Table of Contents
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FORWARD-LOOKING STATEMENTS
This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “will”“will,” “should,” “could,” “may,” “plan” and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future—including statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in ourreports that we have filed or in the future reports filedmay file with the Securities and Exchange Commission.
The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:
•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 impact of global health epidemics, including, but not limited to, the recent and ongoing novel coronavirus pandemic, on our and our portfolio companies’ business and the global economy;
•uncertainty surrounding the financial stability of the United States, Europe, and China;
•the ability of our portfolio companies to achieve their objectives;
•difficulty in obtaining financing or raising capital, especially in the current credit and equity environment;environment, and the impact of a protracted decline in the liquidity of credit markets on our and our portfolio companies’ business;
•the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;
•the impact of changes in London Interbank Offered Rate on our operating results;
•adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;
•a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;
•our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;
•the adequacy of our cash resources and working capital;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•the ability of the Investment Adviserour investment adviser to locate suitable investments for us and to monitor and administer our investments; and
•authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ Global Select Market, the New York Stock Exchange LLC, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business.business; and
•any of the other risks, uncertainties and other factors we identify in this Annual Report.
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PART I
Item 1. Business
In this report,Annual Report, the terms “Prospect,” “the Company,” “we,” “us” and “our” mean Prospect Capital Corporation and all entities included in our consolidated financial statements, unless the context specifically requires otherwise.
General
Prospect is a financial services company that primarily lends to and invests in middle marketmiddle-market privately-held companies. 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 “Code”). We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004.We2004. We are one of the largest BDCs with approximately $6.17$6.30 billion of total assets as of June 30, 2017.2021.
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect Administration LLC (“Prospect Administration” or the “Administrator”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. 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 ninefour primary strategies that guide our origination of investment opportunities: (1) lending to companies, including companies controlled by private equity sponsors (2) lending to companiesand not controlled by private equity sponsors, (3)and including both directly-originated loans and syndicated loans, (2) lending to companies and purchasing controlling equity positions and lending toin such companies, including both operating companies (4) purchasing controlling equity positions and lending to financial services companies, (5)(3) purchasing controlling equity positions and lending to real estate companies, (6) purchasing controlling equity positions and lending to aircraft leasing companies (7)(4) investing in structured credit (8) investing in syndicated debt and (9) investing in online loans.credit. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy.
Lending to Companies Controlled by Private Equity Sponsors - We make directly-originated agented loans to companies, including companies which are controlled by private equity sponsors.sponsors and companies that are not controlled by private equity sponsors (such as companies that are controlled by the management team, the founder, a family or public shareholders). This debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. We may also purchase selected equity co-investments in such companies. In addition to directly-originated, agented loans, we also invest in senior and secured loans, syndicated loans and high yield bonds that have been sold to a club or syndicate of buyers, both in the primary and secondary markets. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to the transaction by providing anchoring orders. Historically, this strategy has comprisedcompromised approximately 40%-60% of our portfolio.
Lending to Companies not Controlled by Private Equity Sponsors - We make loans to companies which are not controlled by private equity sponsors, such as companies that are controlled by the management team, the founder, a family or public shareholders. This origination strategy may have less competition to provide debt financing than the private-equity-sponsor origination strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation. This origination strategy can result in investments with higher returns or lower leverage than the private-equity-sponsor origination strategy. Historically, this strategy has comprised up to approximately 15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Operatingin Such Companies - This strategy involves purchasing senior and secured yield-producing debt and controlling equity positions in non-financial-services operating companies.companies across various industries. We believe that we can providethis strategy provides enhanced certainty of closure and liquidity to sellers and we lookthe opportunity for management to continue on in their current roles. This strategy has comprised approximately 5%-15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate investment trusts (“REIT” or “REITs”). The real estate investments of National Property REIT Corp.’s (“NPRC”), an operating company and the surviving entity of the May 23, 2016 merger with American Property REIT Corp. and United Property REIT Corp, real estate investments are in various classes of developed and occupied real estate properties that generate current yields, including multi-family properties, and student housing, and self-storage.housing. NPRC seeks to identify properties that have historically significant occupancy rates and recurring cash flow generation. NPRC generally co-invests with established and experienced property management teams that manage such properties after acquisition. Additionally, NPRC makes investments in rated secured structured notes (primarily debt of structured credit). NPRC also purchases loans originated by certain consumer loan facilitators. It generally purchases each loan in its entirety (i.e., a “whole loan”). The borrowers are consumers, and the loans are typically serviced by the facilitators of the loans. ThisHistorically, this overall investment strategy has comprised approximately 5%-10%10%-20% of our business.
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Investing in Structured Credit - We make investments in CLOs,collateralized loan obligations (“CLOs”), often taking a significant position in the subordinated interestsstructured notes (equity) of the CLOs.and rated secured structured notes (debt). The underlying portfolio of each CLOstructured credit investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real estate, mortgages, or consumer-based credit assets. The CLOsstructured credit portfolios in which we invest are managed by established collateral management teams with many years of experience in the industry. ThisHistorically, this overall strategy has comprised approximately 10%-20% of our portfolio.
Typically, we concentrate on making investments in companies with annual revenues of less than $750 million and enterprise values of less than $1 billion. Our typical investment involves a secured loan of less than $250 million. We also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. In most cases, companies in which we invest are privately held at the time we invest in them. We refer to these companies as “target” or “middle market”“middle-market” companies and these investments as “middle market“middle-market investments.”
We seek to maximize total returns to our investors, including both current yield and equity upside, by applying rigorous credit analysis and asset-based and cash-flow based lending techniques to make and monitor our investments. We are constantly pursuing multiple investment opportunities, including purchases of portfolios from private and public companies, as well as originations and secondary purchases of particular securities. We also regularly evaluate control investment opportunities in a range of industries, and some of these investments could be material to us. There can be no assurance that we will successfully consummate any investment opportunity we are currently pursuing. If any of these opportunities are consummated, there can be no assurance that investors will share our view of valuation or that any assets acquired will not be subject to future write downs, each of which could have an adverse effect on our stock price.
