359
Energy Solutions Holdings, Inc.(8)
Texas / Energy
Junior Secured Note (18.00%, due 12/12/2016)
4,250
0.2%
Senior Secured Note to Vessel Holdings LLC (18.00%, due 12/12/2016)
3,500
Subordinated Secured Note to Freedom Marine Holdings, LLC (12.00% (LIBOR + 6.11% with 5.89% LIBOR floor) plus 4.00% PIK, in non-accrual status effective 10/1/2010, past due) (4)
14,048
12,504
9,750
Senior Secured Debt to Yatesville Coal Holdings, Inc. (Non-accrual status effective 1/1/2009, past due)
1,449
8,318
6,090
30,021
23,590
First Tower Holdings of Delaware, LLC (22), (29)
Mississippi / Consumer Finance
Senior Secured Revolving Credit Facility — $400,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 6/30/2022)(4), (25)
264,760
9.1%
Common Stock (83,729,323 shares)
43,193
34,937
Net Revenue Interest (5% of Net Revenue & Distributions)
13,976
0.5%
307,953
313,673
10.8%
The Healing Staff, Inc.(9)
North Carolina / Contracting
Secured Promissory Notes (15.00%, in non-accrual status effective 12/22/2010, past due)
1,688
1,686
Senior Demand Note (15.00%, in non-accrual status effective 11/1/2010, past due)
1,170
Common Stock (1,000 shares)
975
3,831
Manx Energy, Inc.(12)
Kansas / Oil & Gas Production
Senior Secured Note (13.00%, in non-accrual status effective 1/19/2010, past due)
500
413
Preferred Stock (6,635 shares)
Common Stock (17,082 shares)
MITY Holdings of Delaware Inc.(17)
Utah / Durable Consumer Products
Senior Secured Note (9.00% (LIBOR + 7.00% with 2.00% LIBOR floor) plus 9.00% PIK, due 9/19/2019) (4)
$ 22,792
Senior Secured Note (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 3/19/2019) (4)
18,250
6,943
47,985
1.6%
Nationwide Acceptance Holdings, LLC (22), (36)
Illinois / Consumer Finance
Senior Secured Revolving Credit Facility — $30,000 Commitment (20.00% (LIBOR + 18.50% with 1.50% LIBOR floor), due 1/31/2023)(4), (25)
21,308
Membership Units (100 shares)
3,843
1,869
25,151
27,020
NMMB Holdings, Inc. (24)
New York / Media
Senior Term Loan (14.00%, due 5/6/2016)
16,000
10,727
Senior Subordinated Term Loan (15.00%, due 5/6/2016)
2,800
Series A Preferred Stock (4,400 shares)
4,400
23,200
R-V Industries, Inc.
Pennsylvania / Manufacturing
Senior Subordinated Note (10.00% (LIBOR + 9.00% with 1.00% LIBOR floor), due 6/12/2018)(3), (4)
32,750
1.1%
Warrants (200,000 warrants, expiring 6/30/2017)
1,682
6,754
Common Stock (545,107 shares)
5,087
18,409
39,519
57,913
Valley Electric Holdings I, Inc.(35)
Washington / Construction & Engineering
Senior Secured Note (9.00% (LIBOR + 6.00%, with 3.00% LIBOR floor) plus 9.00% PIK, due 12/31/2018)(4)
34,846
33,533
Senior Secured Note (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor) plus 2.50% PIK, due 12/31/2017)(3), (4)
10,040
Common Stock (50,000 shares)
9,526
3,139
899
54,412
47,611
Wolf Energy Holdings, Inc.(12), (37)
Senior Secured Promissory Note secured by assets formerly owned by H&M (18.00%, in non-accrual status effective 4/15/2013, due 4/15/2018)
22,000
4,210
Appalachian Energy Holdings, LLC (“AEH”) — Senior Secured First Lien Note (8.00%, in non-accrual status effective 1/19/2010, past due)
2,698
2,000
474
Appalachian Energy Holdings, LLC (“AEH”) — Senior Secured First Lien Note (8.00%, in non-accrual status, past due)
52
50
Coalbed, LLC — Senior Secured Note (8.00%, in non-accrual status effective 1/19/2010, past due)(6)
8,098
5,991
Net Profits Interest (8.00% payable on Equity distributions)(7)
520
8,041
5,256
Total Control Investments
970,400
32.6%
9
Affiliate Investments (5.00% to 24.99% voting control)(41)
BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork)
Michigan / Healthcare
Senior Secured Note (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 12/17/2017)(3), (4)
$ 29,400
Preferred Stock Series A (9,925.455 shares)(13)
2,300
1,805
Preferred Stock Series B (1,753.64 shares)(13)
579
384
32,279
31,589
Boxercraft Incorporated(20)
Georgia / Textiles & Leather
Senior Secured Term Loan A (10.00% plus 1.00% PIK, due 9/15/2015)
1,717
Senior Secured Term Loan B (10.00% plus 1.00% PIK, due 9/15/2015)
4,905
3,801
Senior Secured Term Loan C (10.00% plus 1.00% PIK, due 9/15/2015)
2,377
Senior Secured Term Loan (10.00% plus 1.00% PIK, due 9/15/2015)
8,346
8,046
Preferred Stock (1,000,000 shares)
Common Stock (10,000 shares)
Warrants (1 warrant, expiring 8/31/2022)
17,045
5,518
Smart, LLC(14)
New York / Diversified / Conglomerate Service
Membership Interest
318
Total Affiliate Investments
49,324
Non-control/Non-affiliate Investments (less than 5.00% of voting control)
ADAPCO, Inc.
Florida / Ecological
Common Stock (5,000 shares)
Aderant North America, Inc.
Georgia / Software & Computer Services
Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 6/20/2019)(4)
7,000
6,904
Aircraft Fasteners International, LLC
California / Machinery
Convertible Preferred Stock (32,500 units)
396
570
ALG USA Holdings, LLC
Pennsylvania / Hotels, Restaurants & Leisure
Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 2/28/2020)(4)
12,000
11,772
Allied Defense Group, Inc.
Virginia / Aerospace & Defense
56
American Broadband Holding Company and Cameron Holdings of NC, Inc.
North Carolina / Telecommunication Services
Senior Secured Term Loan B (11.00% (LIBOR + 9.75% with 1.25% LIBOR floor), due 9/30/2018) (4)
75,000
2.6%
American Gilsonite Company
Utah / Specialty Minerals
Second Lien Term Loan (11.50%, due 9/1/2017)
38,500
Membership Interest in AGC/PEP, LLC (99.9999%)(15)
3,169
41,669
1.4%
Apidos CLO VIII, Ltd.(22)
Cayman Islands / Diversified Financial Services
Subordinated Notes (Residual Interest)
$ 19,730
$ 19,888
$ 20,367
19,888
20,367
Apidos CLO IX, Ltd.(22)
20,525
19,194
20,073
Apidos CLO XI, Ltd.(22)
38,340
36,157
38,528
Apidos CLO XII, Ltd.(22)
44,063
43,710
41,339
Apidos CLO XV, Ltd.(22)
36,515
36,402
Arctic Glacier U.S.A, Inc. (3), (4)
Minnesota / Food Products
Second Lien Term Loan (11.25% (LIBOR + 10.00% with 1.25% LIBOR floor), due 11/10/2019)
150,000
5.2%
Armor Holding II LLC(16)
New York / Diversified Financial Services
Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 12/26/2020) (3), (4)
6,864
Atlantis Healthcare Group (Puerto Rico), Inc.(4)
Puerto Rico / Healthcare
Revolving Line of Credit — $7,000 Commitment (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 2/21/2014)(25), (26)
Senior Term Loan (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 2/21/2018)(3)
39,253
37,307
41,253
39,307
Babson CLO Ltd 2011-I(22)
35,000
35,301
35,724
Babson CLO Ltd 2012-IA(22)
29,075
25,083
28,208
Babson CLO Ltd 2012-IIA(22)
27,850
28,403
28,571
Blue Coat Systems, Inc.(16)
Massachusetts / Software & Computer Services
Second Lien Term Loan (9.50% (LIBOR + 8.50% with 1.00% LIBOR floor), due 6/28/2020)(4)
11,000
10,893
Broder Bros., Co.
Pennsylvania / Textiles, Apparel & Luxury Goods
Senior Secured Notes (10.75% (LIBOR + 9.00% with 1.75% LIBOR floor), due 6/27/2018)(3), (4)
$ 99,000
3.4%
99,000
Brookside Mill CLO Ltd.(22)
26,000
24,235
25,162
Byrider Systems Acquisition Corp. (22)
Indiana / Auto Finance
Senior Subordinated Notes (12.00% plus 2.00% PIK, due 11/3/2016)(3)
10,972
10,855
Caleel + Hayden, LLC (14), (31)
Colorado / Personal & Nondurable Consumer Products
Membership Units (13,220 shares)
147
Escrow Receivable
89
236
Capstone Logistics, LLC(4)
Georgia / Commercial Services
Senior Secured Term Loan A (6.50% (LIBOR + 5.00% with 1.50% LIBOR floor), due 9/16/2016)
96,683
Senior Secured Term Loan B (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 9/16/2016)(3)
100,000
196,683
6.8%
Cargo Airport Services USA, LLC
New York / Transportation
Common Equity (1.6 units)
1,639
1,833
Cent 17 CLO Limited(22)
24,870
23,837
25,818
CIFC Funding 2011-I, Ltd.(4), (22)
Secured Class D Notes (5.27% (LIBOR + 5.00%), due 1/19/2023)
19,000
15,096
16,144
Unsecured Class E Notes (7.27% (LIBOR + 7.00%), due 1/19/2023)
15,400
12,680
13,176
27,776
29,320
CIFC Funding 2013-III, Ltd. (22)
44,100
41,528
42,852
1.5%
Cinedigm DC Holdings, LLC (4)
New York / Software & Computer Services
Senior Secured Term Loan (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor) plus 2.50% PIK, due 3/31/2021)
69,315
2.4%
12
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY CONSOLIDATED SCHEDULE OF INVESTMENTS – (CONTINUED) September 30, 2013 (Unaudited) and June 30, 2013 (Audited)
(in thousands, except share data)
The Copernicus Group, Inc.
North Carolina / Healthcare
$ —
$ 131
131
Correctional Healthcare Holding Company, Inc.
Colorado / Healthcare
Second Lien Term Loan (11.25%, due 1/11/2020) (3)
$ 27,100
27,100
Coverall North America, Inc.
Florida / Commercial Services
Senior Secured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 12/17/2017)(3) ,(4)
44,122
CRT MIDCO, LLC
Wisconsin / Media
Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 6/30/2017)(3), (4)
70,731
Deltek, Inc.
Virginia / Software & Computer Services
Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 10/10/2019)(4)
11,837
Diamondback Operating, LP
Net Profits Interest (15.00% payable on Equity distributions) (7)
Edmentum, Inc. (f/k/a Archipelago Learning, Inc.)(4)
Minnesota / Consumer Services
Second Lien Term Loan (11.25% (LIBOR + 9.75% with 1.50% LIBOR floor), due 5/17/2019) (3)
50,000
48,271
1.7%
EIG Investors Corp.
Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 5/09/2020)(4), (16)
21,798
Empire Today, LLC
Illinois / Durable Consumer Products
Senior Secured Note (11.375%, due 2/1/2017)
15,700
15,353
14,180
Evanta Ventures, Inc. (11)
Oregon / Commercial Services
Subordinated Unsecured (12.00% plus 1.00% PIK, due 9/28/2018)
10,506
10,717
EXL Acquisition Corp.
South Carolina / Biotechnology
14
13
Fairchild Industrial Products, Co.
North Carolina / Electronics
$ 135
135
Fischbein, LLC
227
Focus Brands, Inc. (4)
Georgia / Consumer Services
Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 8/21/2018)
$ 18,000
17,742
18,000
FPG, LLC
Senior Secured Term Loan (12.00% (LIBOR + 11.00% with 1.00% LIBOR floor), due 1/20/2017)(4)
21,125
20,822
Common Stock (5,638 shares)
27
21,152
20,835
Galaxy XII CLO, Ltd.(22)
20,506
23,346
Galaxy XV CLO, Ltd.(22)
35,025
32,307
31,750
Galaxy XVI CLO, Ltd.(22)
22,575
20,945
20,484
Grocery Outlet, Inc.
California / Retail
Second Lien Term Loan (10.50% (LIBOR + 9.25% with 1.25% LIBOR floor), due 6/17/2019)(4)
14,457
14,137
GTP Operations, LLC (f/k/a CI (Transplace) Holdings, LLC)(4)
Texas / Software & Computer Services
Senior Secured Term Loan (10.00% (LIBOR + 5.00% with 5.00% LIBOR floor), due 6/11/2019) (3) ,(10)
114,425
3.9%
Gulf Coast Machine & Supply Company
Texas / Manufacturing
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 10/12/2017)(4)
41,213
12,998
Halcyon Loan Advisors Funding 2012-I, Ltd.(22)
23,188
21,685
23,596
Halcyon Loan Advisors Funding 2013-I, Ltd.(22)
40,400
42,890
39,564
Hoffmaster Group, Inc.(4)
Wisconsin / Personal & Nondurable Consumer Products
Second Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 1/3/2019)
$ 20,000
$ 19,837
$ 19,122
Second Lien Term Loan (10.25% (LIBOR + 9.00% with 1.25% LIBOR floor), due 1/3/2019)
991
932
20,828
20,054
ICON Health & Fitness, Inc.
Senior Secured Note (11.875%, due 10/15/2016)(3)
43,100
43,297
37,497
IDQ Holdings, Inc.
Texas / Automobile
Senior Secured Note (11.50%, due 4/1/2017)
12,310
ING IM CLO 2012-II, Ltd.(22)
38,070
33,518
38,477
ING IM CLO 2012-III, Ltd.(22)
46,632
42,614
47,322
ING IM CLO 2012-IV, Ltd.(22)
Income Notes (Residual Interest)
40,613
37,855
41,867
Injured Workers Pharmacy LLC
Massachusetts / Healthcare
Second Lien Debt (11.50% (LIBOR + 7.00% with 4.50% LIBOR floor) plus 1.00% PIK, due 5/31/2019)(3), (4)
22,506
Interdent, Inc.(4)
California / Healthcare
Senior Secured Term Loan A (8.00% (LIBOR + 6.50% with 1.50% LIBOR floor), due 8/3/2017)
53,131
Senior Secured Term Loan B (13.00% (LIBOR + 10.00% with 3.00% LIBOR floor), due 8/3/2017)(3)
55,000
1.9%
108,131
3.7%
JHH Holdings, Inc.
Texas / Healthcare
Second Lien Debt (11.25% (LIBOR + 10.00% with 1.25% LIBOR floor) plus 0.50% PIK, due 3/30/2019)(3), (4)
LaserShip, Inc.(4)
Virginia / Transportation
Revolving Line of Credit — $5,000 Commitment (10.25% (LIBOR + 8.25% with 2.00% LIBOR floor), due 12/21/2014)(25)
Senior Secured Term Loan (10.25% (LIBOR + 8.25% with 2.00% LIBOR floor), due 12/21/2017)(3)
36,797
15
LCM XIV CLO Ltd.(22)
$ 26,500
$ 26,161
$ 25,732
26,161
25,732
LHC Holdings Corp.
Florida / Healthcare
Revolving Line of Credit — $750 Commitment (8.50% (LIBOR + 6.00% with 2.50% LIBOR floor), due 5/31/2015)(4), (25), (26)
Senior Subordinated Debt (10.50%, due 5/31/2015)(3)
2,665
Membership Interest (125 units)
216
256
2,881
2,921
Madison Park Funding IX, Ltd.(22)
31,110
26,061
27,703
Material Handling Services, LLC (4)
Ohio / Business Services
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 7/5/2017) (3)
27,300
27,322
Senior Secured Term Loan (10.00% (LIBOR + 8.00% with 2.00% LIBOR floor), due 12/21/2017)
37,578
37,174
64,878
64,496
2.2%
Matrixx Initiatives, Inc. (4)
New Jersey / Pharmaceuticals
Revolving Line of Credit — $10,000 Commitment (10.00% (LIBOR + 8.50% with 1.50% LIBOR floor), due 2/9/2014)(25)
4,000
Senior Secured Term Loan A (7.50% (LIBOR + 6.00% with 1.50% LIBOR floor), due 8/9/2018)
Senior Secured Term Loan B (12.50% (LIBOR + 11.00% with 1.50% LIBOR floor), due 8/9/2018)
74,000
2.5%
Maverick Healthcare, LLC
Arizona / Healthcare
Preferred Units (1,250,000 units)
1,252
677
Common Units (1,250,000 units)
Mountain View CLO 2013-I Ltd.(22)
43,650
44,523
43,056
National Bankruptcy Services, LLC (4)
Texas / Diversified Financial Services
Senior Subordinated Term Loan (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 1.50% PIK, due 7/17/2017)
18,755
11,004
Naylor, LLC(4)
Florida / Media
Revolving Line of Credit — $2,500 Commitment (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017)(25)
Senior Secured Term Loan (11.00% (LIBOR + 8.00% with 3.00% LIBOR floor), due 6/7/2017)(3)
45,562
16
NCP Finance Limited Partnership(22), (23)
Subordinated Secured Term Loan (11.00% (LIBOR + 9.75% with 1.25% LIBOR floor), due 9/30/2018) (4), (16)
$ 12,000
$ 11,760
11,760
New Century Transportation, Inc.
New Jersey / Transportation
Senior Subordinated Term Loan (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 3.00% PIK, due 2/3/2018)(3), (4)
45,467
43,832
New Star Metals, Inc.
Indiana / Metal Services & Minerals
Senior Subordinated Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor) plus 1.00% PIK, due 2/2/2018)(4)
50,405
Nixon, Inc.
California / Durable Consumer Products
Senior Secured Term Loan (8.75% plus 2.75% PIK, due 4/16/2018)(16)
14,325
14,078
NRG Manufacturing, Inc.
1,040
Pegasus Business Intelligence, LP
Revolving Line of Credit — $2,500 Commitment (9.00% (LIBOR + 7.75% with 1.25% LIBOR floor), due 4/18/2014)(25)
Senior Secured Term Loan A (6.75% (LIBOR + 5.50% with 1.25% LIBOR floor), due 4/18/2018)
15,938
Senior Secured Term Loan B (13.75% (LIBOR + 12.50% with 1.25% LIBOR floor), due 4/18/2018)
31,876
Octagon Investment Partners XV, Ltd. (22)
26,901
25,578
26,032
Pelican Products, Inc.(16)
Subordinated Secured (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 6/14/2019)(3),(4)
15,000
14,736
The Petroleum Place, Inc.
Colorado / Software & Computer Services
Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 5/20/2019)(4)
21,698
Photonis Technologies SAS(22)
France / Aerospace & Defense
First Lien Term Loan (8.50% (LIBOR + 7.50% with 1.00% LIBOR floor), due 9/18/2019) (4), (16)
12,126
12,323
Pinnacle (US) Acquisition Co Limited(16)
Second Lien Term Loan (10.50% (LIBOR + 9.25% with 1.25% LIBOR floor), due 8/3/2020)(4)
10,000
9,819
Prince Mineral Holding Corp.
New York / Metal Services & Minerals
Senior Secured Term Loan (11.50%, due 12/15/2019)
9,892
17
Progrexion Holdings, Inc.(4),(28)
Utah / Consumer Services
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 9/14/2017)(3)
$ 240,277
8.3%
240,277
Rocket Software, Inc.(3), (4)
Second Lien Term Loan (10.25% (LIBOR + 8.75% with 1.50% LIBOR floor), due 2/8/2019)
20,000
19,729
19,738
Royal Adhesives & Sealants, LLC
Indiana / Chemicals
Second Lien Term Loan (9.75% (LIBOR + 8.50% with 1.25% LIBOR floor), due 1/31/2019) (4), (16)
19,605
Ryan, LLC(4)
Texas / Business Services
Subordinated Unsecured (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 3.00% PIK, due 6/30/2018)
70,000
Sandow Media, LLC
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor) plus 1.50% PIK, due 5/8/2018) (3), (4)
25,150
SESAC Holdco II LLC
Tennessee / Media
Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 7/12/2019)(4), (16)
6,000
5,916
Skillsoft Public Limited Company (22)
Ireland / Software & Computer Services
Senior Unsecured (11.125%, due 6/1/2018)
14,930
Snacks Holding Corporation
Series A Preferred Stock (4,021.45 shares)
Series B Preferred Stock (1,866.10 shares)
Warrant (to purchase 31,196.52 voting common shares, expires 11/12/2020)
479
484
591
596
18
Spartan Energy Services, Inc. (3).