Our Investment Objective and Policies
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We focus on making investments in private companies. We are a non-diversified company within the meaning of the 1940 Act.
We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured loans generally are senior debt instruments that rank ahead of unsecured 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. Our investments in CLOsstructured credit are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of CLOsstructured credit 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 CLOstructured credit investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B.
We may also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. These may be in several industries, including industrial, service, aircraft leasing, real estate and financial businesses.
We seek to maximize returns and minimize risk for our investors by applying rigorous analysis to make and monitor our investments. While the structure of our investments varies, we can invest in senior secured debt, senior unsecured debt, subordinated secured debt, subordinated unsecured debt, convertible debt, convertible preferred equity, preferred equity, common equity, warrants and other instruments, many of which generate current yield. While our primary focus is to seek current income through investment in the debt and/or dividend-paying equity securities of eligible privately-held, thinly-traded or distressed companies and long-term capital appreciation by acquiring accompanying warrants, options or other equity securities of such companies, we may invest up to 30% of the portfolio in opportunistic investments in order to seek enhanced returns for stockholders. Such investments may include investments in the debt and equity instruments of broadly-traded public companies. We expect that these public companies generally will have debt securities that are non-investment grade. Such investments may also include purchases (either in the primary or secondary markets) of the equity and junior debt tranches of a type of pools such as CLOs. Structurally, CLOs are entities that are formed to hold a portfolio of senior secured loans made to companies whose debt is rated below investment grade or, in limited circumstances, unrated. The senior secured loans within a CLO are limited to senior secured loans which meet specified credit and diversity criteria and are subject to concentration limitations in order to create an investment portfolio that is diverse by senior secured loan, borrower, and industry, with limitations on non-U.S. borrowers. Within this 30% basket, we have and may make additional investments in debt and equity securities of financial companies and companies located outside of the United States.
Our investments may include other equity investments, such as warrants, options to buy a minority interest in a portfolio company, or contractual payment rights or rights to receive a proportional interest in the operating cash flow or net income of
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such company. When determined by the Investment Adviser to be in our best interest, we may acquire a controlling interest in a portfolio company. Any warrants we receive with our debt securities may require only a nominal cost to exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We have structured, and will continue to structure, some warrants to include provisions protecting our rights as a minority-interest or, if applicable, controlling-interest holder, as well as puts, or rights to sell such securities back to the company, upon the occurrence of specified events. In many cases, we obtain registration rights in connection with these equity interests, which may include demand and “piggyback” registration rights.
We plan to hold many of our debt investments to maturity or repayment, but will sell a debt investment earlier if a liquidity event takes place, such as the sale or recapitalization of a portfolio company, or if we determine a sale of such debt investment to be in our best interest.
We have qualified and elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To continue to qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses.
For a discussion of the risks inherent in our portfolio investments, see “Risk Factors – Risks Relating to Our Investments.”
Industry Sectors
Our portfolio is invested across 3337 industry categories. Excluding our CLO investments, which do not have industry concentrations, no individual industry comprises more than 10.7%17.7% of the portfolio on either a cost or fair value basis.
Ongoing Relationships with Portfolio Companies
Monitoring
Prospect Capital Management monitors our portfolio companies on an ongoing basis. Prospect Capital Management will continue to monitor the financial trends of each portfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.
Prospect Capital Management employs several methods of evaluating and monitoring the performance and value of our investments, which may include, but are not limited to, the following:
•Assessment of success in adhering to the portfolio company’s business plan and compliance with covenants;
•Regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and accomplishments;
•Comparisons to other portfolio companies in the industry, if any;
•Attendance at and participation in board meetings of the portfolio company; and
•Review of monthly and quarterly financial statements and financial projections for the portfolio company.
Investment Valuation
Consolidated Statement of Operations.To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for measuring fair value in conformity with accounting principles generally accepted in the United States of America (“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.
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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.
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 prepare independent valuations for each investment based on their own independent assessments and issue their report.
3.The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment.
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.
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, liquidationasset recovery technique, discounted cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market (multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidationasset recovery technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued primarily using a discounted multi-path cash flow model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e.
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(i.e., multi-path) cash flows from the underlying assets and liabilities. These cash flows after payments to debt tranches senior to our equity positions, are discounted using appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third partythird-party CLO collateral managers. The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see “Risk Factors – Risks Relating to Our Business – Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments.”
Managerial Assistance
As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significant managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us to controlled and non-controlled portfolio companies will vary according to the particular needs of each portfolio company. Examples of such activities include (i) advice on recruiting, hiring, management and termination of employees, officers and directors, succession planning and other human resource matters; (ii) advice on capital raising, capital budgeting, and capital expenditures; (iii) advice on advertising, marketing, and sales; (iv) advice on fulfillment, operations, and execution; (v) advice on managing relationships with unions and other personnel organizations, financing sources, vendors, customers, lessors, lessees, lawyers, accountants, regulators and other important counterparties; (vi) evaluating acquisition and divestiture opportunities, plant expansions and closings, and market expansions; (vii) participating in audit committee, nominating committee, board and management meetings; (viii) consulting with and advising board members and officers of portfolio companies (on overall strategy and other matters); and (ix) providing other organizational, operational, managerial and financial guidance.
Prospect Administration, when executing a managerial assistance agreement with each portfolio company to which we provide managerial assistance, arranges for the provision of such managerial assistance on our behalf. When doing so, Prospect Administration utilizes personnel of our Investment Adviser. We, on behalf of Prospect Administration, invoice portfolio companies
receiving and paying for managerial assistance, and we remit to Prospect Administration its cost of providing such services, including the charges deemed appropriate by our Investment Adviser for providing such managerial assistance. No income is recognized by Prospect.