Louisiana / Energy
Senior Secured Term Loan (10.50% (LIBOR + 9.00% with 1.50% LIBOR floor), due 12/28/2017) (4))
$ 31,625
31,625
Speedy Group Holdings Corp.
Canada / Consumer Finance
Senior Unsecured (12.00%, due 11/15/2017)(22)
Sport Helmets Holdings, LLC(14)
New York / Personal & Nondurable Consumer Products
395
Stauber Performance Ingredients, Inc. (3), (4)
California / Food Products
Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 1/21/2016)
13,772
Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 5/21/2017)
10,172
23,944
Stryker Energy, LLC
Ohio / Oil & Gas Production
Subordinated Secured Revolving Credit Facility — $50,300 Commitment (12.25% (LIBOR + 10.75% with 1.50% LIBOR floor) plus 3.75% PIK, in non-accrual status effective 12/1/2011, due 12/1/2015)(4), (25)
35,072
32,710
Overriding Royalty Interests(18)
Symphony CLO IX Ltd.(22)
LP Certificates (Residual Interest))
45,500
40,525
45,705
System One Holdings, LLC (3),(4)
Pennsylvania / Business Services
Senior Secured Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 12/31/2018)
48,000
TB Corp. (3)
Texas / Consumer Service
Senior Subordinated Note (12.00% plus 1.50% PIK, due 12/18/2018)
23,451
Targus Group International, Inc. (16)
First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor) plus 1.0% PIK, due 5/24/2016)(3),(4)
22,604
22,316
TGG Medical Transitory, Inc.
New Jersey / Healthcare
Second Lien Term Loan (11.25% (LIBOR + 10.00% with 1.25% LIBOR floor), due 6/27/2018)(4), (16)
8,000
7,782
See notes to consolidated financial statements
19
Totes Isotoner Corporation
Ohio / Personal & Nondurable Consumer Products
Second Lien Term Loan (10.75%, (LIBOR + 9.25% with 1.50% LIBOR floor), due 1/8/2018)(3), (4)
$ 53,000
$ 52,828
52,828
Traeger Pellet Grills LLC(4)
Oregon / Durable Consumer Products
Revolving Line of Credit — $10,000 Commitment (9.00% (LIBOR + 7.00% with 2.00% LIBOR floor), due 6/18/2014)(25)
6,143
Senior Secured Term Loan A (6.50% (LIBOR + 4.50% with 2.00% LIBOR floor), due 6/18/2018)
29,775
Senior Secured Term Loan B (11.50% (LIBOR + 9.50% with 2.00% LIBOR floor), due 6/18/2018) (3)
29,925
65,843
2.3%
TransFirst Holdings, Inc.(4)
Second Lien Term Loan (11.00%, (LIBOR + 9.75% with 1.25% LIBOR floor), due 6/27/2018)
5,000
4,865
United Bank Card, Inc. (d/b/a Harbortouch)
Senior Secured Term Loan (11.50% (LIBOR + 9.50% with 2.00% LIBOR floor), due 9/5/2018) (4)
50,132
United Sporting Companies, Inc.(5)
South Carolina / Durable Consumer Products
Second Lien Term Loan (12.75% (LIBOR + 11.00% with 1.75% LIBOR floor), due 5/16/2018) (3) ,(4)
160,000
5.5%
Water Pik, Inc. (16)
Second Lien Term Loan (9.75% (LIBOR + 8.75% with 1.00% LIBOR floor), due 1/8/2021) (4)
10,574
Wind River Resources Corporation(39)
Utah / Oil & Gas Production
Senior Secured Note (13.00% (LIBOR + 7.50% with 5.50% LIBOR floor) plus 3.00% default interest on principal, 16.00% default interest on past due interest, in non-accrual status effective 12/1/2008, past due)(4)
14,750
Net Profits Interest (5.00% payable on Equity distributions)(7)
Total Non-control/Non-affiliate Investments (Level 3 Investments)
3,622,501
3,568,003
122.6%
Total Level 3 Portfolio Investments
4,642,225
4,553,000
156.5%
20
LEVEL 1 PORTFOLIO INVESTMENTS:
Dover Saddlery, Inc.
Massachusetts / Retail
Common Stock (30,974 shares)
$ 63
$ 136
63
136
Total Non-control/Non-affiliate Investments (Level 1 Investments)
Total Portfolio Investments
4,642,288
SHORT TERM INVESTMENTS: Money Market Funds (Level 2 Investments)
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)
138,573
4.8%
Fidelity Institutional Money Market Funds — Government Portfolio (Class I)(3)
13,422
Victory Government Money Market Funds
Total Money Market Funds
Total Investments
$ 4,794,283
$4,705,131
161.7%
21
June 30, 2013 (Audited)
Control Investments (greater than 25.00% voting control)(42)
$ 28,750
3,478
51,170
54,648
2.1%
Senior Secured Note — Tranche A (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/30/2018)(3), (4)
19,737
19,700
45,494
39,437
125,892
1.0.%
152,540
5.8%
586
1,611
9,738
706
3,302
CCPI Holdings, Inc.(33)
17,663
7,659
7,977
604
33,903
22
$ 38,082
8,361
4,019
50,462
Texas / Gas Gathering and Processing
8,500
13,906
12,503
8,449
6,247
34,270
26,696
10.0%
20,447
12,877
298,084
11.3%
Manx Energy, Inc. (“Manx”)(12)
346
Chicago / Consumer Finance
2,142
1,701
13,149
23
Senior Subordinated Note (10.00% (LIBOR + 9.00% with 1.00% LIBOR floor), due 6/12/2018)(4)
$ 32,750
6,796
18,522
58,068
Valley Electric Holdings I, Inc. (35)
34,063
10,026
8,288
1,238
53,615
3,832
2,642
546
51
7,930
5,990
8,040
4,949
830,151
30.6%
Affiliate Investments (5.00% to 24.99% voting control)(43)
29,550
2,832
533
32,429
32,915
24
$ 1,712
$ 1,702
4,892
4,809
2,371
8,325
7,878
410
16,760
9,385
143
49,189
141
335
6,900
565
11,764
4,058
42,558
19,730
19,931
19,718
25
$ 20,525
$ 19,609
$ 19,294
19,609
19,294
39,239
37,972
43,480
40,294
Arctic Glacier U.S.A, Inc.(4)
Canada / Food Products
5.6%
Armor Holding II LLC(4), (16)
Second Lien Term Loan (9.25% (LIBOR + 8.00% with 1.25% LIBOR floor), due 12/26/2020)
6,860
39,352
41,352
34,499
34,450
25,917
27,269
28,863
27,510
Blue Coat Systems, Inc. (16)
10,890
99,500
99,323
26
$ 26,000
$ 23,896
$ 23,743
23,896
23,743
10,914
10,417
104
137
241
97,291
3.8%
197,291
7.5%
Senior Secured Term Loan (10.50% (LIBOR + 7.50% with 3.00% LIBOR floor), due 3/31/2016) (3), (4)
43,977
44,417
1,860
45,616
46,277
24,615
25,454
CI Holdings(4)
Senior Secured Term Loan (10.00% (LIBOR + 5.00% with 5.00% LIBOR floor), due 6/11/2019)
114,713
4.3%
Secured Class D Notes (5.32% (LIBOR + 5.00%), due 1/19/2023)
15,029
15,844
Unsecured Class E Notes (7.32% (LIBOR + 7.00%), due 1/19/2023)
12,638
12,745
27,667
28,589
70,595
2.7%
130
Second Lien Term Loan (11.25%, due 1/11/2020)(3)
Senior Secured Term Loan (11.50% (LIBOR + 8.50% with 3.00% LIBOR floor), due 12/17/2017)(3), (4)
39,303
CP Well Testing, LLC
Oklahoma / Oil & Gas Products
Senior Secured Term Loan (13.50% (LIBOR + 11.00% with 2.50% LIBOR floor), due 10/03/2017)(4)
19,125
71,106
11,833
Net Profits Interest (15.00% payable on Equity distributions)(7)
Edmentum, Inc (f/k/a Archipelago Learning, Inc.)(4)
Second Lien Term Loan (11.25% (LIBOR + 9.75% with 1.50% LIBOR floor), due 5/17/2019)
48,218
21,792
15,332
14,650
10,479
28
149
225
17,731
21,401
21,428
21,420
20,792
21,657
32,119
30,227
14,127
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor), due 10/12/2017)(3), (4)
31,972
22,279
22,724
41,085
38,291
29
$ 19,831
$ 19,598
955
20,553
43,310
33,929
12,300
34,904
36,848
44,454
46,361
39,255
41,153
22,430
53,475
108,475
4.1%
Second Lien Debt (12.00% (LIBOR + 10.00% with 2.00% LIBOR floor) plus 1.50% PIK, due 6/23/2018)(3), (4)
16,119
37,031
30
$ 25,838
25,838
2,865
245
3,081
3,110
26,401
26,596
27,580
27,199
37,959
37,035
65,539
64,234
780
44,235
43,192
Medical Security Card Company, LLC(4)
Revolving Line of Credit — $1,500 Commitment (9.50% (LIBOR + 7.00% with 2.50% LIBOR floor), due 2/1/2016)(25)
First Lien Term Loan (11.25% (LIBOR + 8.75% with 2.50% LIBOR floor), due 2/1/2016)(3)
13,427
National Bankruptcy Services, LLC (3), (4)
18,683
16,883
46,170
31
$ 45,120
$ 44,166
45,120
44,166
50,274
15,509
15,252
14,992
3,618
Pegasus Business Intelligence, LP(4)
26,919
25,515
Subordinated Secured (11.50% (LIBOR + 10.00% with 1.50% LIBOR floor), due 6/14/2019)(3), (4)
14,729
9,815
Pre-Paid Legal Services, Inc.(16)
Oklahoma / Consumer Services
Senior Subordinated Term Loan (11.50% (PRIME + 8.25%), due 12/31/2016)(3), (4)
9,888
32
Progrexion Holdings, Inc.(4), (28)
$ 241,033
241,033
19,719
Senior Subordinated Unsecured Term Loan (12.00% plus 2.00% PIK, due 11/29/2016)
28,364
28,648
Subordinated Secured (12.00% (LIBOR + 9.00% with 3.00% LIBOR floor) plus 3.00% PIK, due 6/30/2018)
Senior Secured Term Loan (10.50% (LIBOR + 8.50% with 2.00% LIBOR floor) plus 1.50% PIK, due 5/8/2018)(4)
24,900
Seaton Corp.(3), (4)
Illinois / Business Services
Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2014)
3,305
3,249
Subordinated Secured (12.50% (LIBOR + 9.00% with 3.50% LIBOR floor) plus 2.00% PIK, due 3/14/2015)
10,005
13,254
13,310
SESAC Holdco II LLC(16)
Second Lien Term Loan (10.00% (LIBOR + 8.75% with 1.25% LIBOR floor), due 7/12/2019)(4)
5,914
14,927
Southern Management Corporation (22), (30)
South Carolina / Consumer Finance
Second Lien Term Loan (12.00% plus 5.00% PIK, due 5/31/2017)
17,565
18,267
33
Spartan Energy Services, Inc.(3), (4)
Senior Secured Term Loan (10.50% (LIBOR + 9.00% with 1.50% LIBOR floor), due 12/28/2017)
$ 29,625
29,625
389
16,594
10,238
26,832
Subordinated Secured Revolving Credit Facility — $50,300 Commitment (8.50% (LIBOR + 7.00% with 1.50% LIBOR floor) plus 3.75% PIK, in non-accrual status effective 12/1/2011, due 12/1/2015)(4), (25)
34,738
32,711
Symphony CLO, IX Ltd.(22)
LP Certificates (Residual Interest)
42,289
43,980
System One Holdings, LLC (3), (4)
32,000
23,361
First Lien Term Loan (11.00% (LIBOR + 9.50% with 1.50% LIBOR floor), due 5/25/2016)(3), (4)
23,520
23,209
7,773
34
$ 22,000
$ 21,690
21,690
Ohio / Nondurable Consumer Products
39,000
30,000
Senior Secured Term Loan B (11.50% (LIBOR + 9.50% with 2.00% LIBOR floor), due 6/18/2018)
66,143
4,860
Second Lien Term Loan (12.75% (LIBOR + 11.00% with 1.75% LIBOR floor), due 5/16/2018)(4)
6.0%
Wind River Resources Corp. and Wind River II Corp.
3,376,375
3,318,663
124.9%
4,255,715
4,172,740
157.1%
35
$ 112
112
4,255,778
83,456
3.1%
49,804
10,002
5.4%
$ 4,399,040
$ 4,316,114
162.5%
36
Endnote Explanations for the Consolidated Schedule of Investments as of September 30, 2013 and June 30, 2013
(1)
The securities in which Prospect Capital Corporation (“we”, “us” or “our”) has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended, or the “Securities Act.” These securities may be resold only in transactions that are exempt from registration under the Securities Act.
(2)
Fair value is determined by or under the direction of our Board of Directors. As of September 30, 2013 and June 30, 2013, one of our portfolio investments, Dover Saddlery, Inc. (“Dover”), was publicly traded and classified as Level 1 within the valuation hierarchy established by Accounting Standards Codification 820, Fair Value Measurements and Disclosures (“ASC 820”). As of September 30, 2013 and June 30, 2013, the fair value of our remaining portfolio investments was determined using significant unobservable inputs. ASC 820 classifies such inputs used to measure fair value as Level 3 within the valuation hierarchy. Our investments in money market funds are classified as Level 2. See Notes 2 and 3 within the accompanying notes to consolidated financial statements for further discussion.
(3)
Security, or a portion thereof, is held by Prospect Capital Funding LLC (“PCF”), our wholly-owned subsidiary and a bankruptcy remote special purpose entity, and is pledged as collateral for the revolving credit facility and such security is not available as collateral to our general creditors (see Note 4). The fair values of these investments held by PCF at September 30, 2013 and June 30, 2013 were $884,267 and $883,114, respectively; they represent 18.8% and 20.5% of total investments at fair value, respectively.
(4)
Security, or portion thereof, has a floating interest rate which may be subject to a LIBOR or PRIME floor. Stated interest rate was in effect at September 30, 2013 and June 30, 2013.
(5)
Ellett Brothers, LLC, Evans Sports, Inc., Jerry’s Sports, Inc., Simmons Gun Specialties, Inc., Bonitz Brothers, Inc., and Outdoor Sports Headquarters, Inc. are joint borrowers on our second lien loan. United Sporting Companies, Inc. is a parent guarantor of this debt investment.
(6)
During the quarter ended December 31, 2009, we created two new entities, Coalbed Inc. and Coalbed LLC, to foreclose on the outstanding senior secured loan and assigned rights and interests of Conquest Cherokee, LLC (“Conquest”) as a result of the deterioration of Conquest’s financial performance and inability to service debt payments. We own 1,000 shares of common stock in Coalbed Inc., representing 100% of the issued and outstanding common stock. Coalbed Inc., in turn, owns 100% of the membership interest in Coalbed LLC.
On October 21, 2009, Coalbed LLC foreclosed on the loan formerly made to Conquest. On January 19, 2010, as part of the Manx rollup, the Coalbed LLC assets and loan were assigned to Manx, the holding company. On June 30, 2012, Manx reassigned our investment in Coalbed to Wolf Energy Holdings, Inc. (“Wolf”), a newly-formed, separately owned holding company. Our Board of Directors set the fair value at zero for the loan position in Coalbed LLC investment as of September 30, 2013 and June 30, 2013.
(7)
In addition to the stated returns, the net profits interest held will be realized upon sale of the borrower or a sale of the interests.
(8)
During the quarter ended December 31, 2011, our ownership of Change Clean Energy Holdings, Inc. (“CCEHI”) and Change Clean Energy, Inc. (“CCEI”), Freedom Marine Holding, Inc. (“Freedom Marine”) and Yatesville Coal Holdings, Inc. (“Yatesville”) was transferred to Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) (“Energy Solutions”) to consolidate all of our energy holdings under one management team. We own 100% of Energy Solutions.
(9)
Entity was formed as a result of the debt restructuring of ESA Environmental Specialist, Inc. In early 2009, we foreclosed on the two loans on non-accrual status and purchased the underlying personal and real property. We own 1,000 shares of common stock in The Healing Staff, Inc. (f/k/a Lisamarie Fallon, Inc.) (“THS), representing 100% ownership. We own 1,500 shares of Vets Securing America, Inc. (“VSA”), representing 100% ownership.
During the three months ended December 31, 2012, we determined that the impairment of Integrated Contract Services, Inc. (“ICS”) was other-than-temporary and recorded a realized loss of $12,198 for the amount that the amortized cost exceeded the fair value. Our remaining investment in THS, an affiliate of ICS, was valued at zero as of September 30, 2013 and continues to provide staffing solutions for health care facilities and security staffing.
(10)
GTP Operations, LLC (formerly known as CI (Transplace) Holdings, LLC), Transplace, LLC, CI (Transplace) International, LLC, Transplace Freight Services, LLC, Transplace Texas, LP, Transplace Stuttgart, LP, Transplace International, Inc., Celtic International, LLC, and Treetop Merger Sub, LLC are joint borrowers on our senior secured investment.
(11)
Evanta Ventures, Inc. and Sports Leadership Institute, Inc. are joint borrowers on our investment.
37
Endnote Explanations for the Consolidated Schedule of Investments as of September 30, 2013 and June 30, 2013 (Continued)
(12)
On January 19, 2010, we modified the terms of our senior secured debt in AEH and Coalbed in conjunction with the formation of Manx Energy, Inc. (“Manx”), a new entity consisting of the assets of AEH, Coalbed and Kinley Exploration. The assets of the three companies were brought under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring. On June 30, 2012, Manx reassigned our investments in Coalbed and AEH to Wolf, a newly-formed, separately owned holding company. We continue to fully reserve any income accrued for Manx. During the quarter ended June 30, 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair value. The Board of Directors set the fair value of our investment in Manx at $413 and $346 as of September 30, 2013 and June 30, 2013, respectively.
(13)
On a fully diluted basis represents 10.00% of voting common shares.
(14)
A portion of the positions listed was issued by an affiliate of the portfolio company.
(15)
We own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,037.65 out of a total of 83,818.69 shares (including 5,111 vested and unvested management options) of American Gilsonite Holding Company which owns 100% of American Gilsonite Company.
(16)
Syndicated investment which had been originated by another financial institution and broadly distributed.
(17)
Our wholly-owned entity, MITY Holdings of Delaware Inc., owns 98.6% (42,053 common shares) of MITY Enterprises, Inc., the operating company.
(18)
The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower.
(19)
On December 31, 2009, we sold our investment in Aylward Enterprises, LLC. AWCNC, LLC is the remaining holding company with zero assets. Our remaining outstanding debt after the sale was written off on December 31, 2009 and no value has been assigned to the equity position as of September 30, 2013 and June 30, 2013.
(20)
We own a warrant to purchase 3,755,000 shares of Series A Preferred Stock, 625,000 shares of Series B Preferred Stock, and 43,800 shares of Voting Common Stock in Boxercraft Incorporated.
(21)
We own warrants to purchase 33,750 shares of common stock in Metal Buildings Holding Corporation (“Metal Buildings”), the former holding company of Borga, Inc. Metal Buildings owned 100% of Borga, Inc.
On March 8, 2010, we foreclosed on the stock in Borga, Inc. that was held by Metal Buildings, obtaining 100% ownership of Borga, Inc.
(22)
Certain investments that we have determined are not “qualifying” assets under Section 55(a) of the Investment Company Act of 1940 (the “1940 Act”). Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. We monitor the status of these assets on an ongoing basis.
(23)
NCP Finance Limited Partnership, NCP Finance Ohio, LLC and certain affiliates thereof, are joint borrowers on our subordinated secured investment.
(24)
On May 6, 2011, we made a secured first lien $24,250 debt investment to NMMB Acquisition, Inc., a $2,800 secured debt and $4,400 equity investment to NMMB Holdings, Inc. We own 100% of the Series A Preferred Stock in NMMB Holdings, Inc. NMMB Holdings, Inc. owns 100% of the Convertible Preferred in NMMB Acquisition, Inc. NMMB Acquisition, Inc. has a 5.8% dividend rate which is paid to NMMB Holdings, Inc. Our fully diluted ownership in NMMB Holdings, Inc. is 100% as of September 30, 2013 and June 30, 2013. Our fully diluted ownership in NMMB Acquisition, Inc. is 83.5% as of September 30, 2013 and June 30, 2013.
(25)
Undrawn committed revolvers incur commitment and unused fees ranging from 0.50% to 2.00%. As of September 30, 2013 and June 30, 2013, we had $206,684 and $202,518 of undrawn revolver commitments to our portfolio companies, respectively.