Investment Adviser
Prospect Capital Management, a Delaware limited partnership that is registered as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers Act”) manages our investments. Prospect Capital Management is led by John F. Barry III and M. Grier Eliasek, two senior executives with significant investment advisory and business experience. Both Messrs. Barry and Eliasek spend a significant amount of their time in their roles at Prospect Capital Management working on our behalf. The principal executive offices of Prospect Capital Management are 10 East 40th Street, 42nd Floor, New York, NY 10016.700 S Rosemary Ave, Suite 204, West Palm Beach, FL 33401. We depend on the due diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent, on the Investment Adviser’s investment professionals and the information and deal flow generated by those investment professionals in the course of their investment and portfolio management activities. The Investment Adviser’s senior management team evaluates, negotiates, structures, closes, monitors and services our investments. Our future success depends to a significant extent on the continued service of the senior management team, particularly John F. Barry III and M. Grier Eliasek. The departure of any of the senior managers of the Investment Adviser could have a materially adverse effect on our ability to achieve our investment objective. In addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to its investment professionals or its information and deal flow. Under the Investment Advisory Agreement (as defined below), we pay Prospect Capital Management investment advisory fees, which consist of an annual base management fee based on our gross assets as well as a two-part incentive fee based on our performance. Mr. Barry currently controls Prospect Capital Management.
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Investment Advisory Agreement
Terms
We have entered into an investment advisory and management agreement with the Investment Adviser (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.
The Investment Adviser’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 total assets. 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 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 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 gains or losses. 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), i.e., the “catch-up”; 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 our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be 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 amortized cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the
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aggregate net sales price of each investment is less than the aggregate amortized 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 amortized 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.
Examples of Quarterly Incentive Fee Calculation
Example 1: Income Incentive Fee*
*The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.
Alternative 1
Assumptions
•Investment income (including interest, dividends, fees, etc.) = 1.25%
•Hurdle rate(1) = 1.75%
•Base management fee(2) = 0.50%
•Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
•Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 0.55%
Pre-incentive net investment income does not exceed hurdle rate, therefore there is no income incentive fee.
Alternative 2
Assumptions
•Investment income (including interest, dividends, fees, etc.) = 2.70%
•Hurdle rate(1) = 1.75%
•Base management fee(2) = 0.50%
•Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
•Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 2.00%
Pre-incentive net investment income exceeds hurdle rate, therefore there is an income incentive fee payable by us to the Investment Adviser. The Income Incentive Fee would be calculated as follows:
= 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.1875%))
= (100% × (2.00% - 1.75%)) + 0%
= 100% × 0.25% + 0%
= 0.25%
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Alternative 3
Assumptions
•Investment income (including interest, dividends, fees, etc.) = 3.00%
•Hurdle rate(1) = 1.75%
•Base management fee(2) = 0.50%
•Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
•Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 2.30%
Pre-incentive net investment income exceeds hurdle rate, therefore there is an income incentive fee payable by us to the Investment Adviser. The Income Incentive Fee would be calculated as follows:
= 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.1875%))
= (100% × (2.1875% – 1.75%)) + the greater of 0% AND (20% × (2.30% – 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
(1)Represents 7% annualized hurdle rate.
(2)Represents 2% annualized base management fee.
(3)Excludes organizational and offering expenses.
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Example 2: Capital Gains Incentive Fee
Alternative 1
Assumptions
•Year 1: $20 million investment made
•Year 2: Fair market value (“FMV”) of investment determined to be $22 million
•Year 3: FMV of investment determined to be $17 million
•Year 4: Investment sold for $21 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•Year 1: No impact
•Year 2: No impact
•Year 3: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation)
•Year 4: Increase base amount on which the second part of the incentive fee is calculated by $4 million ($1 million of realized capital gain and $3 million reversal in unrealized capital depreciation)
Alternative 2
Assumptions
•Year 1: $20 million investment made
•Year 2: FMV of investment determined to be $17 million
•Year 3: FMV of investment determined to be $17 million
•Year 4: FMV of investment determined to be $21 million
•Year 5: FMV of investment determined to be $18 million
•Year 6: Investment sold for $15 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•Year 1: No impact
•Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation)
•Year 3: No impact
•Year 4: Increase base amount on which the second part of the incentive fee is calculated by $3 million (reversal in unrealized capital depreciation)
•Year 5: Decrease base amount on which the second part of the incentive fee is calculated by $2 million (unrealized capital depreciation)
•Year 6: Decrease base amount on which the second part of the incentive fee is calculated by $3 million ($5 million of realized capital loss offset by a $2 million reversal in unrealized capital depreciation)
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Alternative 3
Assumptions
•Year 1: $20 million investment made in company A (“Investment A”) and $20 million investment made in company B (“Investment B”)
•Year 2: FMV of Investment A is determined to be $21 million and Investment B is sold for $18 million
•Year 3: Investment A is sold for $23 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•Year 1: No impact
•Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $2 million (realized capital loss on Investment B)
•Year 3: Increase base amount on which the second part of the incentive fee is calculated by $3 million (realized capital gain on Investment A)
Alternative 4
Assumptions
•Year 1: $20 million investment made in company A (“Investment A”) and $20 million investment made in company B (“Investment B”)
•Year 2: FMV of Investment A is determined to be $21 million and FMV of Investment B is determined to be $17 million
•Year 3: FMV of Investment A is determined to be $18 million and FMV of Investment B is determined to be $18 million
•Year 4: FMV of Investment A is determined to be $19 million and FMV of Investment B is determined to be $21 million
•Year 5: Investment A is sold for $17 million and Investment B is sold for $23 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•Year 1: No impact
•Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation on Investment B)
•Year 3: Decrease base amount on which the second part of the incentive fee is calculated by $1 million ($2 million in unrealized capital depreciation on Investment A and $1 million recovery in unrealized capital depreciation on Investment B)
•Year 4: Increase base amount on which the second part of the incentive fee is calculated by $3 million ($1 million recovery in unrealized capital depreciation on Investment A and $2 million recovery in unrealized capital depreciation on Investment B)
•Year 5: Increase base amount on which the second part of the incentive fee is calculated by $1 million ($3 million realized capital gain on Investment B offset by $3 million realized capital loss on Investment A plus a $1 million reversal in unrealized capital depreciation on Investment A from Year 4)
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Duration and Termination
The Investment Advisory Agreement was originally approved by our Board of Directors on June 23, 2004 and was recently re-approved by the Board of Directors on June 13, 201717, 2021 for an additional one-year term expiring June 22, 2018.21, 2022, as discussed below. Unless terminated earlier as described below, it will remain in effect from year to year thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in either case, approval by a majority of our directors who are not interested persons. The Investment Advisory Agreement will automatically terminate in the event of its assignment. The Investment Advisory Agreement may be terminated by either party without penalty upon not more than 60 days’ written notice to the other. See “Risk Factors – Risks Relating to Our Business – We are dependent upon Prospect Capital Management’s key management personnel for our future success.”