(26)
Stated interest rates are based on September 30, 2013 and June 30, 2013 one month or three month Libor rates plus applicable spreads based on the respective credit agreements. Interest rates are subject to change based on actual elections by the borrower for a Libor rate contract or Base Rate contract when drawing on the revolver.
38
(27)
On July 30, 2010, we made a secured first lien $30,000 debt investment to AIRMALL USA, Inc., a $12,500 secured second lien to AMU Holdings, Inc., and acquired 100% of the Convertible Preferred Stock and Common stock of AMU Holdings, Inc. Our Convertible Preferred Stock in AMU Holdings, Inc. has a 12.0% dividend rate which is paid from the dividends received from the underlying operating company, AIRMALL USA Inc. AMU Holdings, Inc. owns 100% of the common stock in AIRMALL USA, Inc.
(28)
Progrexion Marketing, Inc., Progrexion Teleservices, Inc., Progrexion ASG, Inc. Progrexion IP, Inc. and Efolks, LLC, are joint borrowers on our senior secured investment. Progrexion Holdings, Inc. and eFolks Holdings, Inc. are the guarantors of this debt investment.
(29)
Our wholly-owned entity, First Tower Holdings of Delaware, LLC, owns 80.1% of First Tower Holdings LLC, which owns 100% of First Tower, LLC, the operating company.
(30)
Southern Management Corporation, Thaxton Investment Corporation, Southern Finance of Tennessee, Inc., Covington Credit of Texas, Inc., Covington Credit, Inc., Covington Credit of Alabama, Inc., Covington Credit of Georgia, Inc., Southern Finance of South Carolina, Inc. and Quick Credit Corporation, are joint borrowers on our senior secured investment. SouthernCo, Inc. is the guarantor of this debt investment.
(31)
We own 2.8% (13,220 shares) of the Mineral Fusion Natural, LLC, a subsidiary of Caleel + Hayden, common and preferred interest.
(32)
Our wholly-owned entity, APH Property Holdings, LLC, owns 100% of the common equity of American Property Holdings Corp., a REIT which holds investments in several real estate properties.
(33)
Our wholly-owned entity, CCPI Holdings Inc., owns 95.13% of CCPI Inc., the operating company.
(34)
Our wholly-owned entity, Credit Central Holdings of Delaware, LLC, owns 74.8% of Credit Central Holdings, LLC, which owns 100% of each of Credit Central, LLC, Credit Central South, LLC, Credit Central of Texas, LLC, and Credit Central of Tennessee, LLC, the operating companies.
(35)
Our wholly-owned entity, Valley Electric Holdings I, Inc. (“HoldCo”), owns 100% of Valley Electric Holdings II, Inc. (“Valley II”). Valley II owns 96.3% of Valley Electric Co. of Mt. Vernon, Inc. (“OpCo”), the operating company. Our debt investments are with both HoldCo and OpCo.
(36)
Our wholly-owned entity, Nationwide Acceptance Holdings, LLC, owns 93.8% of Nationwide Acceptance LLC, the operating company.
(37)
On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. The cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors, and was equal to the fair value of assets at the time of transfer resulting in a capital loss of $19,647 in connection with the foreclosure on the assets. On May 17, 2013, Wolf sold the assets located in Martin County, which were previously held by H&M, for $66,000. Proceeds from the sale were primarily used to repay the loan and net profits interest receivable due to us resulting in a realized capital gain of $11,826. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the net profits interest agreement which was recognized as other income during the fiscal year ended June 30, 2013.
(38)
Our wholly-owned entity, CP Holdings of Delaware LLC, owns 82.9% of CP Energy Services Inc., which owns 100% of CP Well Testing Holding Company, LLC and 100% of Fluid Management Holdings, Inc., the operating companies.
(39)
Wind River Resources Corporation and Wind River II Corporation (collectively, “Wind River”) are joint borrowers on our senior secured loan.
39
(40)
As defined in the 1940 Act, we are deemed to be an “Affiliated Company” and “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding voting securities and we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Our transactions with these portfolio companies during the quarter ended September 30, 2013 are as follows:
Company
Purchases
Redemptions
Sales
Interest income
Dividend income
Other income
Net realized gains (losses)
Net unrealized gains (losses)
AIRMALL USA, Inc.
150
1,457
(3,088)
100
1,408
(11,560)
APH Property Holdings, LLC
3,700
320
AWCNC, LLC
CCPI Holdings Inc.
113
826
(141)
CP Holdings of Delaware LLC
2,176
1,864
(1,992)
Credit Central Holdings of Delaware, LLC
1,967
119
2,897
Energy Solutions Holdings, Inc.
2,935
1,143
First Tower Holdings of Delaware, LLC
13,532
699
15,589
The Healing Staff, Inc.
Manx Energy, Inc.
MITY Holdings of Delaware Inc.
198
1,049
Nationwide Acceptance Holdings, LLC
1,089
NMMB Holdings, Inc.
679
(2,422)
819
(155)
Valley Electric Holdings I, Inc.
1,847
(6,801)
Wolf Energy Holdings, Inc.
307
Total
141,999
4,663
(4,311)
(41)
As defined in the 1940 Act, we are deemed to be an “Affiliated Company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities and we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Our transactions with these portfolio companies during the quarter ended September 30, 2013 are as follows:
755
(1,176)
Boxercraft Incorporated
741
(4,152)
Smart, LLC
175
(5,153)
40
(42)
As defined in the 1940 Act, we are deemed to be an “Affiliated Company” and “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding voting securities and we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Our transactions with these portfolio companies during the year ended June 30, 2013 are as follows:
600
5,822
7,266
23,300
19,065
5,176
155
(17,208)
151,648
2,898
4,650
(232)
CCPI Holdings, Inc.
34,081
338
1,792
607
3,893
1,680
2,799
28,500
475
24,809
53,820
(71,198)
52,476
2,426
(9,869)
894
(12,117)
12,117
(9,397)
18,865
1,787
884
5,700
3,026
(5,903)
781
24,462
1,463
52,098
3,511
1,325
452
4,951
11,826
(3,092)
387,866
48,503
7,169
106,425
78,282
16,821
(9,688)
(64,992)
(43)
As defined in the 1940 Act, we are deemed to be an “Affiliated Company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities and we have the power to exercise control over the management or policies of such portfolio company (including through a management agreement). Our transactions with these portfolio companies during the year ended June 30, 2013 are as follows:
26,677
3,159
672
3,356
(9,413)
728
108
6,515
(8,633)
41
PROSPECT CAPITAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2013 (Unaudited) (in thousands, except share and per share data)
Note 1. Organization
References herein to “we”, “us” or “our” refer to Prospect Capital Corporation (“Prospect”) and its subsidiary unless the context specifically requires otherwise.
We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004. We are a closed-end investment company incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the “Internal Revenue Code”). We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes.
On May 15, 2007, we formed a wholly-owned subsidiary, Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the credit facility at PCF.
Note 2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Articles 6 or 10 of Regulation S-X. The financial results of our portfolio investments are not consolidated in the financial statements.
Reclassifications
Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompany notes to conform to the presentation as of and for the three months ended September 30, 2013.
Use of Estimates
The preparation of GAAP consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, gains and losses, and expenses during the reported period. Changes in the economic environment, financial markets, creditworthiness of our portfolio companies and any other parameters used in determining these estimates could cause actual results to differ, and these differences could be material.
Basis of Consolidation
Under the 1940 Act, the regulations pursuant to Article 6 of Regulation S-X and Accounting Standards Codification (“ASC”) 946, Financial Services—Investment Companies (“ASC 946”), we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services and benefits to us. Our consolidated financial statements include our accounts and the accounts of PCF, our only wholly-owned, closely-managed subsidiary that is also an investment company. All intercompany balances and transactions have been eliminated in consolidation.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, controlled investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Under the 1940 Act, Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person.
Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Amounts for investments recognized or derecognized but not yet settled are reported as receivables for investments sold and payables for investments purchased, respectively, in the Consolidated Statements of Assets and Liabilities.
Investment Risks
Our investments are subject to a variety of risks. Those risks include the following:
Market Risk
Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.
Credit Risk
Credit risk represents the risk that we would incur if the counterparties failed to perform pursuant to the terms of their agreements with us.
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to rapidly adjust the size of its positions in times of high volatility and financial stress at a reasonable price.
Interest Rate Risk
Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.
Prepayment Risk
Many of our debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the security and making the security less likely to be an income producing instrument.
Investment Valuation
To value our investments, we follow the guidance of ASC 820 that defines fair value, establishes a framework for measuring fair value in conformity with GAAP and requires disclosures about fair value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
43
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below:
1)
Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors;
2)
the independent valuation firms conduct independent valuations and make their own independent assessment;
3)
the Audit Committee of our Board of Directors reviews and discusses the preliminary valuation of Prospect Capital Management LLC (the “Investment Adviser”) and that of the independent valuation firms; and
4)
the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.
Investments are valued utilizing a shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and market approaches use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.
Our investments in CLOs are classified as ASC 820 Level 3 securities, and are valued using a dynamic discounted cash flow model, where the projected future cash flow was estimated using Monte Carlo simulation techniques. The valuations have been accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each CLO security, the most appropriate valuation approach has been chosen from alternative approaches to ensure the most accurate valuation for such security. To value a CLO, both the assets and the liabilities of the CLO capital structure are modeled. We use a waterfall engine to store the collateral data, generate numerous collateral cash flows from the assets based on various assumptions for the risk factors, and distribute the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates to the various cash flows along each simulation path. The main risk factors are: default risk, interest rate risk, downgrade risk, and credit spread risk.
Valuation of Other Financial Assets and Financial Liabilities
ASC Subtopic 825-10-25, The Fair Value Option for Financial Assets and Financial Liabilities (“ASC 825-10-25”), permits an entity to elect fair value as the initial and subsequent measurement attribute for eligible assets and liabilities for which the assets and liabilities are measured using another measurement attribute. We have elected not to value some assets and liabilities at fair value as would be permitted by ASC 825-10-25.
44
Senior Convertible Notes
We have recorded the Senior Convertible Notes (see Note 5) at their contractual amounts. The Senior Convertible Notes were analyzed for any features that would require their accounting to be bifurcated and such features were determined to be immaterial.
Revenue Recognition
Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of such purchase discounts or premiums is calculated by the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. The purchase discount for portfolio investments acquired from Patriot Capital Funding, Inc. (“Patriot”) was determined based on the difference between par value and fair market value as of December 2, 2009, and continues to accrete until maturity or repayment of the respective loans.
Interest income from investments in the “equity” class of security of CLO Funds (typically income notes or subordinated notes) is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40-35, Beneficial Interests in Securitized Financial Assets. We monitor the expected cash inflows from our CLO equity investments, including the expected residual payments, and the effective yield is determined and updated periodically.
Dividend income is recorded on the ex-dividend date.
Structuring fees and similar fees are recognized as income as earned, usually when paid. Structuring fees, excess deal deposits, net profits interests and overriding royalty interests are included in other income.
Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Unpaid accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management’s judgment. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, are likely to remain current. As of September 30, 2013, approximately 0.5% of our net assets are in non-accrual status.
Federal and State Income Taxes
We have elected to be treated as a regulated investment company and intend to continue to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies. We are required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.
If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income and 98.2% of our capital gains in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income as taxable income is earned using an annual effective excise tax rate. The annual effective excise tax rate is determined by dividing the estimated annual excise tax by the estimated annual taxable income.
45
If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Internal Revenue Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years reduced by an interest charge of 50% of such earnings and profits payable by us as an additional tax. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of ten years.
We follow ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. As of September 30, 2013 and for the three months then ended, we did not have a liability for any unrecognized tax benefits. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof.
Dividends and Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a monthly dividend or distribution is approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our earnings for the quarter. Net realized capital gains, if any, are distributed at least annually.
Financing Costs
We record origination expenses related to our credit facility and Senior Convertible Notes, Senior Unsecured Notes and Prospect Capital InterNotes® (collectively, our “Senior Notes”), as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method for our revolving credit facility and the effective interest method for our Senior Notes, over the respective expected life or maturity.
We record registration expenses related to shelf filings as prepaid assets. These expenses consist principally of Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These prepaid assets will be charged to capital upon the receipt of proceeds from an equity offering or charged to expense if no offering is completed.
Guarantees and Indemnification Agreements
We follow ASC 460, Guarantees (“ASC 460”). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual consolidated financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.
Per Share Information
Net increase or decrease in net assets resulting from operations per common share is calculated using the weighted average number of common shares outstanding for the period presented. In accordance with ASC 946, convertible securities are not considered in the calculation of net assets per share.
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Recent Accounting Pronouncements
In June 2013, the FASB issued Accounting Standards Update 2013-08, Financial Services — Investment Companies (Topic 946) — Amendments to the Scope, Measurement, and Disclosure Requirements (“ASU 2013-08”). The update clarifies the approach to be used for determining whether an entity is an investment company and provides new measurement and disclosure requirements. ASU 2013-08 is effective for interim and annual reporting periods in fiscal years that begin after December 15, 2013. Earlier application is prohibited. The adoption of ASU 2013-08 is not expected to materially affect our consolidated financial statements and disclosures.
Note 3. Portfolio Investments
At September 30, 2013, we had investments in 129 long-term portfolio investments, which had an amortized cost of $4,642,288 and a fair value of $4,553,136 and at June 30, 2013, we had investments in 124 long-term portfolio investments, which had an amortized cost of $4,255,778 and a fair value of $4,172,852.
As of September 30, 2013, we own controlling interests in AIRMALL USA, Inc. (“Airmall”), Ajax Rolled Ring & Machine, Inc., APH Property Holdings, LLC (“APH”), AWCNC, LLC, Borga, Inc. (“Borga”), CCPI Holdings, Inc., CP Holdings of Delaware LLC, Credit Central Holdings of Delaware, LLC, Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) (“Energy Solutions”), First Tower Holdings of Delaware, LLC, The Healing Staff, Inc. (“THS”), Manx Energy, Inc. (“Manx”), MITY Holdings of Delaware Inc. (“Mity”), Nationwide Acceptance Holdings, LLC, NMMB Holdings, Inc., R-V Industries, Inc., Valley Electric Holdings I, Inc. and Wolf Energy Holdings, Inc. (“Wolf”). We also own an affiliated interest in BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork), Boxercraft Incorporated and Smart, LLC.
The composition of our investments and money market funds as of September 30, 2013 and June 30, 2013 at cost and fair value was as follows:
Fair Value
Revolving Line of Credit
13,238
12,705
9,238
8,729
Senior Secured Debt
2,524,504
2,444,947
2,262,327
2,207,091
Subordinated Secured Debt
1,032,693
988,581
1,062,386
1,024,901
Subordinated Unsecured Debt
130,444
119,165
88,470
88,827
CLO Debt
CLO Residual Interest
749,019
777,678
660,619
658,086
Equity
164,614
180,740
145,071
156,629
Money Market Funds
Total Investments and Money Market Funds
4,794,283
4,705,131
4,399,040
4,316,114
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The fair values of our investments and money market funds as of September 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows:
Quoted Prices in Active Markets for Identical Securities (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
Investments at fair value
180,604
Fair Value Hierarchy
Level 1
Level 2
Level 3
Non-control/non-affiliate investments
Investments in Money Market Funds
The fair values of our investments and money market funds as of June 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows:
156,517
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The aggregate values of Level 3 portfolio investments changed during the three months ended September 30, 2013 as follows:
Fair Value Measurements Using Unobservable Inputs (Level 3)
Control Investments
Affiliate Investments
Non-Control/ Non-Affiliate Investments
Fair value as of June 30, 2013
Total realized gain, net
Change in unrealized (depreciation) appreciation
(5,153
3,213
(6,251)
Net realized and unrealized (loss) gain
7,002
(2,462)
Purchases of portfolio investments
410,263
552,262
2,913
1,623
4,581
Accretion (amortization) of purchase discount and premiums
240
(10,194)
(9,954)
Repayments and sales of portfolio investments
(4,663
(150
(159,354
(164,167)
Transfers within Level 3
Transfers in (out) of Level 3
Fair value as of September 30, 2013
Revolver
Unsecured Debt
Total realized loss (gain), net
-
3,704
(24,321)
(6,626)
(11,637)
31,193
4,542
(24,276)
(6,586)
8,246
355,021
74,568
98,987
19,686
3,409
836
336
Accretion (amortization) of discounts and premiums
295
109
(10,588)
(96,593)
(35,365)
(28,364)
(3,845)
(70,000)
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The aggregate values of Level 3 portfolio investments changed during the three months ended September 30, 2012 as follows:
Fair value as of June 30, 2012
564,489
46,116
1,483,487
2,094,092
Change in unrealized appreciation (depreciation)
(31,744
(1,221
4,425
(28,540
Net realized and unrealized gain (loss)
6,200
(26,765
746,064
1,732
1,873
6,489
6,708
(2,960
(155,163
(158,123
Fair value as of September 30, 2012
529,785
45,255
2,088,809
2,663,849
868
1,088,019
480,147
73,195
27,717
218,009
206,137
(47)
(949)
142
1,014
2,907
(31,587)
(28,540)
(29,812)
(26,765)
7,150
283,000
255,760
95,400
104,754
246
963
664
306
173
6,110
(1,100)
(88,424)
(66,557)
(2,042)
(158,123)
6,871
1,282,198
670,628
169,258
28,831
331,780
174,283
For the three months ended September 30, 2013 and 2012, the net change in unrealized appreciation on the investments that use Level 3 inputs was $4,575 and $26,768 for assets still held as of September 30, 2013 and 2012, respectively.
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of September 30, 2013 were as follows:
Unobservable Input
Asset Category
Primary Valuation Technique
Input
Range
Weighted Average
Senior Secured
2,457,652
Yield Analysis
Market Yield
5.8%-16.0%
10.6%
Subordinated Secured
8.1%-17.7%
11.7%
Subordinated Unsecured
6.0%-14.2%
10.4%
Discounted Cash Flow
Discount Rate
19.0%-20.0%
19.5%
10.0%-28.0%
18.6%
178,573
EV Market Multiple Analysis
3.3x-9.3x
6.5x
Escrow
2,031
7.1%-8.3%
7.7%
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2013 were as follows:
2,215,820
5.7%-20.8%
10.7%
7.7%-19.8%
11.6%
6.1%-14.6%
12.1%-20.1%
15.7%
11.3%-19.8%
15.3%
151,855
3.3x-8.8x
6.2x
4,662
6.5%-7.5%
7.0%
The significant unobservable inputs used in the market approach of fair value measurement of our investments are the market multiples of earnings before income tax, depreciation and amortization (“EBITDA”) of the comparable guideline public companies. The independent valuation firm selects a population of public companies for each investment with similar operations and attributes of the subject company. Using these guideline public companies’ data, a range of multiples of enterprise value to EBITDA is calculated. The independent valuation firm selects percentages from the range of multiples for purposes of determining the subject company’s estimated enterprise value based on said multiple and generally the latest twelve months EBITDA of the subject company (or other meaningful measure). Significant increases or decreases in the multiple will result in an increase or decrease, respectively, in enterprise value, resulting in an increase or decrease in the fair value estimate of the equity investment.
The significant unobservable input used in the income approach of fair value measurement of our investments is the discount rate used to discount the estimated future cash flows expected to be received from the underlying investment, which include both future principal and interest payments. Significant increases or decreases in the discount rate would result in a decrease or increase, respectively, in the fair value measurement. Included in the consideration and selection of discount rates are the following factors: risk of default, rating of the investment and comparable company investments, and call provisions.
Changes in market yields, discount rates or EBITDA multiples, each in isolation, may change the fair value of certain of our investments. Generally, an increase in market yields or discount rates or decrease in EBITDA multiples may result in a decrease in the fair value of certain of our investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the valuations currently assigned.
During the quarter ended September 30, 2013, the valuation methodology for Gulf Coast Machine & Supply Company (“Gulf Coast”) changed to incorporate an enterprise value waterfall analysis in place of the income method (discounted cash flow analysis) used in previous quarters. Management adopted the enterprise value waterfall analysis due to a deterioration in operating results. As a result of this change and in recognition of recent company performance and current market conditions, we decreased the fair value of our investment in Gulf Coast to $12,998 as of September 30, 2013, a discount of $28,215 to its amortized cost, compared to the $9,241 unrealized depreciation recorded at June 30, 2013.
During the quarter ended September 30, 2013, the valuation methodology for ICON Health & Fitness, Inc. (“ICON”) changed to incorporate weighted broker quotes in addition to the enterprise value waterfall analysis and income method (discounted cash flow analysis) used in previous quarters. Management adopted the weighted broker quotes because they are representative of sufficient liquidity to provide an indication of value. As a result of this change and in recognition of recent company performance and current market conditions, we increased the fair value of our investment in ICON to $37,497 as of September 30, 2013, a discount of $5,800 to its amortized cost, compared to the $9,381 unrealized depreciation recorded at June 30, 2013.
During the quarter ended September 30, 2013, the valuation methodology for National Bankruptcy Services, LLC (“NBS”) changed to incorporate an enterprise value waterfall analysis in place of the income method (discounted cash flow analysis) used in previous quarters. Management adopted the enterprise value waterfall analysis due to a deterioration in operating results. As a result of this change and in recognition of recent company performance and current market conditions, we decreased the fair value of our investment in NBS to $11,004 as of September 30, 2013, a discount of $7,751 to its amortized cost, compared to the $1,800 unrealized depreciation recorded at June 30, 2013.
On January 4, 2012, Energy Solutions sold its gas gathering and processing assets (“Gas Solutions”) for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that may be paid based on the future performance of Gas Solutions. Through September 30, 2013, we have not accrued income for any portion of the $28,000 potential payment. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received $158,687 in cash. Currently, a loan to Energy Solutions remains outstanding and is collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were required to be recognized as dividend income, in accordance with ASC 946, as cash distributions were received from Energy Solutions, to the extent there are current year earnings and profits sufficient to support such recognition. During the three months ended September 30, 2013, Energy Solutions repaid $4,250 of senior and subordinated secured debt. We received $2,409 of make-whole fees for early repayment of the outstanding loan receivables, which was recorded as interest income during the three months ended September 30, 2013. During the three months ended September 30, 2012, we received distributions of $33,250 from Energy Solutions which were recorded as dividend income. No such dividends were received during the three months ended September 30, 2013. As of September 30, 2013, Energy Solutions continues to hold $7,118 of cash for future investment and repayment of the remaining debt.
As of September 30, 2013, we have provided $127,374 and $26,648 of debt and equity financing, respectively, to APH for the acquisition of various industrial and multi-family residential real estate properties in Florida and Georgia. APH is a holding company that owns 100% of the common equity of American Property Holdings Corp. (“APHC”). APHC is a Maryland corporation and qualified REIT for federal income tax purposes. As of September 30, 2013, APHC’s real estate portfolio was comprised of seven investments. The following table shows the mortgages outstanding due to other parties for each of the seven properties:
No.
Property Name
City
Date of Acquisition
Purchase Price
Mortgage Outstanding
1
146 Forest Parkway
Forest Park, GA
10/24/2012
$ 7,400
$ -
Abbington Pointe
Marietta, GA
12/28/2012
23,500
15,275
Amberly Place
Tampa, FL
1/17/2013
63,400
39,600
Lofton Place
4/30/2013
16,965
Vista at Palma Sola
Bradenton, FL
27,000
Arlington Park
5/8/2013
14,850
9,650
Arium Resort
Pembroke Pines, FL
6/24/2013
225,000
157,500
At September 30, 2013 and June 30, 2013, eight loan investments were on non-accrual status: Borga, Freedom Marine, THS, Manx, Stryker Energy, LLC, Wind River, Wolf and Yatesville. Principal balances of these loans amounted to $114,376 and $106,395 as of September 30, 2013 and June 30, 2013, respectively. The fair value of these loans amounted to $15,461 and $13,810 as of September 30, 2013 and June 30, 2013, respectively. The fair values of these investments represent approximately 0.3% of our total assets as of September 30, 2013 and June 30, 2013. For the three months ended September 30, 2013 and September 30, 2012, the income foregone as a result of not accruing interest on non-accrual debt investments amounted to $5,570 and $7,212, respectively.
On August 6, 2013, we received a distribution of $3,252 related to our investment in NRG Manufacturing, Inc., for which we realized a gain of the same amount. This was a partial release of the amount held in escrow.
The original cost basis of debt placements and equity securities acquired, including follow-on investments for existing portfolio companies, totaled $556,843 and $747,937 during the three months ended September 30, 2013 and September 30, 2012, respectively. Debt repayments and proceeds from sales of equity securities with a cost basis of approximately $164,167 and $158,123 were received during the three months ended September 30, 2013 and September 30, 2012, respectively.
During the quarters ended September 30, 2013 and September 30, 2012, we recognized $240 and $284 of interest income due to purchase discount accretion from the assets acquired from Patriot, respectively. No accelerated accretion was recorded during the three months ended September 30, 2013 and September 30, 2012.
As of September 30, 2013, $300 of purchase discount from the assets acquired from Patriot remains to be accreted as interest income, of which $160 is expected to be amortized during the three months ending December 31, 2013.
As of September 30, 2013, $3,295,801 of our loans bear interest at floating rates, $3,266,481 of which have Libor floors ranging from 1.25% to 6.00%.
Undrawn committed revolvers incur commitment fees ranging from 0.50% to 2.00%. As of September 30, 2013 and June 30, 2013, we have $206,684 and $202,518 of undrawn revolver commitments to our portfolio companies, respectively.
Note 4. Revolving Credit Agreements
On March 27, 2012, we closed on an expanded five-year $650,000 revolving credit facility with a syndicate of lenders through PCF (the “2012 Facility”). The lenders have extended commitments of $567,500 under the 2012 Facility as of September 30, 2013; which was increased to $587,500 in October 2013 (see Note 16). The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders.
The 2012 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2012 Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the 2012 Facility. The 2012 Facility also requires the maintenance of a minimum liquidity requirement. At September 30, 2013, we were in compliance with the applicable covenants.
Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of September 30, 2013 and June 30, 2013, we had $498,675 and $473,508, respectively, available to us for borrowing under the 2012 Facility, of which the amount outstanding was $69,000 and $124,000, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $587,500. At September 30, 2013, the investments used as collateral for the 2012 Facility had an aggregate market value of $884,267, which represents 18.8% of our total investments at fair value. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at fair value as of September 30, 2013. The release of any assets from PCF requires the approval of the facility agent.
In connection with the origination and amendments of the 2012 Facility, we incurred $11,399 of fees, including $1,319 of fees carried over from the previous facility, which are being amortized over the term of the facility in accordance with ASC 470-50, Debt Modifications and Extinguishments, of which $5,966 remains to be amortized.
During the three months ended September 30, 2013 and September 30, 2012, we recorded $2,476 and $2,168 of interest costs, unused fees and amortization of financing costs on the 2012 Facility as interest expense, respectively.
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Note 5. Senior Convertible Notes
On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 (“2015 Notes”) for net proceeds after underwriting expenses of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 88.0902 and 88.1429 shares of common stock, respectively, per $1 principal amount of 2015 Notes, which is equivalent to an initial conversion price and a conversion price at September 30, 2013 of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at September 30, 2013 was calculated on the last anniversary of the issuance (December 21, 2012) and will be adjusted again on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2015 Notes is increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 cents per share, subject to adjustment.
On February 18, 2011, we issued $172,500 in aggregate principal amount of our 5.50% senior convertible notes due 2016 (“2016 Notes”) for net proceeds after underwriting expenses of approximately $167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 of our 2016 Notes at a price of 97.5, including commissions. The transactions resulted in our recognizing $10 of loss in the year ended June 30, 2012. Interest on the remaining $167,500 of 2016 Notes is paid semi-annually in arrears on February 15 and August 15, at a rate of 5.50% per year, commencing August 15, 2011. The 2016 Notes mature on August 15, 2016 unless converted earlier. The 2016 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 78.3699 and 78.5395 shares of common stock, respectively, per $1 principal amount of 2016 Notes, which is equivalent to a conversion price of approximately $12.76 and $12.73 per share of common stock, respectively, subject to adjustment in certain circumstances. The conversion price in effect at September 30, 2013 was calculated on the last anniversary of the issuance (February 14, 2013) and will be adjusted again on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2016 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101150 per share.
On April 16, 2012, we issued $130,000 in aggregate principal amount of our 5.375% senior convertible notes due 2017 (“2017 Notes”) for net proceeds after underwriting expenses of approximately $126,035. Interest on the 2017 Notes is paid semi-annually in arrears on October 15 and April 15, at a rate of 5.375% per year, commencing October 15, 2012. The 2017 Notes mature on October 15, 2017 unless converted earlier. The 2017 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 85.8442 and 86.1162 shares of common stock, respectively, per $1 principal amount of 2017 Notes, which is equivalent to a conversion price of approximately $11.65 and $11.61 per share of common stock, respectively, subject to adjustment in certain circumstances. The conversion price in effect at September 30, 2013 was calculated on the last anniversary of the issuance (April 16, 2013) and will be adjusted again on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2017 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.10150 per share.
On August 14, 2012, we issued $200,000 in aggregate principal amount of our 5.75% senior convertible notes due 2018 (“2018 Notes”) for net proceeds after underwriting expenses of approximately $193,600. Interest on the 2018 Notes is paid semi-annually in arrears on March 15 and September 15, at a rate of 5.75% per year, commencing March 15, 2013. The 2018 Notes mature on March 15, 2018 unless converted earlier. The 2018 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 82.3451and 82.8631 of common stock, respectively, per $1 principal amount of 2018 Notes, which is equivalent to a conversion price of approximately $12.14 and $12.07 per share of common stock, respectively, subject to adjustment in certain circumstances. The conversion price in effect at September 30, 2013 was calculated on the last anniversary of the issuance (August 14, 2013) and will be adjusted again on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2018 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.101600 per share.
On December 21, 2012, we issued $200,000 in aggregate principal amount of 5.875% senior convertible notes due 2019 (the ‘‘2019 Notes’’) for net proceeds after underwriting and other expenses of approximately $193,600. Interest on the 2019 Notes is paid semi-annually in arrears on January 15 and July 15, at a rate of 5.875% per year, commencing July 15, 2013. The 2019 Notes mature on January 15, 2019 unless converted earlier. The 2019 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 79.7766 shares of common stock per $1 principal amount of 2019 Notes, which is equivalent to a conversion price of approximately $12.54 per share of common stock, subject to adjustment in certain circumstances. The conversion price has not been adjusted since the issuance (December 21, 2012) and will be adjusted on the first anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2019 Notes is increased when monthly cash dividends paid to common shares exceed the monthly dividend rate of $0.110025 per share.
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In no event will the total number of shares of common stock issuable upon conversion exceed 96.8992 per $1 principal amount of the 2015 Notes (the “conversion rate cap”), except that, to the extent we receive written guidance or a no-action letter from the staff of the Securities and Exchange Commission (the “Guidance”) permitting us to adjust the conversion rate in certain instances without regard to the conversion rate cap and to make the 2015 Notes convertible into certain reference property in accordance with certain reclassifications, business combinations, asset sales and corporate events by us without regard to the conversion rate cap, we will make such adjustments without regard to the conversion rate cap and will also, to the extent that we make any such adjustment without regard to the conversion rate cap pursuant to the Guidance, adjust the conversion rate cap accordingly. We will use our commercially reasonable efforts to obtain such Guidance as promptly as practicable.
Prior to obtaining the Guidance, we will not engage in certain transactions that would result in an adjustment to the conversion rate increasing the conversion rate beyond what it would have been in the absence of such transaction unless we have engaged in a reverse stock split or share combination transaction such that in our reasonable best estimation, the conversion rate following the adjustment for such transaction will not be any closer to the conversion rate cap than it would have been in the absence of such transaction.
Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a separate cash payment with respect to the Notes surrendered for conversion representing accrued and unpaid interest to, but not including the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the 2015 Notes, the 2016 Notes, the 2017 Notes, the 2018 Notes, and the 2019 Notes (collectively, the “Senior Convertible Notes”).
No holder of Senior Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Notes upon a fundamental change at a price equal to 100% of the principal amount of the Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Senior Convertible Notes through and including the maturity date.
In connection with the issuance of the Senior Convertible Notes, we incurred $27,030 of fees which are being amortized over the terms of the notes, of which $19,149 remains to be amortized and is included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of September 30, 2013.
During the three months ended September 30, 2013 and September 30, 2012, we recorded $13,310 and $8,667 of interest costs and amortization of financing costs on the Senior Convertible Notes as interest expense, respectively.
Note 6. Senior Unsecured Notes
On May 1, 2012, we issued $100,000 in aggregate principal amount of 6.95% senior unsecured notes due 2022 for proceeds net of offering expenses of $97,000 (the “2022 Notes”). Interest on the 2022 Notes is paid quarterly in arrears on August 15, November 15, February 15 and May 15, at a rate of 6.95% per year, commencing on August 15, 2012. The 2022 Notes mature on November 15, 2022. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding.
On March 15, 2013, we issued $250,000 in aggregate principal amount of 5.875% senior unsecured notes due 2023 (the “2023 Notes”) for net proceeds after underwriting and other expenses of approximately $245,885. Interest on the 2023 Notes is paid semi-annually. The 2023 Notes mature on March 15, 2023. These notes will be our direct unsecured obligations and rank equally with all of our unsecured senior indebtedness from time to time outstanding.
In connection with the issuance of the 2022 Notes and 2023 Notes (collectively, the “Senior Unsecured Notes”), we incurred $7,364 of fees which are being amortized over the term of the notes, of which $6,866 remains to be amortized and is included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of September 30, 2013.
During the three months ended September 30, 2013 and September 30, 2012, we recorded $5,541 and $1,807 of interest costs and amortization of financing costs on the Senior Unsecured Notes as interest expense, respectively.
Note 7. Prospect Capital InterNotes®
On February 16, 2012, we entered into a Selling Agent Agreement (the “Selling Agent Agreement”) with Incapital LLC, as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes® (the “InterNotes® Offering”), which was subsequently increased to $1,000,000. Additional agents appointed by us from time to time in connection with the InterNotes® Offering may become parties to the Selling Agent Agreement.
These notes are direct unsecured senior obligations and will rank equally with all of our unsecured senior indebtedness outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.
During the three months ended September 30, 2013, we issued $98,255 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of approximately $96,189. These notes were issued with stated interest rates ranging from 4.75% to 6.75% with a weighted average rate of 5.48%. These notes mature between July 15, 2018 and September 15, 2043.
Date of Issuance
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date
July 5, 2013 – July 25, 2013
18,557
4.75%-5.00%
4.96%
July 15, 2018
August 8, 2013 – August 22, 2013
11,885
5.00%
August 15, 2018
September 6, 2013 – September 26, 2013
21,095
September 15, 2018
August 1, 2013
3,820
February 15, 2019
August 15, 2013 – August 22, 2013
1,800
5.50%
February 15, 2020
8,962
5.50%– 5.75%
5.65%
July 15, 2020
August 8, 2013
851
August 15, 2020
4,586
September 15, 2020
1,996
5.75%
February 15, 2021
940
6.00%
August 15, 2028
2,960
6.25%
July 15, 2031
August 1, 2013 – August 8, 2013
1,102
6.00% - 6.125%
6.09%
August 15, 2031
1,127
September 15, 2033
3,372
6.50%
August 15, 2038
7,337
6.75%
July 15, 2043
2,707
6.50% - 6.625%
6.57%
August 15, 2043
5,158
September 15, 2043
$ 98,255
Below are the notes outstanding as of September 30, 2013:
Tenor at Origination (in years)
Average Interest Rate
Maturity Date Range
51,537
4.95%
July 15, 2018 – September 15, 2018
5,134
5.00%-5.50%
5.25%
February 15, 2019 – February 15, 2020
209,767
4.00%-6.55%
5.15%
June 15, 2019 – September 15, 2020
18,127
3.27%-7.00%
5.30%
March 15, 2022 – April 15, 2023
15,940
5.00%-6.00%
May 15, 2028 – August 15, 2028
26,219
4.125%-6.25%
5.24%
December 15, 2030 – August 15, 2031
4,233
5.625%-6.00%
5.90%
November 15, 2032 – September 15, 2033
125,652
5.50%-6.75%
6.13%
November 15, 2042 – September 15, 2043
In connection with the issuance of the Prospect Capital InterNotes®, we incurred $12,757 of fees which are being amortized over the term of the notes, of which $12,212 remains to be amortized and is included within deferred financing costs on the Consolidated Statements of Assets and Liabilities as of September 30, 2013.
During the three months ended September 30, 2013 and September 30, 2012, we recorded $6,044 and $869 of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense, respectively.
Note 8. Financial Instruments Disclosed, But Not Carried, At Fair Value
The fair values of our financial liabilities disclosed, but not carried, at fair value as of September 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows:
Credit facility payable(1)
Senior convertible notes(2)
882,149
Senior unsecured notes(2)
101,800
242,013
343,813
Prospect Capital InterNotes®(3)
429,366
1,622,528
1,724,328
(1) The carrying value of our credit facility payable approximates the fair value.
(2) We use available market quotes to estimate the fair value of the Senior Convertible Notes and Senior Unsecured Notes.
(3) The fair value of our Prospect Capital InterNotes® is estimated by discounting remaining payments using estimated current market rates.
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The fair values of our financial liabilities disclosed, but not carried, at fair value as of June 30, 2013 disaggregated into the three levels of the ASC 820 valuation hierarchy are as follows:
886,210
336,055
1,588,278
1,690,078
Note 9. Equity Offerings, Offering Expenses, and Distributions
Excluding dividend reinvestments, we issued 23,211,680 and 33,161,977 shares of our common stock during the three months ended September 30, 2013 and September 30, 2012, respectively. The proceeds raised, the related underwriting fees, the offering expenses and the prices at which these shares were issued are as follows:
Issuances of Common Stock
Number of Shares Issued
Gross Proceeds Raised
Underwriting Fees
Offering Expenses
Average Offering Price
During the quarter ended September 30, 2013:
July 5, 2013 – August 21, 2013(1)
9,818,907
107,725
902
10.97
August 2, 2013(2)
10.95
August 29, 2013 – September 30, 2013(3)
11,474,431
130,311
1,303
793
11.36
During the quarter ended September 30, 2012:
July 2, 2012 – July 12, 2012(4)
2,247,275
26,040
260
11.59
July 16, 2012
21,000,000
234,150
2,100
300
11.15
July 27, 2012
3,150,000
35,123
315
September 13, 2012 – September 28, 2012(5)
6,764,702
80,249
805
332
11.86
(1) On May 8, 2013, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 45,000,000 shares of our common stock. Through this program we issued 9,818,907 shares of our common stock at an average price of $10.97 per share, raising $107,725 of gross proceeds, from July 5, 2013 through August 21, 2013.
(2) On August 2, 2013, we issued 1,918342 shares of our common stock in conjunction with an investment in a controlled portfolio company.
(3) On August 22, 2013, we established an at-the-market program through which we may sell, from time to time and at our sole discretion 45,000,000 shares of our common stock. Through this program we issued 11,474,431 shares of our common stock at an average price of $11.36 per share, raising $130,311 of gross proceeds, from August 29, 2013 through September 30, 2013.
(4) On June 1, 2012, we established a fifth at-the-market program through which we may sell, from time to time and at our sole discretion 9,500,000 shares of our common stock. Through this program we issued 5,199,764 shares of our common stock at an average price of $11.38 per share, raising $59,170 of gross proceeds, from June 12, 2012 through July 12, 2012.
(5) On September 10, 2012, we established a sixth at-the-market program through which we may sell, from time to time and at our sole discretion 9,750,000 shares of our common stock. Through this program we issued 6,764,702 shares of our common stock at an average price of $11.86 per share, raising $80,249 of gross proceeds, from September 13, 2012 through September 28, 2012.
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Our shareholders’ equity accounts at September 30, 2013 and June 30, 2013 reflect cumulative shares issued as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters and our dividend reinvestment plan. When our common stock is issued, the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
On August 24, 2011, our Board of Directors approved a share repurchase plan under which we may repurchase up to $100,000 of our common stock at prices below our net asset value. We have not made any purchases of our common stock during the period from August 24, 2011 to September 30, 2013 pursuant to this plan. Prior to any repurchase we are required to notify shareholders of our intention to purchase our common stock. This notice lasts for six months after notice is given. Our last notice was delivered with our annual proxy mailing on September 10, 2013.
On October 29, 2012, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, as of September 30, 2013 we can issue up to $1,406,927 of additional debt and equity securities in the public market.
On June 17, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates:
·
$0.110225 per share for September 2013 to holders of record on September 30, 2013 with a payment date of October 24, 2013;
$0.110250 per share for October 2013 to holders of record on October 31, 2013 with a payment date of November 21, 2013;
$0.110275 per share for November 2013 to holders of record on November 29, 2013 with a payment date of December 19, 2013; and
$0.110300 per share for December 2013 to holders of record on December 31, 2013 with a payment date of January 23, 2014.