Indemnification
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Prospect Capital Management and its officers, managers, 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 Capital Management’s services under the Investment Advisory Agreement or otherwise as the Investment Adviser.
Board of Directors Approval of the Investment Advisory Agreement
On June 17, 2021, our Board of Directors voted unanimously to renew the Investment Advisory Agreement for the 12-month period ending June 21, 2022. In its consideration of the Investment Advisory Agreement, the Board of Directors focused on information it had received relating to, among other things: (a) the nature, quality and extent of the advisory and other services to be provided to us by Prospect Capital Management; (b) comparative data with respect to advisory fees or expense ratios paid by other business development companies with similar investment objectives; (c) our operating expenses; (d) the profitability of Prospect Capital Management and any existing and potential sources of indirect income to Prospect Capital Management or Prospect Administration from their relationships with us and the profitability of those relationships; (e) information about the services performed and the personnel performing such services under the Investment Advisory Agreement; (f) the organizational capability and financial condition of Prospect Capital Management and its affiliates and (g) the possibility of obtaining similar services from other third party service providers or through an internally managed structure. In approving the renewal of the Investment Advisory Agreement, the Board of Directors, including all of the directors who are not “interested persons,” considered the following:
•Nature, Quality and Extent of Services. The Board of Directors considered the nature, extent and quality of the investment selection process employed by Prospect Capital Management. The Board of Directors also considered Prospect Capital Management’s personnel and their prior experience in connection with the types of investments made by us. The Board of Directors concluded that the services to be provided under the Investment Advisory Agreement are generally the same as those of comparable business development companies described in the available market data.
•Investment Performance. The Board of Directors reviewed our investment performance over various periods, as well as comparative data with respect to the investment performance of a group of other, comparable externally managed business development companies. The Board of Directors concluded that Prospect Capital Management was delivering results consistent with our investment objective and that our investment performance was satisfactory when compared to comparable business development companies.
•The reasonableness of the fees paid to Prospect Capital Management. The Board of Directors considered comparative data based on publicly available information on a group of other, comparable business development companies selected by the Adviser and the Company’s Board of Directors (the “BDC Expense Peers”) with respect to services rendered and the advisory fees (including the management fees and incentive fees), as well as our operating expenses, efficiency ratio and expense ratio compared to the BDC Expense Peers. The Board of Directors reviewed information concerning Prospect Capital Management’s costs in serving as the Company’s investment adviser, including costs associated with technology, infrastructure and compliance necessary to manage the Company, as well as compensation costs, Prospect Capital Management’s compensation program, and the relationship of such compensation to Prospect Capital Management’s ability to attract and retain investment advisory personnel. Finally, on behalf of the Company, the Board of Directors also considered the profitability of Prospect Capital Management. Based upon its review, the Board of Directors concluded that the fees to be paid under the Investment Advisory Agreement are reasonable.
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•Economies of Scale. The Board of Directors considered information about the potential of Prospect Capital Management to realize economies of scale in managing our assets, and determined that at this time there were not economies of scale to be realized by Prospect Capital Management.
Based on the information reviewed and the discussions detailed above, the Board of Directors (including all of the directors who are not “interested persons”) concluded that the investment advisory fee rates and terms are fair and reasonable in relation to the services provided and approved the renewal of the Investment Advisory Agreement with Prospect Capital Management as being in the best interests of the Company and its stockholders.
Administration Agreement
We have also entered into an administration agreement (the “Administration Agreement”) with 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 hisher staff, including the internal legal staff. Under this agreement, Prospect Administration furnishes us with office 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 (see Managerial Assistance section below). 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. Our payments to Prospect Administration are reviewed quarterly by our Board of Directors.
Staffing
We do not currently have any employees and do not expect to have any employees. The services necessary for the operation of our business are provided by investment professionals and personnel of Prospect Capital Management and by the officers and the employees of Prospect Administration pursuant to the terms of the Investment Advisory Agreement and the Administration Agreement, respectively, each as described herein and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Each of our executive officers is an employee or affiliate of Prospect Capital Management or Prospect Administration. Our day-to-day investment activities are managed by Prospect Capital Management, the investment professionals of which focus on origination, transaction development, investment and the ongoing monitoring of our investments. We reimburse both Prospect Capital Management and Prospect Administration for a certain portion of expenses incurred in connection with such staffing. Because we have no employees, we do not have a formal employee relations policy.
Portfolio Managers
The following individuals function as portfolio managers primarily responsible for the day-to-day management of our portfolio. Our portfolio managers are not responsible for day-to-day management of any other accounts. For a description of their principal occupations for the past five years, please refer to our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders, which will be filed with the SEC not later than 120 days after the end of our fiscal year.
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| Name | Position | Length of Service with Company (Years) | |||||||||||||||
| John F. Barry III | Chairman and Chief Executive Officer | 17 | |||||||||||||||
| M. Grier Eliasek | President and Chief Operating Officer | 17 | |||||||||||||||
Mr. Eliasek receives no compensation from the Company. Mr. Eliasek receives a salary and bonus from Prospect Capital Management that takes into account his role as a senior officer of the Company and of Prospect Capital Management, his performance and the performance of each of Prospect Capital Management and the Company. Mr. Barry receives no compensation from the Company. Mr. Barry, as the sole member of Prospect Capital Management, receives a salary and/or bonus from Prospect Capital Management and is entitled to equity distributions after all other obligations of Prospect Capital Management are met.