On August 21, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates:
$0.110325 per share for January 2014 to holders of record on January 31, 2014 with a payment date of February 20, 2014;
$0.110350 per share for February 2014 to holders of record on February 28, 2014 with a payment date of March 20, 2014; and
$0.110375 per share for March 2014 to holders of record on March 31, 2014 with a payment date of April 17, 2014.
During the three months ended September 30, 2013 and September 30, 2012, we issued 355,644 and 355,871 shares, respectively, of our common stock in connection with the dividend reinvestment plan.
At September 30, 2013, we have reserved 70,377,219 shares of our common stock for issuance upon conversion of the Senior Convertible Notes (see Note 5).
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Note 10. Other Investment Income
Other investment income consists of structuring fees, overriding royalty interests, revenue receipts related to net profit interests, deal deposits, administrative agent fee, and other miscellaneous and sundry cash receipts. Income from such sources was $15,524 and $9,118 for the three months ended September 30, 2013 and September 30, 2012, respectively.
Income Source
Structuring, advisory and amendment fees (Note 3)
9,078
9,036
Recovery of legal costs from prior periods from legal settlement
Overriding royalty interests
1,339
Administrative agent fee
107
68
Other Investment Income
Note 11. Net Increase in Net Assets per Common Share
The following information sets forth the computation of net increase in net assets resulting from operations per common share for the three months ended September 30, 2013 and September 30, 2012, respectively.
Weighted average common shares outstanding
258,084,153
162,492,894
Net increase in net assets resulting from operations per common share
Note 12. Related Party Agreements and Transactions
Investment Advisory Agreement
We have entered into an investment advisory and management agreement with Prospect Capital Management (the “Investment Advisory Agreement”) under which the Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make.
Prospect Capital Management’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services the Investment Adviser receives a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our gross assets (including amounts borrowed). For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter.
The total base management fees incurred to the favor of the Investment Adviser for the three months ended September 30, 2013 and September 30, 2012 were $23,045 and $13,228, respectively.
The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence
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and consulting fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment in kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital appreciation or depreciation. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.75% per quarter (7.00% annualized).
The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base management fee. We pay the Investment Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
· no incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
· 100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate); and
· 20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate).
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in its portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which maybe asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception.
For the three months ended September 30, 2013 and September 30, 2012, $20,584 and $18,507, respectively, of income incentive fees were incurred. No capital gains incentive fees were incurred for the three months ended September 30, 2013 and September 30, 2012, respectively.
Administration Agreement
We have also entered into an Administration Agreement with Prospect Administration, LLC (“Prospect Administration”) under which Prospect Administration, among other things, provides (or arranges for the provision of) administrative services and facilities for us. For providing these services, we reimburse Prospect Administration for our allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of our chief financial officer and chief compliance officer and his staff. For the three months ended September 30, 2013 and 2012, the reimbursement was approximately $3,986 and $2,184, respectively. Under this agreement, Prospect Administration furnishes us with office
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facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Prospect Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Prospect Administration assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Prospect Administration also provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance. The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. Prospect Administration is a wholly owned subsidiary of the Investment Adviser.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Prospect Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Prospect Administration’s services under the Administration Agreement or otherwise as administrator for us.
Managerial Assistance
As a business development company, we offer, and must provide upon request, managerial assistance to certain of our portfolio companies. This assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio companies and providing other organizational and financial guidance. As of September 30, 2013 and June 30, 2013, $130 and $1,291 of managerial assistance fees remain on the Consolidated Statements of Assets and Liabilities as a payable to Prospect Administration for reimbursement of its cost in providing such assistance.
Note 13. Litigation
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. During the three months ended September 30, 2013, we received $5,000 of legal cost reimbursement from a litigation settlement, which had been expensed in prior quarters, and is recognized as other income on our consolidated financial statements. We are not aware of any other material litigation as of the date of this report.
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Note 14. Financial Highlights (Unaudited)
For The Three Months Ended
September 30,
Per Share Data(1):
Net asset value at beginning of period
10.83
0.32
0.46
Net realized gain
0.01
Net unrealized depreciation
(0.02)
(0.18)
Net increase in net assets as a result of public offerings
0.02
0.07
Dividends declared and paid
(0.33)
(0.31)
Net asset value at end of period
10.88
Per share market value at end of period
11.17
11.52
Total return based on market value(2)
6.49%
3.82%
Total return based on net asset value(2)
2.96%
3.12%
Shares outstanding at end of period
Average weighted shares outstanding for period
Ratio / Supplemental Data:
Net assets at end of period
Portfolio turnover rate
3.76%
6.65%
Annualized ratio of operating expenses to average net assets
11.31%
11.69%
Annualized ratio of net operating income to average net assets
11.83%
17.44%
Year
Ended
June 30, 2012
June 30, 2011
June 30, 2010
June 30, 2009
10.36
10.30
12.40
14.55
1.57
1.63
1.10
1.13
1.87
Realized (loss) gain
(0.13)
0.19
(0.87)
(1.24)
Net unrealized (depreciation) appreciation
(0.37)
(0.28)
0.09
0.48
Net increase (decrease) in net assets as a result of public offering
0.13
0.04
(0.08)
(0.85)
(2.11)
Net increase in net assets as a result of shares issued for Patriot acquisition
–
0.12
Dividends to shareholders
(1.31)
(1.70)
(1.15)
10.80
11.39
10.11
9.65
9.20
6.24%
27.21%
17.22%
17.66%
(18.60%)
10.91%
18.03%
12.54%
(6.82%
(0.61%)
107,606,690
69,086,862
42,943,084
207,069,971
114,394,554
85,978,757
59,429,222
31,559,905
Net assets at end of period (in thousands)
1,114,357
711,424
532,596
29.24%
29.06%
27.63%
21.61%
4.99%
11.50%
10.73%
8.47%
7.54%
9.03%
Annualized ratio of net investment income to average net assets
14.86%
14.92%
10.60%
10.69%
13.14%
(1) Financial highlights are based on weighted average shares.
(2) Total return based on market value is based on the change in market price per share between the opening and ending market prices per share in each period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in each period and assumes that dividends are reinvested in accordance with our dividend reinvestment plan.
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Note 15. Selected Quarterly Financial Data (Unaudited)
Net Realized and Unrealized Gains (Losses)
Net Increase (Decrease) in Net Assets from Operations
Quarter Ended
Per Share (1)
September 30, 2010
35,212
0.47
20,995
0.28
4,585
0.06
25,580
0.34
December 31, 2010
33,300
0.40
19,080
0.23
12,861
0.16
31,940
0.38
March 31, 2011
44,573
0.51
23,956
0.27
9,803
0.11
33,759
56,391
0.58
30,190
(3,232)
(0.03)
26,959
September 30, 2011
55,342
27,877
0.26
12,023
39,900
0.37
December 31, 2011
67,263
0.61
36,508
27,984
64,492
0.59
March 31, 2012
95,623
0.84
58,072
(7,863)
(0.07)
50,209
0.44
102,682
0.82
64,227
0.52
(27,924)
(0.22)
36,303
September 30, 2012
0.76
(26,778)
(0.17)
December 31, 2012
166,035
0.85
99,216
(52,727)
(0.27)
46,489
0.24
March 31, 2013
120,195
0.53
59,585
(15,156)
44,429
0.20
166,470
0.68
92,096
(9,407)
(0.04)
82,689
0.62
(2,437)
(0.01)
Per share amounts are calculated using weighted average shares during period.
Note 16. Subsequent Events
During the period from October 1, 2013 to November 4, 2013, we issued $56,771 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $55,739. In addition, we sold $8,158 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $8,005 with expected closing on November 7, 2013.
During the period from October 1, 2013 to November 4, 2013, we sold 12,652,811 shares of our common stock at an average price of $11.21 per share, and raised $141,804 of gross proceeds, under the ATM Program. Net proceeds were $140,416 after commissions to the broker-dealer on shares sold and offering costs.
On October 1, 2013, we made a $2,600 follow-on investment in Airmall, a leading developer and manager of airport retail operations.
On October 2, 2013, we announced an increase of $20,000 to our commitments to our credit facility. The commitments to the credit facility now stand at $587,500.
On October 7, 2013, Evanta Ventures, Inc. repaid the $10,506 loan receivable to us.
On October 11, 2013, we made a $5,846 follow-on senior debt and equity investment in CP Energy Services, Inc., an energy services company based in western Oklahoma.
On October 11, 2013, we provided $25,000 in preferred equity for the recapitalization of Ajax Rolled Ring & Machine, Inc. After the financing, we received repayment of the $20,009 loan previously outstanding.
On October 15, 2013, we made a secured debt investment of $2,000 in Digital Insight, a leading provider of digital banking software to financial institutions in the U.S. which allows financial institutions to offer a comprehensive, user
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friendly platform of products and services through the online and mobile channels. On the same day, we fully exited the deal and realized a gain of $20 on this investment.
On October 15, 2013, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to an additional $5,000,000 of debt and equity securities.
On October 16, 2013, we made a secured debt investment of $7,000 in Renaissance Learning, Inc., a leading provider of technology based school improvement and student assessment programs. On November 4, 2013, we fully exited this investment and realized a gain of $140 on this investment.
On October 17, 2013, $19,730 of the Apidos CLO VIII, Ltd. subordinated notes were called.
On October 22, 2013, we made an investment of $40,791 to purchase 85.05% of the subordinated notes in CIFC Funding 2013-IV, Ltd.
On October 24, 2013, we issued 135,212 shares of our common stock in connection with the dividend reinvestment plan.
On October 29, 2013, we made a $2,000 follow-on investment in APH.
On October 30, 2013, we made a secured debt investment of $2,500 in Omnitracs, Inc., one of the world’s largest providers of satellite and terrestrial-based connectivity and position location solutions to transportation and logistics companies. On the same day, we fully exited the deal and realized a gain of $25 on this investment.
On October 30, 2013, we made a secured debt investment of $6,000 in The Petroleum Place, Inc. (“P2”), a provider of enterprise resource planning software focused on the oil & gas industry. On November 4, 2013, we fully exited this investment and realized a gain of $60 on this investment.
On October 31, 2013, we sold $18,755 of the National Bankruptcy Services, LLC loan receivable. The loan receivable was sold at a discount, for which we realized a loss of $7,854.
On November 1, 2013, P2 repaid the $22,000 second lien term loan receivable to us.
On November 1, 2013, we made a $9,869 follow-on investment in APH, to acquire Bexley Apartment Houses, a multi-family residential property located in Marietta, Georgia. We invested $1,669 of equity and $8,200 of debt in APH.
On November 4, 2013, we announced the declaration of monthly dividends in the following amounts and with the following dates:
· $0.110400 per share for April 2014 to holders of record on April 30, 2014 with a payment date of May 22, 2014;
· $0.110425 per share for May 2014 to holders of record on May 30, 2014 with a payment date of June 19, 2014; and
· $0.110450 per share for June 2014 to holders of record on June 30, 2014 with a payment date of July 24, 2014.
On November 4, 2013, we made a $2,000 follow-on investment in Photonis Technologies SAS.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All figures in this item are in thousands except share, per share and other data)
References herein to “we,” “us” or “our” refer to Prospect Capital Corporation and its subsidiary unless the context specifically requires otherwise.
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. Historical results set forth are not necessarily indicative of our future financial position and results of operations.
Note on Forward Looking Statements
Some of the statements in this report constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained herein involve risks and uncertainties, including statements as to:
· our future operating results;
· our business prospects and the prospects of our portfolio companies;
· the impact of investments that we expect to make;
· our contractual arrangements and relationships with third parties;
· the dependence of our future success on the general economy and its impact on the industries in which we invest;
· the ability of our portfolio companies to achieve their objectives;
· our expected financings and investments;
· the adequacy of our cash resources and working capital; and
· the timing of cash flows, if any, from the operations of our portfolio companies.
We generally use words such as “anticipates,” “believes,” “expects,” “intends” and similar expressions to identify forward-looking statements. Our actual results could differ materially from those projected in the forward-looking statements for any reason, including the factors set forth in “Risk Factors” and elsewhere in this report.
We have based the forward-looking statements included in this report on information available to us on the date of this report, and we assume no obligation to update any such forward-looking statements. Although we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise, you are advised to consult any additional disclosures that we may make directly to you or through reports that we in the future may file with the Securities and Exchange Commission (“SEC”), including any annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.
Overview
We are a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company that has filed an election to be treated as a business development company under the Investment Company Act of 1940, or the 1940 Act. We invest primarily in senior and subordinated debt and equity of companies in need of capital for acquisitions, divestitures, growth, development and recapitalization. We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows.
We currently have seven origination strategies in which we make investments: (1) lending in private equity sponsored transactions, (2) lending directly to companies not owned by private equity firms, (3) control investments in corporate operating companies, (4) control investments in financial companies, (5) investments in structured credit, (6) real estate investments, and (7) investments in syndicated debt. We continue to evaluate other origination strategies in the ordinary course of business with no specific tops-down allocation to any single origination strategy.
Lending in Private Equity Sponsored Transactions – We make loans to companies which are controlled by leading private equity firms. This debt can take the form of first lien, second lien, unitranche or mezzanine loans. In making these investments, we look for a diversified customer base, recurring demand for the product or service, barriers to entry, strong historical cash flow and experienced management teams. These loans typically have significant equity subordinate to our loan position. This strategy has comprised approximately 50%-60% of our business.
Lending Directly to Companies – We provide debt financing to companies owned by non-private equity firms, the company founder, a management team or a family. Here, in addition to the strengths we look for in a sponsored transaction, we also look for the alignment with the management team with significant invested capital. This strategy often has less competition than the private equity sponsor strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation. Direct lending can result in higher returns and lower leverage than sponsor transactions and may include warrants or equity to us. This strategy generally has comprised approximately 5%-15% of our business.
Control Investments in Corporate Operating Companies – This strategy involves acquiring controlling stakes in non-financial operating companies. Our investments in these companies are generally structured as a combination of yield-producing debt and equity. We provide certainty of closure to our counterparties, give the seller personal liquidity and generally look for management to continue on in their current roles. This strategy has comprised approximately 10%-15% of our business.
Control Investments in Financial Companies – This strategy involves acquiring controlling stakes in financial companies, including consumer direct lending, subprime auto lending and other strategies. Our investments in these companies are generally structured as a combination of yield-producing debt and equity. These investments are often structured in a tax-efficient RIC-compliant partnership, enhancing returns. This strategy has comprised approximately 10%-15% of our business.
Investments in Structured Credit – We make investments in CLOs, generally taking a significant position in the subordinated interests (equity) of the CLOs. The CLOs include a diversified portfolio of broadly syndicated loans and do not have direct exposure to real estate, mortgages, sub-prime debt, or consumer based debt. The CLOs in which we invest are managed by top-tier collateral managers that have been thoroughly diligenced prior to investment. This strategy has represented 10%-20% of the portfolio.
Real Estate Investments – We make investments in real estate through our wholly-owned tax-efficient REIT, American Property Holdings Corp. (“APHC”). Our real estate investments are in various classes of fully developed and occupied real estate properties that generate current yields. We seek to identify properties that have historically high occupancy and steady cash flow generation. We partner with established property managers with experience in managing the property type to manage such properties after acquisition. This is a more recent investment strategy that has represented approximately 5%-10% of our business.
Investments in Syndicated Debt – On an opportunistic basis, we make investments in loans and high yield bonds that have been sold to a syndicate of buyers. Here we look for investments with attractive risk-adjusted returns after we have completed a fundamental credit analysis. These investments are purchased with a long term, buy-and-hold outlook and we look to provide significant structuring input by providing anchoring orders. This strategy has represented approximately 5%-10% of the portfolio.
We invest primarily in first and second lien senior loans and mezzanine debt, which in some cases includes an equity component. First and second lien senior loans generally are senior debt instruments that rank ahead of subordinated debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Mezzanine debt and our investments in CLOs are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of CLOs which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. Our CLO investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B depending on the tranche.
We seek to be a long-term investor with our portfolio companies. The aggregate value of our portfolio investments was $4,553,136 and $4,172,852 as of September 30, 2013 and June 30, 2013, respectively. During the three months ended September 30, 2013, our net cost of investments increased by $386,510 or 9.08%, as a result of thirteen new investments, five follow-on investments and one revolver advance of $552,262, accrued of payment-in-kind interest of $4,581, structuring fees of $8,660 and net amortization of discounts and premiums of $9,954, while we received full
repayment on seven investments, sold two investments for which we realized a gain of $498, received $3,252 from the release of escrow amounts which was recognized as a capital gain, and received several partial prepayments, amortization payments and a revolver repayment totaling $18,394.
Compared to the end of last fiscal year (ended June 30, 2013), net assets increased by $253,261 or 9.53% during the three months ended September 30, 2013, from $2,656,494 to $2,909,755. This increase resulted from the issuance of new shares of our common stock (less offering costs) in the amount of $256,043, dividend reinvestments of $3,994, and another $79,900 from operations. These increases, in turn, were offset by $86,676 in dividend distributions to our stockholders. The $79,900 increase in net assets resulting from operations is net of the following: net investment income of $82,337, net realized gain on investments of $3,789, and a decrease in net assets due to changes in net unrealized depreciation of investments of $6,226.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reported period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ, and these differences could be material.
First Quarter Highlights
Investment Transactions
On July 1, 2013, Pre-Paid Legal Services, Inc. repaid the $5,000 loan receivable to us.
On July 9, 2013, Southern Management Corporation repaid the $17,565 loan receivable to us.
On July 12, 2013, we provided $11,000 of secured second lien financing to Water PIK, Inc., a leader in developing innovative personal and oral healthcare products. The second lien term loan bears interest in cash at the greater of 9.75% or Libor plus 8.75% and has a final maturity of January 8, 2021.
On July 23, 2013, we made a $2,000 investment in Carolina Beverage Group, LLC (“Carolina Beverage”), a contract beverage manufacturer. The senior secured note bears interest in cash at 10.5% and has a final maturity of July 23, 2018. On July 24, 2013, we sold our $2,000 investment in Carolina Beverage and realized a gain of $45 on this investment.
On July 26, 2013, we made a $2,000 follow-on senior secured debt investment in Spartan Energy Services, Inc., a provider of thru tubing and flow control services to oil and gas companies. The first lien note bears interest in cash at the greater of 10.5% or Libor plus 9.0% and has a final maturity of December 28, 2017.
On July 26, 2013, we made a $20,000 follow-on secured second lien investment in Royal Adhesives & Sealants, LLC (“Royal”), a producer of proprietary, high-performance adhesives and sealants. The second lien term loan bears interest in cash at the greater of 9.75% or Libor plus 8.5% and has a final maturity of January 31, 2019.
On July 31, 2013, we made a $5,100 follow-on investment in Coverall North America, Inc., a franchiser of commercial cleaning businesses. The first lien note bears interest in cash at the greater of 11.5% or Libor plus 8.5% and has a final maturity of December 17, 2017.
On July 31, 2013, Royal repaid the $28,364 subordinated unsecured loan receivable to us.
On July 31, 2013, Cargo Airport Services USA, LLC repaid the $43,399 loan receivable to us.
On August 1, 2013, Medical Security Card Company, LLC repaid the $13,214 loan receivable to us.
On August 2, 2013, we made an investment of $44,100 to purchase 90% of the subordinated notes in CIFC Funding 2013-III, Ltd.
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On August 2, 2013, we provided $81,273 of debt and $12,741 of equity financing to support the recapitalization of CP Holdings of Delaware LLC (“CP Holdings”), an energy services company based in western Oklahoma. Through the recapitalization, we acquired a controlling interest in CP Holdings for $73,009 in cash and 1,918,342 unregistered shares of our common stock. After the financing, we received repayment of the $18,991 loan previously outstanding. The $58,773 first lien note issued to CP Energy Services Inc. bears interest in cash at the greater of 9.0% or Libor plus 7.0% and interest payment in kind of 9.0% and has a final maturity of August 2, 2018. The $22,500 first lien note issued to CP Well Testing Holding Company LLC bears interest in cash at the greater of 11.0% or Libor plus 9.0% and has a final maturity of August 2, 2018.
On August 9, 2013, we provided $80,000 in senior secured loans and a senior secured revolving loan facility, of which $70,000 was funded at closing, for the recapitalization of Matrixx Initiatives, Inc., owner of Zicam, a developer and marketer of OTC cold remedy products under the Zicam brand. The $35,000 Term Loan A note bears interest in cash at the greater of 7.5% or Libor plus 6.0% and has a final maturity of August 9, 2018. The $35,000 Term Loan B note bears interest in cash at the greater of 12.5% or Libor plus 11.0% and has a final maturity of August 9, 2018. The $10,000 senior secured revolver, which was unfunded at closing, bears interest in cash at the greater of 10.0% or Libor plus 8.5% and has a final maturity of February 9, 2014.
On August 15, 2013, we made a $14,000 follow-on investment in Totes Isotoner Corporation, a designer, distributer and retailer of high quality, branded functional accessories. The second lien term loan bears interest in cash at the greater of 10.75% or Libor plus 9.25% and has a final maturity of January 8, 2018.
On August 30, 2013, we made a $16,000 follow-on investment in System One Holdings, LLC, a provider of professional staffing services. The first lien note bears interest in cash at the greater of 11.0% or Libor plus 9.5% and has a final maturity of December 31, 2018.
On September 5, 2013, we provided a $50,382 senior secured term loan to United Bank Card, Inc. (d/b/a Harbortouch), a payments processor. The first lien term loan bears interest in cash at the greater of 11.5% or Libor plus 9.5% and has a final maturity of September 5, 2018.
On September 10, 2013, we made a $12,500 first lien secured investment in Photonis Technologies SAS, a world leader in the development, manufacture and sale of electro-optic components for the detection and intensification of very faint light sources. The first lien term loan bears interest in cash at the greater of 8.5% or Libor plus 7.5% and has a final maturity of September 18, 2019.
On September 11, 2013, Seaton Corp. repaid the $13,310 loan receivable to us.
On September 11, 2013, we provided a $75,000 senior secured term loan to support the recapitalization of American Broadband Holding Company and Cameron Holdings of NC, Inc., a provider of voice, video, and high-speed internet services. The first lien Term Loan B bears interest in cash at the greater of 11.0% or Libor plus 9.75% and has a final maturity of September 30, 2018.
On September 13, 2013, we made an investment of $36,515 to purchase 83.56% of the subordinated notes in Apidos CLO XV, Ltd.
On September 19, 2013, we provided $41,042 of debt and $6,943 of equity financing to support the recapitalization of MITY Holdings of Delaware Inc. (“Mity”), a designer, manufacturer and seller of multipurpose room furniture and specialty healthcare seating products. The $22,792 first lien note issued to Mity bears interest in cash at the greater of 9.0% or Libor plus 7.0% and interest payment in kind of 9.0% and has a final maturity of September 19, 2019. The $18,250 first lien note issued to Mity-Lite, Inc. bears interest in cash at the greater of 10.0% or Libor plus 7.0% and has a final maturity of March 19, 2019.
On September 25, 2013, we made a $12,000 subordinated secured second lien investment in NCP Finance Limited Partnership, a lender to short term loan providers in the alternative financial services industry. The subordinated secured term loan bears interest in cash at the greater of 11.0% or Libor plus 9.75% and has a final maturity of September 30, 2018.
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On September 30, 2013, we made an investment of $20,945 to purchase 51.02% of the subordinated notes in Galaxy XVI CLO, Ltd.
On September 30, 2013, we sold our investment in ADAPCO, Inc. for net proceeds of $553, recognizing a realized gain of $413 on the sale.
On September 30, 2013, we made an $18,818 follow-on investment in JHH Holdings, Inc., a provider of home healthcare services in Texas. The second lien term loan bears interest in cash at the greater of 11.25% or Libor plus 10.0% and interest payment in kind of 0.5% and has a final maturity of March 30, 2019.
Equity Issuance
During the period from July 1, 2013 to September 30, 2013, we sold 21,293,338 shares of our common stock at an average price of $11.18 per share, and raised $238,036 of gross proceeds, under the ATM Program. Net proceeds were $235,037 after commissions to the broker-dealer on shares sold and offering costs.
On July 22, 2013, August 22, 2013 and September 19, 2013, we issued 109,437, 113,610 and 132,597 shares of our common stock in connection with the dividend reinvestment plan, respectively.
Dividend
· $0.110325 per share for January 2014 to holders of record on January 31, 2014 with a payment date of February 20, 2014;
· $0.110350 per share for February 2014 to holders of record on February 28, 2014 with a payment date of March 20, 2014; and
· $0.110375 per share for March 2014 to holders of record on March 31, 2014 with a payment date of April 17, 2014.
Credit Facility
On August 15, 2013, we announced an increase of $15,000 to our commitments to our credit facility. The lenders have extended commitments of $567,500 as of September 30, 2013; which was increased to $587,500 in October 2013 (see Recent Developments).
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Debt Issuance
During the quarter ended September 30, 2013, we issued $98,255 in aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $96,189, as follows:
4.75% - 5.00%
5.50% - 5.75%
98,255
Investment Holdings
As of September 30, 2013, we continue to pursue our diversified investment strategy. At September 30, 2013, approximately $4,553,136 or 156.5% of our net assets are invested in 129 long-term portfolio investments and CLOs and 5.2% of our net assets are invested in money market funds.
During the three months ended September 30, 2013, we originated $556,843 of new investments, primarily composed of $312,944 of secured lending to non-control investments, $144,912 of debt and equity financing to controlled investments, and $98,987 of subordinated notes in CLOs. Our origination efforts are focused primarily on secured lending, to reduce the risk in the portfolio, investing primarily in first lien loans, and subordinated notes in CLOs, though we also continue to close select junior debt and equity investments. Our annualized current yield was 13.6% and 12.5% as of June 30, 2013 and September 30, 2013, respectively, across all performing interest bearing investments. The decrease in our current yield is primarily the result of senior secured loan refinancing activity that took place in the leveraged loan market and within our CLO portfolios during the first half of calendar year 2013. Monetization of equity positions that we hold and loans on non-accrual status are not included in this yield calculation. In many of our portfolio companies we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns. Some of these equity positions include features such as contractual minimum internal rates of returns, preferred distributions, flip structures and other features expected to generate additional investment returns, as well as contractual protections and preferences over junior equity, in addition to the yield and security offered by our cash flow and collateral debt protections.
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We classify our investments by level of control. As defined in the 1940 Act, control investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of more than 25% of the voting securities of an investee company. Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of the investee company.
As of September 30, 2013, we own controlling interests in AIRMALL USA, Inc. (“Airmall”), Ajax Rolled Ring & Machine, Inc. (“Ajax”), APH Property Holdings, LLC (“APH”), AWCNC, LLC, Borga, Inc. (“Borga”), CCPI Holdings, Inc., CP Holdings, Credit Central Holdings of Delaware, LLC, Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.) (“Energy Solutions”), First Tower Holdings of Delaware, LLC (“First Tower Delaware”), The Healing Staff, Inc. (“THS”), Manx Energy, Inc. (“Manx”), MITY Holdings of Delaware Inc. (“Mity”), Nationwide Acceptance Holdings, LLC, NMMB Holdings, Inc., R-V Industries, Inc. (“R-V”), Valley Electric Holdings I, Inc. (“Valley Electric”) and Wolf Energy Holdings, Inc. (“Wolf”). We also own an affiliated interest in BNN Holdings Corp. (f/k/a Biotronic NeuroNetwork), Boxercraft Incorporated (“Boxercraft”) and Smart, LLC.
The following is a summary of our investment portfolio by level of control at September 30, 2013 and June 30, 2013, respectively:
Level of Control
Percent of Portfolio
Control
20.9%
20.8%
Affiliate
Non-control/Non-affiliate
3,622,564
78.0%
78.4%
3,376,438
79.3%
79.5%
Total Portfolio
100.0%
The following is our investments in interest bearing securities presented by type of security at September 30, 2013 and June 30, 2013, respectively:
Type of Investment
54.4%
53.7%
53.1%
52.8%
22.3%
21.8%
25.0%
24.6%
2.8%
16.1%
17.1%
15.5%
15.8%
Preferred Stock
24,904
4,827
25,016
14,742
Common Stock
137,221
2.9%
141,910
117,678
108,494
Membership Interests
3,890
492
Overriding Royalty Interests
—%
Net Profits Interests
20,732
20,959
Escrows Receivable
Warrants
2,273
7,350
2,161
7,280
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Percent of Debt Securities
Percent of
Debt Securities
First Lien
2,537,742
56.7%
56.2%
2,271,565
55.3%
55.2%
Second Lien
23.1%
22.6%
25.8%
25.5%
Unsecured
16.7%
17.8%
16.0%
16.4%
Total Debt Securities
4,477,674
4,372,396
4,110,707
4,016,223
The following is our investment portfolio presented by geographic location of the investment at September 30, 2013 and June 30, 2013, respectively:
Geographic Location
Canada
165,000
4.0%
Cayman Islands
776,795
806,998
17.7%
688,286
16.2%
686,675
16.5%
France
Ireland
Midwest US
717,782
688,145
15.1%
565,239
13.3%
531,934
12.7%
Northeast US
719,081
725,638
15.9%
649,484
663,025
Puerto Rico
Southeast US
1,174,655
25.3%
1,144,289
25.2%
1,111,946
26.0%
1,081,320
Southwest US
454,055
9.8%
415,244
345,392
8.1%
336,362
Western US
716,611
15.4%
691,192
15.2%
674,152
652,184
15.6%
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The following is our investment portfolio presented by industry sector of the investment at September 30, 2013 and June 30, 2013, respectively:
Industry
Portfolio
Aerospace and Defense
12,182
Automobile / Auto Finance
23,282
23,355
23,214
22,917
Biotechnology
Business Services
233,010
5.0%
232,628
5.1%
180,793
4.2%
179,544
Chemicals
Commercial Services
251,311
251,522
252,073
5.9%
Construction and Engineering
Consumer Finance
407,527
8.8%
421,052
9.2%
413,332
9.7%
406,964
Consumer Services
329,741
7.1%
331,728
7.3%
330,343
7.8%
332,394
8.0%
Contracting
2,661
2,145
Diversified Financial Services
834,290
18.0%
856,742
18.8%
745,705
17.5%
742,434
Diversified / Conglomerate Service
Durable Consumer Products
404,760
8.7%
398,269
380,225
8.9%
370,207
Ecological
Electronics
Energy
61,646
55,215
63,895
56,321
Food Products
174,535
174,540
177,423
177,428
Healthcare
279,354
275,362
6.1%
275,124
6.5%
273,838
6.6%
Hotel, Restaurant & Leisure
Machinery
797
790
Manufacturing
163,800
3.5%
134,520
163,431
167,584
Media
170,559
158,170
171,290
161,325
Metal Services and Minerals
60,297
60,405
60,162
60,274
Oil and Gas Production
150,015
97,692
75,126
24,420
Personal and Nondurable Consumer Products
84,230
84,087
39,630
Pharmaceuticals
Property Management
Real Estate
3.3%
3.6%
Retail
14,200
14,593
14,190
14,569
Software & Computer Services
306,213
307,371
6.7%
307,734
7.2%
309,308
7.4%
Specialty Minerals
Textiles, Apparel & Luxury Goods
Textiles and Leather
116,045
104,518
Transportation
83,903
82,462
127,767
3.0%
127,474
Portfolio Investment Activity
During the three months ended September 30, 2013, we acquired $492,518 of new investments, completed follow-on investments in existing portfolio companies, totaling approximately $55,743, funded $4,000 of revolver advances, and recorded PIK interest of $4,581, resulting in gross investment originations of $556,843. The more significant of these investments are discussed in the First Quarter Highlights.
In addition to the repayments noted in the First Quarter Highlights, during the three months ended September 30, 2013, we received principal amortization payments of $7,712 on several loans, and $10,683 of partial prepayments primarily related to Energy Solutions, Stauber Performance Ingredients, and Cinedigm DC Holdings, LLC.
On January 4, 2012, Energy Solutions sold its gas gathering and processing assets (“Gas Solutions”) for a sale price of $199,805, adjusted for the final working capital settlement, including a potential earnout of $28,000 that may be paid based on the future performance of Gas Solutions. Through September 30, 2013, we have not accrued income for any portion of the $28,000 potential payment. After expenses, including structuring fees of $9,966 paid to us, Energy Solutions received $158,687 in cash. Currently, a loan to Energy Solutions remains outstanding and is collateralized by the cash held by Energy Solutions after the sale transaction. The sale of Gas Solutions by Energy Solutions resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, distributions from Energy Solutions to us were required to be recognized as dividend income, in accordance with ASC 946, as cash distributions were received from Energy Solutions, to the extent there are current year earnings and profits sufficient to support such recognition. During the three months ended September 30, 2013, Energy Solutions repaid $4,250 of senior and subordinated secured debt. We received $2,409 of make-whole fees for early repayment of the outstanding loan receivables, which was recorded as interest income during the three months ended September 30, 2013. During the three months ended September 30, 2012, we received distributions of $33,250 from Energy Solutions which were recorded as dividend income. No such dividends were received during the three months ended September 30, 2013. Energy Solutions continues to hold $7,118 of cash for future investment and repayment of the remaining debt.
During the quarters ended September 30, 2013 and September 30, 2012, we recognized $240 and $284 of interest income due to purchase discount accretion from the assets acquired from Patriot Capital Funding, Inc. (“Patriot”), respectively. There was no accelerated accretion during the three months ended September 30, 2013 and September 30, 2012. We expect to recognize $160 of normal accretion during the three months ended December 31, 2013, after which, there will be $141 remaining to be accreted.
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The following is a quarter-by-quarter summary of our investment activity:
Quarter-End
Acquisitions(1)
Dispositions(2)
556,843
798,760
321,615
784,395
102,527
772,125
349,269
747,937
573,314
146,292
170,073
188,399
154,697
120,206
222,575
46,055
312,301
71,738
359,152
78,571
140,933
67,405
140,951
68,148
88,973
39,883
March 31, 2010
59,311
26,603
December 31, 2009(3)
210,438
September 30, 2009
6,066
24,241
7,929
3,148
March 31, 2009
6,356
10,782
December 31, 2008
13,564
2,128
September 30, 2008
70,456
10,949
June 30, 2008
118,913
61,148
March 31, 2008
31,794
28,891
December 31, 2007
120,846
19,223
September 30, 2007
40,394
17,949
June 30, 2007
130,345
9,857
March 31, 2007
19,701
7,731
December 31, 2006
62,679
17,796
September 30, 2006
24,677
2,781
June 30, 2006
42,783
5,752
March 31, 2006
15,732
901
December 31, 2005
3,523
September 30, 2005
25,342
June 30, 2005
17,544
March 31, 2005
7,332
December 31, 2004
23,771
32,083
September 30, 2004
30,371
Since inception
6,909,373
2,253,378
(1) Includes new deals, additional fundings, refinancings and PIK interest.
(2) Includes scheduled principal payments, prepayments and refinancings.
(3) The $210,438 of acquisitions for the quarter ended December 31, 2009 includes $207,126 of portfolio investments acquired from Patriot.
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In determining the fair value of our portfolio investments at September 30, 2013, the Audit Committee considered valuations from the independent valuation firms and from management having an aggregate range of $4,437,390 to $4,720,672 excluding money market investments.
In determining the range of value for debt instruments, management and the independent valuation firms generally shadow rated the investment and then based upon the range of ratings, determined appropriate yields to maturity for a loan rated as such. A discounted cash flow analysis was then prepared using the appropriate yield to maturity as the discount rate, yielding the ranges. For equity investments, the enterprise value was determined by applying EBITDA multiples for similar recent investment sales. For stressed equity investments, a liquidation analysis was prepared.
In determining the range of value for our investments in CLOs, management and the independent valuation firms used dynamic discounted cash flow models, where the projected future cash flow was estimated using Monte Carlo simulation techniques in accordance with the requirements of ASC 820. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view. For each CLO security, the most appropriate valuation approach was chosen from alternative approaches to ensure the most accurate valuation for such security. A discounted cash flow model is prepared, utilizing a waterfall engine to store the collateral data, generate numerous collateral cash flows from the assets based on various assumptions for the risk factors, and distribute the cash flow to the liability structure based on the payment priorities, and discount them back using proper discount rates to the various cash flows along each simulation path.
The Board of Directors looked at several factors in determining where within the range to value the asset including: recent operating and financial trends for the asset, independent ratings obtained from third parties, comparable multiples for recent sales of companies within the industry and discounted cash flow models for our investments in CLOs. The composite of all these analyses, applied to each investment, was a total valuation of $4,553,136, excluding money market investments.
Our portfolio companies are generally lower middle market companies, outside of the financial sector, with less than $150,000 of annual EBITDA. We believe our market has experienced less volatility than others because we believe there are more buy and hold investors who own these less liquid investments.
Control investments offer increased risk and reward over straight debt investments. Operating results and changes in market multiples can result in dramatic changes in values from quarter to quarter. Significant downturns in operations can further result in our looking to recoveries on sales of assets rather than the enterprise value of the investment. Several control investments in our portfolio are under enhanced scrutiny by our senior management and our Board of Directors and are discussed below.
AIRMALL is a leading developer and manager of airport retail operations. AIRMALL has developed and presently manages all or substantially all of the retail operations and food and beverage concessions at Baltimore/Washington International Thurgood Marshall Airport (BWI), Boston Logan International Airport (BOS), Cleveland Hopkins International Airport (CLE) and Pittsburgh International Airport (PIT). AIRMALL does so pursuant to long-term, infrastructure-like contracts with the respective municipal agencies that own and operate the airports.
On July 30, 2010, we invested $52,420 of combined debt and equity as follows: $30,000 senior term loan, $12,500 senior subordinated note and $9,920 preferred equity. We own 100% of AIRMALL’s equity securities. AIRMALL’s financial performance has been consistent since the acquisition and we continue to monitor the medium to long-term growth prospects for the company.
In September 2013, AIRMALL distributed $7,000 of earnings to us which was recorded as dividend income during the quarter ended September 30, 2013. As a result of the distribution of earnings, our Board of Directors decreased the fair value of our investment in AIRMALL to $51,411 as of September 30, 2013, a premium of $391 from its amortized cost, compared to the $3,478 unrealized appreciation recorded at June 30, 2013.
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Ajax forges large seamless steel rings on two forging mills in the company’s York, South Carolina facility. The rings are used in a range of industrial applications, including in construction equipment and power turbines. Ajax also provides machining and other ancillary services.
We acquired a controlling equity interest in Ajax in a recapitalization of Ajax that was closed on April 4, 2008. We funded $22,000 of senior secured term debt, $11,500 of subordinated term debt and $6,300 of equity as of that closing. During the fiscal year ended June 30, 2010, we funded an additional $3,530 of secured subordinated debt to refinance a third-party revolver provider and provide working capital. Ajax repaid $3,461 of this secured subordinated debt during the quarter ended September 30, 2010. During the quarter ended December 31, 2012, we funded an additional $3,600 of unsecured debt to refinance first lien debt held by Wells Fargo.
On April 1, 2013, we refinanced our existing $38,472 senior loans to Ajax, increasing the size of our debt investment to $38,537. Concurrent with the refinancing, we received repayment of the $18,635 loans that were previously outstanding. As of September 30, 2013, we control 78.01% of the fully-diluted common and preferred equity. The principal balance of our senior debt to Ajax was $19,636 and our subordinated debt was $20,008 as of September 30, 2013.
Due to soft operating results, the Board of Directors decreased the fair value of our investment in Ajax to $28,084 as of September 30, 2013, a reduction of $17,617 from its amortized cost, compared to the $6,057 unrealized depreciation recorded at June 30, 2013.
We make investments in real estate through our investment in APH, a holding company that owns 100% of the common equity of APHC. APHC is a Maryland corporation and qualified REIT for federal income tax purposes.
As of September 30, 2013, we have provided $127,374 and $26,648 of debt and equity financing, respectively, to APH for the acquisition of various industrial and multi-family residential real estate properties in Florida and Georgia. As of September 30, 2013, APHC’s real estate portfolio was comprised of seven investments. The following table shows the mortgages outstanding due to other parties for each of the seven properties:
$ –
The Board of Directors set the fair value of our investment in APH at $154,022 as of September 30, 2013, equal to its amortized cost.
Energy Solutions Holdings, Inc. (f/k/a Gas Solutions Holdings, Inc.)
Energy Solutions owns interests in other companies operating in the energy sector. These include operating offshore supply vessels and ownerships of a non-operating biomass plant and several coal mines. Energy Solutions subsidiaries formerly owned interests in a gas gathering and processing system in east Texas.
In December 2011, we completed a reorganization of Gas Solutions Holdings, Inc. renaming the company Energy Solutions and transferring ownership of other operating companies owned by us and operating within the energy industry with the intent of strategically expanding Energy Solutions operations across energy sectors. As part of the reorganization, we transferred our equity interests in Change Clean Energy Holdings, Inc. (“CCEHI”), Change Clean Energy, Inc. (“CCEI”), Freedom Marine Holdings, LLC (“Freedom Marine”) and Yatesville Coal Holdings, Inc. (“Yatesville”) to Energy Solutions. On December 28, 2011, we made a follow-on investment of $4,750 to support the acquisition of a new vessel by Vessel Holdings LLC, a subsidiary of Freedom Marine.