The following table sets forth the dollar range of our common stock beneficially owned by each of the portfolio managers described above as of June 30, 2021.
| Name | Aggregate Dollar Range of Common Stock Beneficially Owned by Portfolio Managers(1)(2)(3) | |||||||||||||
| John F. Barry III | Over $1,000,000 | |||||||||||||
| M. Grier Eliasek | Over $1,000,000 | |||||||||||||
(2) The dollar ranges are: none, $1-$10,000, $10,001-$50,000, $50,001-$100,000; $100,001 - $500,000; $500,001 - $1,000,000; or over $1,000,000.
(3) The dollar range of our equity securities beneficially owned is based on the closing price of $8.39 on June 30, 2021 on The Nasdaq Stock Market LLC (the “Nasdaq”).
Payment of Our Expenses
All investment professionals of the Investment Adviser and its respective staff, when and to the extent engaged in providing investment advisory and management services, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by the Investment Adviser. We bear all other costs and expenses of our operations and transactions, including those relating to: organization and offering; calculation of our net asset value (including the cost and expenses of any independent valuation firm); expenses incurred by Prospect Capital Management payable to third parties, including agents, consultants or other advisers (such as independent valuation firms, accountants and legal counsel), in monitoring our financial and legal affairs and in monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on debt, if any, and dividends payable on preferred stock, if any, incurred to finance our investments; offerings of our debt, our preferred shares, our common stock and other securities; investment advisory fees; fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments; transfer agent and custodial fees; registration fees; listing fees; taxes; independent directors’ fees and expenses; costs of preparing and filing reports or other documents with the SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; our allocable portion of the fidelity bond, directors and officers/errors and omissions liability insurance, and any
other insurance premiums; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred by us, by the Investment Adviser or by Prospect Administration in connection with administering our business, such as our allocable portion of overhead under the Administration Agreement, including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and hisher staff.
License Agreement
We entered into a license agreement with Prospect Capital Management pursuant to which Prospect Capital Management agreed to grant us a non-exclusive, royalty free license to use the name “Prospect Capital.” Under this agreement, we have a right to use the Prospect Capital name, for so long as Prospect Capital Management or one of its affiliates remains the Investment Adviser. Other than with respect to this limited license, we have no legal right to the Prospect Capital name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with the Investment Adviser is in effect.
Determination of Net Asset Value
The net asset value per share of our outstanding shares of common stock will be determined quarterly by dividing the value of total assets minus liabilities minus liquidation value of our then outstanding preferred stock by the total number of common shares outstanding.
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In calculating the value of our total assets, we will value investments for which market quotations are readily available at such market quotations. Short-term investments which mature in 60 days or less, such as U.S. Treasury bills, are valued at amortized cost, which approximates market value. The amortized cost method involves recording a security at its cost (i.e., principal amount plus any premium and less any discount) on the date of purchase and thereafter amortizing/accreting that difference between the principal amount due at maturity and cost assuming a constant yield to maturity as determined at the time of purchase. Short-term securities which mature in more than 60 days are valued at current market quotations by an independent pricing service or at the mean between the bid and ask prices obtained from at least two brokers or dealers (if available, or otherwise by a principal market maker or a primary market dealer). Investments in money market mutual funds are valued at their net asset value as of the close of business on the day of valuation.
Most of the investments in our portfolio do not have market quotations which are readily available, meaning the investments do not have actively traded markets. Debt and equity securities for which market quotations are not readily available are valued with the assistance of an independent valuation service using a documented valuation policy and a valuation process that is consistently applied under the direction of our Board of Directors. For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see “Risk Factors – Risks Relating to Our Business – Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments.”
The factors that may be taken into account in valuing such investments include, as relevant, the portfolio company’s ability to make payments, its estimated earnings and projected discounted cash flows, the nature and realizable value of any collateral, the financial environment in which the portfolio company operates, comparisons to securities of similar publicly traded companies, changes in interest rates for similar debt instruments and other relevant factors. Due to the inherent uncertainty of determining the fair value of investments that do not have readily available market quotations, the fair value of these investments may differ significantly from the values that would have been used had such market quotations existed for such investments, and any such differences could be material.
As part of the fair valuation process, the independent valuation firms engaged by the Board of Directors perform a review of each debt and equity investment requiring fair valuation and provide a range of values for each investment, which, along with management’s valuation recommendations, is reviewed by our Audit Committee. Management and the independent valuation firms may adjust their preliminary evaluations to reflect comments provided by our Audit Committee. The Audit Committee reviews the final valuation reports and management’s valuation recommendations and makes a recommendation to the Board of Directors based on its analysis of the methodologies employed and the various weights that should be accorded to each portion of the valuation as well as factors that the independent valuation firms and management may not have included in their evaluation processes. The Board of Directors then evaluates the Audit Committee recommendations and undertakes a similar analysis to determine the fair value of each investment in the portfolio in good faith.
Determination of fair values involves subjective judgments and estimates. Accordingly, under current accounting standards, the notes to our financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
Common Stock Dividend Reinvestment and Direct Stock Purchase Plan
We have adopted a common stock dividend reinvestment and direct stock purchase plan (the “Plan” or the “DRIP”) that provides for reinvestment of our common stock dividends or distributions on behalf of our common stockholders, unless a common stockholder elects to receive cash as provided below, and the ability to purchase additional shares of common stock by making optional cash investments. On April 17, 2020, our Board of Directors approved amendments to our DRIP, effective on May 21, 2020. These amendments principally provide for the number of newly-issued shares of common stock to be credited to a stockholder’s account to be determined by dividing (i) the total dollar amount of the dividend payable to such stockholder by (ii) 95% of the closing market price per share of our common stock on the date fixed by our Board of Directors for such distribution (thereby providing a 5% discount to the market price of our common stock on such date). As a result, when our Board of Directors authorizes, and we declare, a cash dividend or distribution, then our common stockholders who have not (or whose broker through which they hold shares of our common stock have not) “opted out” of our dividend reinvestment and direct stock purchase planDRIP will have their cash dividends or distributions automatically reinvested in additional shares of our common stock, rather than receiving the cash dividends or distributions.
Common stockholders who purchased shares of our common stock through or hold shares in the name of a broker or financial institution should consult with a representative of their broker or financial institution with respect to their participation in our DRIP. Even if such stockholders have elected to automatically reinvest their shares with their broker, the broker may have “opted out” of our DRIP (which utilizes DTC’s dividend reinvestment service), and such stockholders may therefore not be receiving the 5% pricing discount. Many common stockholders have been “opted out” of our DRIP by their brokers who
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instead implement a “synthetic” dividend reinvestment plan in which such broker purchases shares in the open market with no discount, using the funds from cash dividends. Common stockholders interested in participating in our DRIP should contact their brokers to make sure each such DRIP participation election has been made for the benefit of such stockholder. In making such DRIP election, each such common stockholder should specify to his or her broker the desire to participate in the “Prospect Capital Corporation DRIP through DTC” that issues shares of our common stock based on 95% of the market price (a 5% discount to the market price) and not the broker's own “synthetic” dividend reinvestment plan (if any) that offers no such discount. Common stockholders may need to make such election proactively with their broker.
If you are not a current common stockholder and want to enroll or have “opted out” and wish to rejoin, you may also purchase shares directly through the planPlan or opt in by enrolling online or submitting to the planPlan administrator a completed enrollment form and, if you are not a current stockholder, making an initial investment of at least $250.
No action is required on the part of a directly registered common stockholder to have their cash dividend or distribution reinvested in shares of our common stock. A directly registered common stockholder may elect to receive an entire dividend or distribution in cash by notifying the planPlan administrator and our transfer agent and registrar, in writing so that such notice is received by the planPlan administrator no later than the record date for dividends to stockholders. The planPlan administrator will set up a dividend reinvestment account for shares acquired pursuant to the planPlan for each stockholder who has not so elected to receive dividends and distributions in cash or who has enrolled in the planPlan as described herein (each, a “Participant”). The planPlan administrator will hold each Participant’s shares, together with the shares of other Participants, in non-certificated form in the planPlan administrator’s name or that of its nominee. Upon request by a Participant to terminate their participation in the plan,Plan and liquidate their Plan account, received in writing, via the internetInternet or the planPlan administrator’s toll free number no later than 3 business days prior to a dividend or distribution payment date, such dividend or distribution will be paid out in cash and not be reinvested. If such request is received fewer than 3 business days prior to a dividend or distribution payment date, such dividend or distribution will be reinvested but all subsequent dividends and distributions will be paid to the stockholder in cash on all balances. Upon such termination of the Participant’s participation in the plan,Plan and liquidation of their plain account, all whole shares owned by the Participant will be issued to the Participant in certificated form and a check will be issued to the Participant for the proceeds of fractional shares less a transaction fee of $15. Those stockholders whose shares are held by a broker or other financial intermediary may receive dividends or distributions in cash by notifying their broker or other financial intermediary of their election.
We primarily use newly-issued shares of our common stock to implement reinvestment of dividends and distributions under the plan,DRIP, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve the right to purchase shares of our common stock in the open market in connection with the implementation of reinvestment of dividends or distributions under the plan.DRIP. The number of newly-issued shares of common stock to be issuedcredited to a stockholder isstockholder’s account will be determined by dividing the total dollar amount of the dividend or distribution payable to such stockholder by 95% of the market price per share of our common stock at the close of regular trading on the NASDAQ Global Select Market on the last business day beforedate fixed by the payment dateBoard for Directors for such dividend or distribution. Market price per share on that date will be the closing price for such shares on the NASDAQ Global Select Market or, if no sale is reported for such day, at the average of their reported bid and asked prices. The number of shares of our common stock to be outstanding after giving effect to payment of the dividend or distribution cannot be established until the value per share at which additional shares will be issued has been determined and elections of our stockholders have been tabulated. StockholdersCommon stockholders who do not elect to receive dividends and distributions in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium at the time we issue new shares under the planPlan and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our common stockholders who participate in the plan,Plan, the level of premium or discount at which our shares are trading and the amount of the dividend or distribution payable to a common stockholder.
There are no brokerage charges or other charges to common stockholders who participate in reinvestment of dividends or distributions under the plan.Plan. The planPlan administrator’s fees under the planPlan are paid by us. If a participant elects by written notice to the planPlan administrator to have the planPlan administrator sell part or all of the shares held by the planPlan administrator in the participant’s account and remit the proceeds to the participant, the planPlan administrator is authorized to deduct a $15 transaction fee plus a $0.10 per share brokerage commissions from the proceeds.
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Participants in the planPlan have the option of making additional cash payments to the planPlan administrator for investment in the shares at the then current market price. Such payments may be made in any amount from $25 to $10,000 per transaction. Participants in the planPlan may also elect to have funds electronically withdrawn from their checking or savings account each month. Direct debit of cash will be performed on the 10th of each month. Participants may elect this option by submitting a written authorization form or by enrolling online at the planPlan administrator’s website. The planPlan administrator will use all funds received from participants
since the prior investment of funds to purchase shares of our common stock in the open market. We will not use newly-issued shares of our common stock to implement such purchases. Purchase orders will be submitted daily. The planPlan administrator may, at its discretion, submit purchase orders less frequently but no later than 30 days after receipt. The planPlan administrator will charge each stockholder who makes such additional cash payments $2.50, plus a $0.10 per share brokerage commission. Cash dividends and distributions payable on all shares credited to your planPlan account will be automatically reinvested in additional shares pursuant to the terms of the plan.Plan. Brokerage charges for some purchases are expected to be less than the usual brokerage charge for such transactions. Instructions sent by a participant to the planPlan administrator in connection with such participant’s cash payment may not be rescinded.