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In determining the value of Energy Solutions, we have utilized two valuation techniques to determine the value of the investment. Our Board of Directors has determined the value to be $23,590 for our debt and equity positions at September 30, 2013 based upon a combination of a current value method for the cash balances of Energy Solutions and a liquidation analysis for our interests in CCEHI, CCEI, Freedom Marine and Yatesville. At September 30, 2013 and June 30, 2013, Energy Solutions, including the underlying portfolio companies affected by the reorganization, was valued at $6,431 and $7,574 below its amortized cost, respectively.
First Tower is a multiline specialty finance company based in Flowood, Mississippi with over 170 branch offices.
On June 15, 2012, we acquired 80.1% of First Tower, LLC (“First Tower”) businesses for $110,200 in cash and 14,518,207 unregistered shares of our common stock. Based on our share price of $11.06 at the time of issuance, we acquired our 80.1% interest in First Tower for approximately $270,771. As consideration for our investment, First Tower Delaware, which is 100% owned by us, recorded a secured revolving credit facility to us of $244,760 and equity of $43,193. First Tower Delaware owns 80.1% of First Tower Holdings LLC, the holding company of First Tower. The assets of First Tower acquired include, among other things, the subsidiaries owned by First Tower, which hold finance receivables, leaseholds, and tangible property associated with First Tower’s businesses. During the three months ended June 30, 2012, we received $8,075 in structuring fee income. During the three months ended December 31, 2012, we funded an additional $20,000 of senior secured debt to support seasonally high demand during the holiday season. As of August 31, 2013, First Tower had total assets of approximately $635,483 including $405,742 of finance receivables net of unearned charges. As of June 30, 2013, First Tower’s total debt outstanding to parties senior to us was $264,760.
Due to improved operating results, the Board of Directors increased the fair value of our investment in First Tower to $313,673 as of September 30, 2013, a premium of $5,720 to its amortized cost, compared to the $9,869 unrealized depreciation recorded at June 30, 2013.
Manx was formed for the purpose of rolling up the assets of two existing Prospect portfolio companies, Coalbed, LLC (“Coalbed”) and Appalachian Energy Holdings, LLC (“AEH”), bringing them under new management, restructuring the outstanding debt, and infusing additional capital to allow for future growth. Coalbed is the owner of 100% of the outstanding equity interests of Coalbed Pipelines, LLC and Coalbed Operator, LLC. Coalbed was formed in October 2009 to acquire our outstanding senior secured loan and assigned interests in Conquest Cherokee, LLC (“Conquest”). Conquest’s assets consisted primarily of coalbed methane reserves in the Cherokee Basin. AEH was formed in 2006 and is the owner of 100% of the outstanding equity interests of East Cumberland L.L.C., a provider of outsourced mine site development and construction services for coal production companies operating in Southern Appalachia, and C&S Oilfield and Pipeline Construction, a provider of support services to companies engaged in the exploration and production of oil and natural gas.
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On January 19, 2010, we modified the terms of our senior secured debt in AEH and Coalbed in conjunction with the formation of Manx, a new entity consisting of the assets of AEH, Coalbed and Kinley Exploration LLC. The assets of the three companies were combined under new common management. We funded $2,800 at closing to Manx to provide for working capital. A portion of our loans to AEH and Coalbed was exchanged for Manx preferred equity, while our AEH equity interest was converted into Manx common stock. There was no change to fair value at the time of restructuring, and we continue to fully reserve any income accrued for Manx. During the year ended June 30, 2011, we made a follow-on secured debt investments of $750 in Manx to support ongoing operations. On June 30, 2012, Manx assigned the membership interests and associated operating company debt of Coalbed and AEH to Wolf Energy Holdings, Inc. (“Wolf”), a newly-formed company owned by us. During the quarter ended June 30, 2013, we determined that the impairment of Manx was other-than-temporary and recorded a realized loss of $9,397 for the amount that the amortized cost exceeded the fair value.
The Board of Directors set the fair value of our investment in Manx at $413 as of September 30, 2013, a reduction of $87 from its amortized cost, compared to the $154 unrealized depreciation recorded at June 30, 2013.
During the three months ended December 31, 2012, we determined that the impairment of Integrated Contract Services, Inc. (“ICS”) was other-than-temporary and recorded a realized loss of $12,198 for the amount that the amortized cost exceeded the fair value. Our remaining investments are in THS and Vets Securing America (“VSA”), wholly owned subsidiaries of ICS with ongoing operations. THS provides outsourced medical staffing services to governmental and commercial enterprises. VSA provides out-sourced security guards staffed primarily using retired military and police department veterans.
During September and October 2007, we provided $1,170 to THS for working capital through our investment in ICS. In January 2009, we foreclosed on the real and personal property of ICS. Through this foreclosure process, we gained 100% ownership of THS. As part of its strategy to diversify its revenues THS started VSA as a new business in the latter part of 2009. During the year ended June 30, 2011 and the six months ended December 31, 2011, we made follow-on secured debt investments of $1,708 and $874, respectively, to support the ongoing operations of THS and VSA. Effective October 19, 2011, the closing date of the sale by VSA of a commercial real estate asset, $893 of the follow-on secured debt investments were repaid. In early May 2012, we made short-term secured debt investments of $118 and $42, respectively, to support the operations of THS and VSA, which short term debt was repaid in early June 2012. We made no additional fundings during the fiscal year ended June 30, 2013 and the three months ended September 30, 2013. In May 2012, in connection with the implementation of accounts receivable based funding programs for THS and VSA with a third party provider we agreed to subordinate our first priority security interest in all of the accounts receivable and other assets of THS and VSA to the third party provider of that accounts receivable based funding.
Based upon an analysis of the liquidation value of assets, our Board of Directors determined the fair value of our investment in THS and VSA to be zero at September 30, 2013 and June 30, 2013, respectively, a reduction of $3,831 from its amortized cost.
Wolf is a holding company formed to hold 100% of the outstanding membership interests of each of Coalbed and AEH. The membership interests of Coalbed and AEH, which were previously owned by Manx, were assigned to Wolf effective June 30, 2012. The purpose of assignment was to remove those activities from Manx deemed non-core by the Manx convertible debt investors who were not interested in funding those operations. In addition, effective June 29, 2012 C&J Cladding Holding Company, Inc. (“C&J”) merged with and into Wolf, with Wolf as the surviving entity. At the time of the merger, C&J held the remaining undistributed proceeds from the sale of its membership interests in C&J Cladding, LLC. The merger was effectuated in connection with the broader simplification of our energy investment holdings.
On April 15, 2013, assets previously held by H&M were assigned to Wolf in exchange for a $66,000 term loan secured by the assets. Our cost basis in this loan of $44,632 was determined in accordance with ASC 310-40, Troubled Debt Restructurings by Creditors, and is equal to the fair value of assets at the time of transfer and we recorded a realized loss of $19,647 in connection with the foreclosure on the assets. On May 17, 2013, Wolf sold certain of the assets that had been previously held by H&M that were located in Martin County to Hibernia for $66,000. Proceeds from the sale were primarily used to repay the loan and net profits interest receivable due to us and we recognized as a realized gain of $11,826 partially offsetting the previously recorded loss. We received $3,960 of structuring and advisory fees from Wolf during the year ended June 30, 2013 related to the sale and $991 under the net profits interest agreement which was recognized as other income during the fiscal year ended June 30, 2013.
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Our Board of Directors set the fair value of our investment in Wolf at $5,256 as of September 30, 2013, a reduction of $2,785 from its amortized cost, compared to the $3,091 unrealized depreciation recorded at June 30, 2013.
Equity positions in the portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results. Three of our portfolio companies, Ajax, First Tower Delaware, and Valley Electric experienced such volatility and experienced fluctuations in valuation during the three months ended September 30, 2013. The value of Ajax decreased to $28,084 as of September 30, 2013, a discount of $17,617 to its cost, compared to the $6,057 unrealized loss recorded at June 30, 2013 due to a decline in operating results. The value of our equity position in First Tower increased to $313,673 as of September 30, 2013, a premium of $5,720 to its cost, compared to the $9,869 unrealized loss recorded at June 30, 2013 as there has been improvement in operating results during the quarter. The value of Valley Electric decreased to $47,611 as of September 30, 2013, a discount of $6,801 to its cost, compared to the value of $53,615 recorded at June 30, 2013, equal to its cost, due to a decline in operating results. Six of the other controlled investments have been valued at discounts to the original investment. Seven of the control investments are valued at the original investment amounts or higher. Overall, at September 30, 2013, the control investments are valued at $22,828 below their amortized cost.
We hold three affiliate investments at September 30, 2013. One of our affiliate portfolio companies, Boxercraft, experienced a meaningful decrease in valuation during the three months ended September 30, 2013 due to declining operating results. As of September 30, 2013, Boxercraft is valued at $5,518, a reduction of $11,527 to its amortized cost. Overall, at September 30, 2013, affiliate investments are valued $11,899 below their amortized cost.
With the Non-control/Non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments, the fair value is limited on the high side to each loan’s par value, plus any prepayment premia that could be imposed. Many of the debt investments in this category have not experienced a significant change in value, as they were previously valued at or near par value. Non-control/Non-affiliate investments did not experience significant changes in valuation and are generally performing as expected or better than expected. As of September 30, 2013, three of our Non-control/Non-affiliate investments, Gulf Coast Machine & Supply Company (“Gulf Coast”), Stryker Energy, LLC (“Stryker”) and Wind River Resources Corporation (“Wind River”), are valued at a discount to amortized cost, due to a decline in the operating results of the operating companies from those originally underwritten. Overall, at September 30, 2013, other Non-control/Non-affiliate investments are valued at $21,250 above their amortized cost, excluding our investments in Gulf Coast, Stryker and Wind River, as the remaining companies are generally performing as or better than expected.
Capitalization
Our investment activities are capital intensive and the availability and cost of capital is a critical component of our business. We capitalize our business with a combination of debt and equity. Our debt currently consists of a revolving credit facility availing us of the ability to borrow debt subject to borrowing base determinations and Senior Convertible Notes which we issued in December 2010, February 2011, April 2012, August 2012 and December 2012, Senior Unsecured Notes, and Prospect Capital InterNotes®, which we may issue from time to time, and our equity capital, which is comprised entirely of common equity. The following table shows the Revolving Credit Facility, Senior Convertible Notes, Senior Unsecured Notes and Prospect Capital InterNotes® amounts and outstanding borrowings at September 30, 2013 and June 30, 2013:
As of September 30, 2013
As of June 30, 2013
Maximum Draw Amount
Amount Outstanding
Revolving Credit Facility
567,500
552,500
Senior Unsecured Notes
Prospect Capital InterNotes®
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The following table shows the contractual maturity of our Revolving Credit Facility, Senior Convertible Notes, Senior Unsecured Notes and Prospect Capital InterNotes® at September 30, 2013:
Payments Due by Period
Less than 1 year
1 – 3 Years
3 – 5 Years
After 5 Years
317,500
330,000
410,440
Total contractual obligations
1,726,239
450,537
958,202
We have and expect to continue to fund a portion of our cash needs through borrowings from banks, issuances of senior securities, including secured, unsecured and convertible debt securities, or issuances of common equity. For flexibility, we maintain a universal shelf registration statement that allows for the public offering and sale of our debt securities, common stock, preferred stock, subscription rights, and warrants and units to purchase such securities in an amount up to $3,000,000 less issuances to date. As of September 30, 2013, we can issue up to $1,406,927 of additional debt and equity securities in the public market under this shelf registration. On October 15, 2013, we were declared effective on a new shelf and at that time could issue an additional $5,000,000 of debt and equity securities. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.
On March 27, 2012, we closed on an expanded five-year $650,000 revolving credit facility with a syndicate of lenders through PCF (the “2012 Facility”). The lenders have extended commitments of $567,500 under the 2012 Facility as of September 30, 2013; which was increased to $587,500 in October 2013 (see Recent Developments). The 2012 Facility includes an accordion feature which allows commitments to be increased up to $650,000 in the aggregate. The revolving period of the 2012 Facility extends through March 2015, with an additional two year amortization period (with distributions allowed) after the completion of the revolving period. During such two year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the two year amortization period, the remaining balance will become due, if required by the lenders.
Interest on borrowings under the 2012 Facility is one-month Libor plus 275 basis points with no minimum Libor floor. Additionally, the lenders charge a fee on the unused portion of the 2012 Facility equal to either 50 basis points if at least half of the credit facility is drawn or 100 basis points otherwise. The 2012 Facility requires us to pledge assets as collateral in order to borrow under the credit facility. As of September 30, 2013 and June 30, 2013, we had $498,675 and $473,508, respectively, available to us for borrowing under the 2012 Facility, of which the amount outstanding was $69,000 and $124,000, respectively. As additional investments that are eligible are transferred to PCF and pledged under the 2012 Facility, PCF will generate additional availability up to the commitment amount of $587,500. At September 30, 2013, the investments used as collateral for the 2012 Facility had an aggregate fair value of $884,267, which represents 18.8% of our total investments at fair value. These assets have been transferred to PCF, a bankruptcy remote special purpose entity, which owns these investments and as such, these investments are not available to our general creditors. PCF, a bankruptcy remote special purpose entity and our wholly-owned subsidiary, holds all of these investments at fair value as of September 30, 2013. The release of any assets from PCF requires the approval of the facility agent.
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During the three months ended September 30, 2013 and September 30, 2012, we recorded $2,476 and $2,168 of interest costs and amortization of financing costs on the 2012 Facility as interest expense, respectively.
On December 21, 2010, we issued $150,000 in aggregate principal amount of our 6.25% senior convertible notes due 2015 (“2015 Notes”) for net proceeds after underwriting expenses of approximately $145,200. Interest on the 2015 Notes is paid semi-annually in arrears on June 15 and December 15, at a rate of 6.25% per year, commencing June 15, 2011. The 2015 Notes mature on December 15, 2015 unless converted earlier. The 2015 Notes are convertible into shares of common stock at an initial conversion rate and conversion rate at September 30, 2013 of 88.0902 and 88.1429 shares of common stock, respectively, per $1 principal amount of 2015 Notes, which is equivalent to an initial conversion price and conversion price at September 30, 2013 of approximately $11.35 per share of common stock, subject to adjustment in certain circumstances. The conversion price in effect at September 30, 2013 was calculated on the last anniversary of the issuance (December 21, 2012) and will be adjusted again on the next anniversary, unless the exercise price shall have changed by more than 1% before the anniversary. The conversion rate for the 2015 Notes is increased if monthly cash dividends paid to common shares exceed the rate of $0.101125 cents per share, subject to adjustment.
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The following is a summary of the notes outstanding at September 30, 2013:
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During the three months ended September 30, 2013 and September 30, 2012, we recorded $6,044 and $869, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense.
Net Asset Value
During the three months ended September 30, 2013, we issued $256,043 of additional equity, net of underwriting and offering costs, by issuing 23,211,680 shares of our common stock. The following table shows the calculation of net asset value per share as of September 30, 2013 and June 30, 2013:
Shares of common stock issued and outstanding
Net asset value per share
At September 30, 2013, we had 271,404,289 of our common stock issued and outstanding.
Results of Operations
Net increase in net assets resulting from operations for the three months ended September 30, 2013 and September 30, 2012 was $79,900 and $47,249, respectively. The $32,651 increase is primarily the result of a $60,111 increase in interest income due to a larger income producing portfolio during the three months ended September 30, 2013. This increase is offset by a decrease of $29,119 in dividend income received from our investment in Energy Solutions. During the three months ended September 30, 2012, we received dividends of $33,250 from our investment in Energy Solutions. No such dividends were received from Energy Solutions during the three months ended September 30, 2013. This decrease in dividend income from our investment in Energy Solutions was partially offset by a $7,000 increase in dividend income from our investment in Airmall and a $22,327 decrease in the net change in unrealized depreciation on investments. During the quarter ended September 30, 2013, we experienced net unrealized losses of $6,226 primarily from significant write-downs of our investments in Ajax, Gulf Coast and Valley Electric. These instances of unrealized depreciation were partially offset by unrealized appreciation in First Tower. During the quarter ended September 30, 2012, we experienced net unrealized losses of $28,553 primarily from write-downs of our investments in Ajax and Energy Solutions. These instances of unrealized depreciation were partially offset by unrealized appreciation in R-V.
Net increase in net assets resulting from operations for the three months ended September 30, 2013 and September 30, 2012 was $0.31 and $0.29 per weighted average share, respectively. The $0.02 increase is primarily the result of a $0.16 per weighted average share favorable decrease in the net change in unrealized depreciation on investments. During the quarter ended September 30, 2013, we experienced net unrealized losses of $0.02 per weighted average share, primarily from write-downs of our investments in Ajax, Gulf Coast and Valley Electric. These instances of unrealized depreciation were partially offset by unrealized appreciation in First Tower. During the quarter ended September 30, 2012, we experienced net unrealized losses of $0.18 per average share primarily from write-downs of our investments in Ajax and Energy Solutions. These instances of unrealized depreciation were partially offset by unrealized appreciation in R-V. The net increase in net assets resulting from operations is also attributable to $0.03 per weighted average share decrease in advisory fees and a $0.03 per weighted average share increase in interest income, net of interest and credit facility expenses, as we have increased the leverage on our portfolio during the three months ended September 30, 2013. These instances of appreciation and additional income were partially offset by a $0.20 per weighted average share decline in dividend income, primarily due to our investment in Energy Solutions as discussed above.
While we seek to maximize gains and minimize losses, our investments in portfolio companies can expose our capital to risks greater than those we may anticipate. These companies are typically not issuing securities rated investment grade, have limited resources, have limited operating history, have concentrated product lines or customers, are generally private companies with limited operating information available and are likely to depend on a small core of management talents. Changes in any of these factors can have a significant impact on the value of the portfolio company.
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We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees generated from the structuring of new deals. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including prepayment penalties and possibly consulting fees. Any such fees generated in connection with our investments are recognized as earned.
Investment income, which consists of interest income, including accretion of loan origination fees and prepayment penalty fees, dividend income and other income, including settlement of net profits interests, overriding royalty interests and structuring fees, was $161,034 and $123,636 for the three months ended September 30, 2013 and September 30, 2012, respectively. During the three months ended September 30, 2013, the increase in investment income is primarily the result of a larger income producing portfolio.
The following table describes the various components of investment income and the related levels of debt investments:
Total investment income
Average debt principal of performing investments
4,179,192
2,144,554
Weighted average interest rate earned on performing assets
12.96%
14.24%
Average interest income producing assets have increased from $2,144,554 for the three months ended September 30, 2012 to $4,179,192 for the three months ended September 30, 2013. The average yield on interest bearing assets decreased from 14.24% for the three months ended September 30, 2012 to 12.96% for the three months ended September 30, 2013. The decrease in our current yield is primarily the result of senior secured loan refinancing activity that took place in the leveraged loan market and within our CLO portfolios during the first half of calendar year 2013, and to a lesser extent, originations at lower rates than our average portfolio yield.
Investment income is also generated from dividends and other income. Dividend income decreased from $36,208 for the three months ended September 30, 2012 to $7,089 for the three months ended September 30, 2013. The decrease in dividend income is primarily attributed to a decrease in the level of dividends received from our investment in Energy Solutions. The sale of Gas Solutions by Energy Solutions resulted in significant earnings and profits, as defined by the Internal Revenue Code, at Energy Solutions for calendar year 2012. As a result, we received dividends from Energy Solutions of $33,250 during the three months ended September 30, 2012. No such dividends were received during the three months ended September 31, 2013 related to our investment in Energy Solutions. The decrease in dividend income was partially offset by a $7,000 dividend received from our investment in Airmall during the three months ended September 30, 2013. No dividends were received from Airmall during the three months ended September 30, 2012.
Other income has come primarily from structuring fees, overriding royalty interests, and settlement of net profits interests. Comparing the three months ended September 30, 2012 to the three months ended September 30, 2013, income from other sources increased from $9,118 to $15,524. This $6,406 increase is primarily due to $5,000 of legal cost reimbursement from a litigation settlement, which had been expensed in prior quarters and a $1,325 increase in royalty interests from our controlled investments, particularly APH, Credit Central, First Tower, and Nationwide.
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Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees and other operating and overhead-related expenses. These expenses include our allocable portion of overhead under the Administration Agreement with Prospect Administration under which Prospect Administration provides administrative services and facilities for us. Our investment advisory fees compensate Prospect Capital Management (the “Investment Adviser”) for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions in accordance with our Administration Agreement with Prospect Administration. Operating expenses were $78,697 and $49,609 for the three months ended September 30, 2013 and September 30, 2012, respectively, holding consistent at approximately $0.30 per weighted average share outstanding.