Participants may terminate their participation in and liquidate their accounts under the planPlan by notifying the planPlan administrator in writing prior to a dividend or distribution payment date via its website at www.amstock.comwww.astfinancial.com or by filling out the transaction request form located at the bottom of their statement and sending it to the planPlan administrator at American Stock Transfer & Trust Company, P.O. Box 922, Wall Street Station, New York, NY 10269-0560 or by calling the planPlan administrator’s Interactive Voice Response System at (888) 888-0313. Upon termination and liquidation, the stockholder will receive certificates for the full shares credited to your planPlan account. If you elect to receive cash, the planPlan administrator sells such shares and delivers a check for the proceeds, less the $0.10 per share brokerage commission and the planPlan administrator’s transaction fee of $15. In every case of termination, fractional shares credited to a terminating planPlan account are paid in cash at the then-current market price, less any commission and transaction fee.
The planPlan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any payable date for the payment of any dividend by us or distribution pursuant to any additional cash payment made. All correspondence concerning the planPlan should be directed to the planPlan administrator by mail at American Stock Transfer and Trust Company LLC, 6201 15th Avenue, Brooklyn, New York 11219, or by telephone at 888-888-0313.
We have adopted a preferred stock dividend reinvestment plan (the “Preferred Stock Plan” or the “Preferred Stock DRIP”) that provides for reinvestment of our dividends declared by our Board of Directors on shares through or hold theirof our 5.50% Series A1 Preferred Stock (the “Series A1 Preferred Stock”), 5.50% Series M1 Preferred Stock (the “Series M1 Preferred Stock”), the 5.50% Series M2 Preferred Stock (the “Series M2 Preferred Stock,” and together with the Series M1 Preferred Stock, the “Series M Preferred Stock”) and 5.50% Series A2 Preferred Stock (the “Series A2 Preferred Stock”, and all such series of preferred stock referred to collectively as the “5.50% Preferred Stock”) on behalf of our preferred stockholders.
Eligibility of Existing Holders of 5.50% Preferred Stock
If you are a current holder of record of shares of 5.50% Preferred Stock, you may participate in the Preferred Stock Plan. Eligible holders of shares of 5.50% Preferred Stock may enroll in the Preferred Stock Plan online through www.computershare.com/investor. Alternatively, you may enroll by completing an enrollment form and delivering it to Computershare Trust Company, N.A. (“Computershare”), the administrator for the Preferred Stock Plan.
If you own shares of 5.50% Preferred Stock that are registered in someone else’s name of(for example, a bank, broker, or financial institutiontrustee) and you want to participate in the Preferred Stock Plan, you may be able to arrange for that person to handle the reinvestment of your dividends. If not, your shares of 5.50% Preferred Stock should consultbe withdrawn from “street name” or other form of registration and should be registered in your own name. Alternatively, your broker or bank may offer a program that allows you to participate in a plan without having to withdraw your shares of 5.50% Preferred Stock from “street name.”
If you are already a participant in the Preferred Stock Plan, you need not take any further action in order to maintain your present participation.
Administration
Computershare Trust Company, N.A. administers the Preferred Stock Plan. Certain administrative support will be provided to Computershare by its designated affiliates. If you have questions regarding the Preferred Stock Plan, please write to Computershare at the following address: Computershare Trust Company, N.A., P.O. Box 505013, Louisville, KY 40233-5013 or call Computershare at 1-877-373-6374. An automated voice response system is available 24 hours a day, 7 days a week.
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Customer service representatives are available from 8:00 a.m. to 8:00 p.m., Eastern Time, Monday through Friday (except holidays). In addition, you may visit Computershare’s website at www.computershare.com/investor. At this website, you can enroll in the Preferred Stock Plan, obtain information, and perform certain transactions on your Preferred Stock Plan account.
Purchases and Pricing of Shares of 5.50% Preferred Stock
With respect to reinvested dividends, the Stated Value for purchases of shares of 5.50% Preferred Stock directly from us will be $25.00 per share, and the investment date will be the dividend payment date for the month. Dividend payment dates generally occur on the first business day of each month. Your account will be credited with a representativefull and fractional number of their brokershares of 5.50% Preferred Stock, subject to operating procedures of the Depository Trust Company, equal to the total amount to be invested by you, divided by the applicable purchase price per share.
There are no fees or financial institutionother charges on shares of 5.50% Preferred Stock purchased through the Preferred Stock Plan.
Participation
Any eligible holder of shares of 5.50% Preferred Stock may enroll in the Preferred Stock Plan online through www.computershare.com/investor. Alternatively, you may enroll in the Preferred Stock Plan by completing an enrollment form and returning it to Computershare at the address set forth above.
If Computershare receives your enrollment form by the record date for the payment of the next dividend (approximately 10 days in advance of the dividend payment date), that dividend will be invested in additional shares of 5.50% Preferred Stock for your Preferred Stock Plan account; provided, however, that the first dividend payable with respect to their participationnewly-issued shares of 5.50% Preferred Stock pursuant to our primary offering will be paid in ourcash, with subsequent dividends reinvested pursuant to the Preferred Stock Plan. If the enrollment form is received in the period after any dividend record date, that dividend will be paid by check or automatic deposit to a U.S. bank account that you designate and your initial dividend reinvestment planwill commence with the following dividend.
By enrolling in the Preferred Stock Plan, you direct Computershare to apply all, but not less than all, dividends to the purchase of additional shares of 5.50% Preferred Stock in accordance with the Preferred Stock Plan’s terms and direct stockconditions. Unless otherwise instructed, Computershare will thereafter automatically reinvest all, but not less than all, dividends declared on shares of 5.50% Preferred Stock held under the Preferred Stock Plan. If you want to discontinue the reinvestment of all dividends paid on your shares of 5.50% Preferred Stock, you must provide notice to Computershare.