The base management fee was $23,045 and $13,228 for the three months ended September 30, 2013 and September 30, 2012, respectively. This increase is directly related to our growth in total assets. For the three months ended September 30, 2013 and September 30, 2012, we incurred $20,584 and $18,507, respectively, of income incentive fees. The $2,077 increase in the income incentive fee for the respective three-month period is driven by an increase in pre-incentive fee net investment income from $92,534 for the three months ended September 30, 2012 to $102,921 for the three months ended September 30, 2013, primarily due to an increase in interest income from a larger asset base and partially offset by a decrease in dividend income from Energy Solutions. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement.
During the three months ended September 30, 2013 and September 30, 2012, we incurred $27,407 and $13,511, respectively, of expenses related to our 2012 Facility, Prospect Capital InterNotes®, Senior Unsecured Notes and Senior Convertible Notes. These expenses are related directly to the leveraging capacity put into place for each of those years and the levels of indebtedness actually undertaken in those years. The table below describes the various expenses of our 2012 Facility, Prospect Capital InterNotes®, Senior Unsecured Notes and Senior Convertible Notes and the related indicators of leveraging capacity and indebtedness during these periods.
Interest on borrowings
23,524
10,470
2,472
Commitment and other fees
1,411
1,267
Weighted-average debt outstanding
1,615,894
710,676
Weighted-average interest rate
5.70%
5.89%
Weighted-average interest rate including amortization of deferred financing costs
6.29%
6.89%
2012 Facility amount at beginning of period
492,500
The increase in interest expense for the three months ended September 30, 2013 is primarily due to the issuance of additional Prospect Capital InterNotes®, the 2023 Notes and the 2019 Notes, for which we incurred $11,077 of collective interest expense. The weighted average interest rate on borrowings (excluding amortization and undrawn facility fees) decreased from 5.89% to 5.70% as of September 30, 2012 and September 30, 2013, respectively. This decrease is primarily due to issuances of our Prospect Capital InterNotes® at lower coupon rates. The weighted average interest rate on our Prospect Capital InterNotes® decreased from 6.25% to 5.69% as of September 30, 2012 and September 30, 2013, respectively.
The allocation of overhead expense from Prospect Administration was $3,986 and $2,184 for the three months ended September 30, 2013 and September 30, 2012, respectively. As our portfolio continues to grow, we expect Prospect Administration to continue to increase the size of its administrative and financial staff.
Total operating expenses, net of investment advisory fees, interest costs, excise tax and allocation of overhead from Prospect Administration were $2,675 and $2,179 for the three months ended September 30, 2013, and September 30, 2012, respectively.
Net investment income represents the difference between investment income and operating expenses. Our net investment income was $82,337 and $74,027 for the three months ended September 30, 2013 and September 30, 2012, respectively, or $0.32 per weighted average share and $0.46 per weighted average share, respectively. The $8,310 increase for the three months ended September 30, 2013 is primarily the result of a $37,398 increase in investment income due to a larger income producing portfolio partially offset by a decrease in dividend income from our investment in Energy Solutions. The $37,398 increase in investment income is offset by an increase in operating expenses of $29,088, primarily due to an $11,894 increase in advisory fees due to the growing size of our portfolio and related income and $13,896 of additional interest and credit facility expenses. The $0.14 per share decrease in net investment income for the three months ended September 30, 2013 is primarily due to a $0.20 per weighted average share decrease in dividend income primarily due to a decline in the level of dividends received from our investment in Energy Solutions. This decrease is partially offset by a $0.03 per weighted average share decrease in advisory fees and a $0.04 per weighted average share increase in interest income, net of interest and credit facility expenses, as we have increased the leverage on our portfolio during the three months ended September 30, 2013 over those for the three months ended September 30, 2012.
Net Realized Gains, Increase in Net Assets from Net Changes in Unrealized Depreciation
Net realized gains were $3,789 and $1,775 for the three months ended September 30, 2013 and September 30, 2012, respectively. The net realized gain of $3,789 for the three months ended September 30, 2013 was due primarily to a $3,252 gain realized from the release of escrowed amount to us related to our investment in NRG Manufacturing, Inc. The net realized gain of $1,775 for the three months ended September 30, 2012 was due primarily to the sale of our common stock in Iron Horse Coiled Tubing, Inc.
Net increase in net assets from changes in unrealized depreciation was $6,226 and $28,553 for the three months ended September 30, 2013 and September 30, 2012, respectively. The variability in results is primarily due to the valuation of equity positions in our portfolio susceptible to significant changes in value, both increases as well as decreases, due to operating results. For the three months ended September 30, 2013, the $6,226 decrease was driven by significant write-downs of our equity investments in Airmall, Ajax, Boxercraft and Valley Electric. We also recognized a decline in value for our investment in Gulf Coast due to a decrease in the company’s operating results. These instances of unrealized depreciation were partially offset by unrealized appreciation in First Tower and our CLO equity investments.
Financial Condition, Liquidity and Capital Resources
For the three months ended September 30, 2013 and September 30, 2012, our operating activities used $245,448 and $491,413 of cash, respectively. There were no investing activities for the three months ended September 30, 2013 and September 30, 2012. Financing activities provided $195,873 and $490,975 of cash during the three months ended September 30, 2013 and September 30, 2012, respectively, which included the payments of dividends of $80,064 and $43,932, during the three months ended September 30, 2013 and September 30, 2012, respectively.
Our primary uses of funds have been to continue to invest in portfolio companies, through both debt and equity investments, repay outstanding borrowings and to make cash distributions to holders of our common stock.
Our primary sources of funds have been issuances of debt and equity. We have and may continue to fund a portion of our cash needs through borrowings from banks, issuances of senior securities or secondary offerings. We may also securitize a portion of our investments in mezzanine or senior secured loans or other assets. Our objective is to put in place such borrowings in order to enable us to expand our portfolio. During the three months ended September 30, 2013, we borrowed $96,000 and made repayments totaling $151,000 under our revolving credit facility. As of September 30, 2013, we had $69,000 outstanding on our revolving credit facility, $847,500 outstanding on our Senior Convertible Notes, Senior Unsecured Notes with a carrying value of $347,762 and $461,977 outstanding on our Prospect Capital InterNotes®. (See Capitalization.)
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On October 29, 2012, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to an additional $1,406,927 of debt and equity securities in the public market at September 30, 2013.
On October 15, 2013, our Registration Statement on Form N-2 was declared effective by the SEC as detailed in Recent Developments. Under this Shelf Registration Statement, we can issue up to an additional $5,000,000 of debt and equity securities.
We also continue to generate liquidity through public and private stock offerings. (See Recent Developments.)
On May 8, 2013, we entered into an ATM Program with BB&T Capital Markets, BMO Capital Markets, and KeyBanc Capital Markets through which we could sell, by means of at-the-market offerings from time to time, of up to 45,000,000 shares of our common stock. During the period from July 5, 2013 to August 21, 2013, we sold 9,818,907 shares of our common stock at an average price of $10.97 per share, and raised $107,725 of gross proceeds, under the ATM Program. Net proceeds were $106,823 after commissions to BB&T Capital Markets, BMO Capital Markets, and KeyBanc Capital Markets on shares sold.
On August 22, 2013, we entered into an ATM Program with BMO Capital Markets, Goldman Sachs, KeyBanc Capital Markets, and RBC Capital Markets through which we could sell, by means of at-the-market offerings from time to time, of up to 45,000,000 shares of our common stock. During the period from August 29, 2013 to September 30, 2013, we sold 11,474,431 shares of our common stock at an average price of $11.36 per share, and raised $130,311 of gross proceeds, under the ATM Program. Net proceeds were $129,008 after commissions to BMO Capital Markets, Goldman Sachs, KeyBanc Capital Markets, and RBC Capital Markets on shares sold. During the period from October 1, 2013 to November 4, 2013, we sold 12,652,811 shares of our common stock at an average price of $11.21 per share, and raised $141,804 of gross proceeds, under the ATM Program. Net proceeds were $140,416 after commissions to BMO Capital Markets, Goldman Sachs, KeyBanc Capital Markets, and RBC Capital Markets on shares sold. (See Recent Developments.)
Off-Balance Sheet Arrangements
At September 30, 2013, we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material effect on our financial condition, other than those which originate from 1) the investment advisory and management agreement and the administration agreement and 2) the portfolio companies.
Recent Developments
On October 11, 2013, we made a $5,846 follow-on senior debt and equity investment in CP Holdings of Delaware LLC, an energy services company based in western Oklahoma.
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On October 11, 2013, we provided $25,000 in preferred equity for the recapitalization of Ajax. After the financing, we received repayment of the $20,009 loan previously outstanding.
On October 15, 2013, we made a secured debt investment of $2,000 in Digital Insight, a leading provider of digital banking software to financial institutions in the U.S. which allows financial institutions to offer a comprehensive, user friendly platform of products and services through the online and mobile channels. On the same day, we fully exited the deal and realized a gain of $20 on this investment.
Critical Accounting Policies and Estimates
We are a non-diversified company within the meaning of the 1940 Act. We classify our investments by level of control. As defined in the 1940 Act, controlled investments are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the
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voting securities of an investee company. Under the 1940 Act, Affiliated investments and affiliated companies are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person.
1) Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors;
2) the independent valuation firms conduct independent valuations and make their own independent assessment;
3) the Audit Committee of our Board of Directors reviews and discusses the preliminary valuation of Prospect Capital Management LLC (the “Investment Adviser”) and that of the independent valuation firms; and
4) the Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.
Investments are valued utilizing a shadow bond approach, a market approach, an income approach, a liquidation approach, or a combination of approaches, as appropriate. The shadow bond and market approaches use prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities (including a business). The income approach uses valuation techniques to convert future amounts (for example, cash flows or earnings) to a single present value amount (discounted) calculated based on an appropriate discount rate. The measurement is based on the net present value indicated by current market expectations about those future amounts. In
following these approaches, the types of factors that we may take into account in fair value pricing our investments include, as relevant: available current market data, including relevant and applicable market trading and transaction comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons of financial ratios of peer companies that are public, M&A comparables, the principal market and enterprise values, among other factors.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Origination, closing and/or commitment fees associated with investments in portfolio companies are accreted into interest income over the respective terms of the applicable loans. Accretion of such purchase discounts or premiums is calculated by the effective interest method as of the purchase date and adjusted only for material amendments or prepayments. Upon the prepayment of a loan or debt security, any prepayment penalties and unamortized loan origination, closing and commitment fees are recorded as interest income. The purchase discount for portfolio investments acquired from Patriot Capital Funding, Inc. (“Patriot”) was determined based on the difference between par value and fair value as of December 2, 2009, and continues to accrete until maturity or repayment of the respective loans.
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95
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates and equity price risk. Some of the loans in our portfolio have floating interest rates.
We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the three months ended September 30, 2013, we did not engage in hedging activities.
Item 4. Controls and Procedures
As of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer conducted an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934). Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to allow timely decisions regarding required disclosure of any material information relating to the Company that is required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934.
There have been no changes in the Company’s internal controls over financial reporting that occurred during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such of these matters as may arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any such litigation as of September 30, 2013.
Item 1A. Risk Factors
There have been no material changes to our risk factors as previously disclosed in our most recent 10-K filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (according to the number assigned to them in Item 601 of Regulation S-K):
4.1
Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee(1)
4.2
Joinder Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Original Trustee, and U.S. Bank National Association, as Series Trustee(2)
4.3
Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee(3)
4.4
One Hundred-Seventeenth Supplemental Indenture dated as of July 5, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(4)
4.5
Form of 4.750% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.4)(4)
4.6
One Hundred-Eighteenth Supplemental Indenture dated as of July 5, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(4)
4.7
Form of 5.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.6)(4)
4.8
One Hundred-Nineteenth Supplemental Indenture dated as of July 5, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(4)
4.9
Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.8)(4)
4.10
One Hundred-Twentieth Supplemental Indenture dated as of July 5, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(4)
4.11
Form of 6.750% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.10)(4)
4.12
One Hundred Twenty-First Supplemental Indenture dated as of July 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(5)
4.13
Form of 4.750% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.12)(5)
4.14
One Hundred Twenty-Second Supplemental Indenture dated as of July 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(5)
4.15
Form of 5.500% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.14)(5)
4.16
One Hundred Twenty-Third Supplemental Indenture dated as of July 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(5)
4.17
Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.16)(5)
4.18
One Hundred Twenty-Fourth Supplemental Indenture dated as of July 11, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(5)
4.19
Form of 6.750% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.18)(5)
4.20
One Hundred Twenty-Fifth Supplemental Indenture dated as of July 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(6)
4.21
Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.20)(6)
4.22
One Hundred Twenty-Sixth Supplemental Indenture dated as of July 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(6)
4.23
Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.22)(6)
99
4.24
One Hundred Twenty-Seventh Supplemental Indenture dated as of July 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(6)
4.25
Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.24)(6)
4.26
One Hundred Twenty-Eighth Supplemental Indenture dated as of July 18, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(6)
4.27
Form of 6.750% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.26)(6)
4.28
One Hundred Twenty-Ninth Supplemental Indenture dated as of July 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(7)
4.29
Form of 5.000% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.28)(7)
4.30
One Hundred Thirtieth Supplemental Indenture dated as of July 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(7)
4.31
Form of 5.750% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.30)(7)
4.32
One Hundred Thirty-First Supplemental Indenture dated as of July 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(7)
4.33
Form of 6.250% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.32)(7)
4.34
One Hundred Thirty-Second Supplemental Indenture dated as of July 25, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(7)
4.35
Form of 6.750% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.34)(7)
4.36
One Hundred Thirty-Third Supplemental Indenture dated as of August 1, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(8)
4.37
Form of 5.000% Prospect Capital InterNote® due 2019 (included as part of Exhibit 4.36)(8)
4.38
One Hundred Thirty-Fourth Supplemental Indenture dated as of August 1, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(8)
4.39
Form of 5.750% Prospect Capital InterNote® due 2021 (included as part of Exhibit 4.38)(8)
4.40
One Hundred Thirty-Fifth Supplemental Indenture dated as of August 1, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(8)
4.41
Form of 6.125% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.40)(8)
4.42
One Hundred Thirty-Sixth Supplemental Indenture dated as of August 1, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(8)
4.43
Form of 6.625% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.42)(8)
4.44
One Hundred Thirty-Seventh Supplemental Indenture dated as of August 8, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(9)
4.45
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.44)(9)
4.46
One Hundred Thirty-Eighth Supplemental Indenture dated as of August 8, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(9)
4.47
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.46)(9)
4.48
One Hundred Thirty-Ninth Supplemental Indenture dated as of August 8, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(9)
4.49
Form of 6.000% Prospect Capital InterNote® due 2031 (included as part of Exhibit 4.48)(9)
4.50
One Hundred Fortieth Supplemental Indenture dated as of August 8, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(9)
4.51
Form of 6.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.50)(9)
4.52
One Hundred Forty-First Supplemental Indenture dated as of August 15, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(10)
4.53
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.52)(10)
4.54
One Hundred Forty-Second Supplemental Indenture dated as of August 15, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(10)
4.55
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.54)(10)
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4.56
One Hundred Forty-Third Supplemental Indenture dated as of August 15, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(10)
4.57
Form of 6.000% Prospect Capital InterNote® due 2028 (included as part of Exhibit 4.56)(10)
4.58
One Hundred Forty-Fourth Supplemental Indenture dated as of August 15, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(10)
4.59
Form of 6.500% Prospect Capital InterNote® due 2038 (included as part of Exhibit 4.58)(10)
4.60
One Hundred Forty-Fifth Supplemental Indenture dated as of August 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(11)
4.61
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.60)(11)
4.62
One Hundred Forty-Sixth Supplemental Indenture dated as of August 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(11)
4.63
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.62)(11)
4.64
One Hundred Forty-Seventh Supplemental Indenture dated as of August 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(11)
4.65
Form of 6.000% Prospect Capital InterNote® due 2028 (included as part of Exhibit 4.64)(11)
4.66
One Hundred Forty-Eighth Supplemental Indenture dated as of August 22, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(11)
4.67
Form of 6.500% Prospect Capital InterNote® due 2038 (included as part of Exhibit 4.66)(11)
4.68
One Hundred Forty-Ninth Supplemental Indenture dated as of September 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(12)
4.69
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.68)(12)
4.70
One Hundred Fiftieth Supplemental Indenture dated as of September 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(12)
4.71
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.70)(12)
102
4.72
One Hundred Fifty-First Supplemental Indenture dated as of September 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(12)
4.73
Form of 6.000% Prospect Capital InterNote® due 2028 (included as part of Exhibit 4.72)(12)
4.74
One Hundred Fifty-Second Supplemental Indenture dated as of September 6, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(12)
4.75
Form of 6.500% Prospect Capital InterNote® due 2038 (included as part of Exhibit 4.74)(12)
4.76
One Hundred Fifty-Third Supplemental Indenture dated as of September 12, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(13)
4.77
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.76)(13)
4.78
One Hundred Fifty-Fourth Supplemental Indenture dated as of September 12, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(13)
4.79
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.78)(13)
4.80
One Hundred Fifty-Fifth Supplemental Indenture dated as of September 12, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(13)
4.81
Form of 6.000% Prospect Capital InterNote® due 2033 (included as part of Exhibit 4.80)(13)
4.82
One Hundred Fifty-Sixth Supplemental Indenture dated as of September 12, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(13)
4.83
Form of 6.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.82)(13)
4.84
One Hundred Fifty-Seventh Supplemental Indenture dated as of September 19, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(14)
4.85
Form of 5.000% Prospect Capital InterNote® due 2018 (included as part of Exhibit 4.84)(14)
4.86
One Hundred Fifty-Eighth Supplemental Indenture dated as of September 19, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(14)
4.87
Form of 5.500% Prospect Capital InterNote® due 2020 (included as part of Exhibit 4.86)(14)
103
4.88
One Hundred Fifty-Ninth Supplemental Indenture dated as of September 19, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(14)
4.89
Form of 6.000% Prospect Capital InterNote® due 2033 (included as part of Exhibit 4.88)(14)
4.90
One Hundred Sixtieth Supplemental Indenture dated as of September 19, 2013, to the Indenture dated as of February 16, 2012, as amended by that certain Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant, American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor Trustee, by and between the Registrant and U.S. Bank National Association, as Trustee(14)
4.91
Form of 6.500% Prospect Capital InterNote® due 2043 (included as part of Exhibit 4.90)(14)
Computation of Per Share Earnings (included in the notes to the consolidated financial statements contained in this report).
Computation of Ratios (included in the notes to the consolidated financial statements contained in this report).
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.*
32.1
Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).*
32.2
Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).*
*
Filed herewith.
Incorporated by reference from Post-Effective Amendment No. 1 to the Registrant’s Registration Statement, filed on March 1, 2012.
Incorporated by reference from Post-Effective Amendment No. 2 to the Registrant’s Registration Statement, filed on March 8, 2012.
Incorporated by reference from Post-Effective Amendment No. 3 to the Registrant’s Registration Statement, filed on March 14, 2012.
Incorporated by reference from Post-Effective Amendment No. 36 to the Registrant’s Registration Statement, filed on July 5, 2013.
Incorporated by reference from Post-Effective Amendment No. 37 to the Registrant’s Registration Statement, filed on July 11, 2013.
Incorporated by reference from Post-Effective Amendment No. 38 to the Registrant’s Registration Statement, filed on July 18, 2013.
Incorporated by reference from Post-Effective Amendment No. 39 to the Registrant’s Registration Statement, filed on July 25, 2013.
Incorporated by reference from Post-Effective Amendment No. 40 to the Registrant’s Registration Statement, filed on August 1, 2013.
Incorporated by reference from Post-Effective Amendment No. 41 to the Registrant’s Registration Statement, filed on August 8, 2013.
Incorporated by reference from Post-Effective Amendment No. 42 to the Registrant’s Registration Statement, filed on August 15, 2013.
Incorporated by reference from Post-Effective Amendment No. 43 to the Registrant’s Registration Statement, filed on August 22, 2013.
Incorporated by reference from Post-Effective Amendment No. 45 to the Registrant’s Registration Statement, filed on September 6, 2013.
Incorporated by reference from Post-Effective Amendment No. 46 to the Registrant’s Registration Statement, filed on September 12, 2013.
Incorporated by reference from Post-Effective Amendment No. 47 to the Registrant’s Registration Statement, filed on September 19, 2013.
105
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 4, 2013.
PROSPECT CAPITAL CORPORATION
By:
/s/ John F. Barry III
John F. Barry III
Chief Executive Officer and Chairman of the Board