Cost
We will pay all fees, the annual cost of administration and, unless provided otherwise in the Preferred Stock Plan, all other charges incurred in connection with the purchase plan. Suchof shares of 5.50% Preferred Stock acquired under the Preferred Stock Plan, if any.
Number of Shares of 5.50% Preferred Stock to be Purchased for the Participant
The number of shares of 5.50% Preferred Stock purchased under the Preferred Stock Plan will depend on the amount of your dividend. Shares of 5.50% Preferred Stock purchased under the Preferred Stock Plan will be credited to your account. Both full and fractional shares will be purchased.
Shares of 5.50% Preferred Stock received through the Preferred Stock Plan will be of the same series and have the same original issue date for purposes of the Holder Optional Conversion Fee and for other terms of the 5.50% Preferred Stock based on issuance date as the 5.50% Preferred Stock for which the dividend was declared.
The aggregate number of shares of 5.50% Preferred Stock, including shares issued under the Preferred Stock Plan, shall not exceed 1,000,000. We cannot assure you there will be enough shares of 5.50% Preferred Stock to meet the requirements under the Preferred Stock Plan. If we do not have a sufficient number of shares of 5.50% Preferred Stock to meet the 5.50% Preferred Stock Plan requirements during any month, the portion of any reinvested dividends received by Computershare but not invested in shares of 5.50% Preferred Stock under the Preferred Stock Plan will be returned to participants without interest.
Source of Shares of 5.50% Preferred Stock Purchased Under the Preferred Stock Plan
Shares of 5.50% Preferred Stock purchased under the Preferred Stock Plan will come from our authorized but unissued shares of preferred stock.
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Method for Changing Preferred Stock Plan Election
You may change your Preferred Stock Plan election at any time online through www.computershare.com/investor, by telephone or by notifying Computershare in writing. To be effective with respect to a particular dividend, any such change must be received by Computershare prior to the record date for such dividend.
Withdrawal by Participant
You may discontinue the reinvestment of your dividends at any time by providing written or telephone notice to Computershare. Alternatively, you may change your dividend election online through www.computershare.com/investor. If Computershare receives your notice of withdrawal prior to the record date for the payment of the next dividend, Computershare, in its sole discretion, will distribute such dividends in cash. If the request is received after the record date for the payment of the next dividend, then that dividend will be reinvested. However, all subsequent dividends will be paid out in cash on all balances. Computershare will continue to hold your shares of 5.50% Preferred Stock in your Preferred Stock Plan account.
Generally, an eligible holder of shares of 5.50% Preferred Stock may again become a participant in the Preferred Stock Plan. However, we reserve the right to reject the enrollment of a previous participant in the Preferred Stock Plan on grounds of excessive joining and termination. This reservation is intended to minimize administrative expense and to encourage use of the Preferred Stock Plan as a long-term investment service.
Share Certificates and Safekeeping
Shares of 5.50% Preferred Stock that you acquire under the Preferred Stock Plan will be maintained in your Preferred Stock Plan account in non-certificated form. This protects your shares of 5.50% Preferred Stock against loss, theft or accidental destruction and also provides a convenient way for you to keep track of your shares of 5.50% Preferred Stock.
Reports to Participants
Statements of your account activity will be sent to you after each transaction, which will simplify your record keeping. Each Preferred Stock Plan account statement will show the amount invested, the purchase price and the number of shares of 5.50% Preferred Stock purchased. The statement will include specific cost basis information in accordance with applicable law. Please notify Computershare promptly either in writing, by telephone or through the Internet if your address changes. In addition, you will receive copies of the same communications sent to all other holders of shares of 5.50% Preferred Stock, if any. You also will receive any U.S. Internal Revenue Service, or the “IRS,” information returns, if required. Please retain all account statements for your records. The statements contain important tax and other information.
Suspension, Modification or Termination of the Preferred Stock Plan
We reserve the right to suspend, modify or terminate the Preferred Stock Plan at any time. Participants will be notified of any suspension, modification or termination of the Preferred Stock Plan. Upon our termination of the Preferred Stock Plan any whole book-entry shares owned will continue to be credited to a participant’s account unless specifically requested otherwise.
U.S. Federal Income tax Consequences of Participating in the Preferred Stock Plan
Preferred stockholders who receive dividends or distributions in the form of stock may not be identifiedare subject to the same U.S. federal, state and local tax consequences as our registeredare preferred stockholders withwho elect to receive their dividends or distributions in cash. A preferred stockholder’s basis for determining gain or loss upon the plan administrator and may not automatically have their cashsale of stock received in a dividend or distribution reinvestedfrom us will be equal to the total dollar amount of the dividend or distribution payable to the stockholder. Any stock received in a dividend or distribution will have a new holding period for tax purposes commencing on the day following the day on which the shares of our common stock by5.50% Preferred Stock are credited to the plan administrator.U.S. Stockholder’s account.
Material U.S. Federal Income Tax Considerations
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our common shares. This summary does not purport to be a complete description of the income tax considerations applicable to us or our investors on such an investment. For example, we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations, insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S. Stockholders (as defined below) whose functional currency is not the U.S. dollar, persons who mark-to-market our shares, and persons who hold our
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shares as part of a “straddle,” “hedge” or “conversion” transaction.transaction, and persons that own or have owned, actually or constructively, 5% or more of any class or series of our stock. This summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury regulations, and administrative and judicial interpretations, each as of the date of this reportAnnual Report and all of which are subject to change, possibly retroactively, which could affect the continuing validity of this discussion. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
A “U.S. Stockholder” is a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:
•A citizen or individual resident of the United States;
•A corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;
•An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
•A trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.
A “Non-U.S. Stockholder” is a beneficial owner of shares of our common stock that is not a partnership and is not a U.S. Stockholder.
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a partnership holding shares of our common stock should consult its tax advisor with respect to the purchase, ownership and disposition of shares of our common stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible changes in the tax laws.
Election to be Taxed as a RIC
As a business development company, we have elected and intend to continue to qualify to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally are not subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to obtain RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).
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Taxation as a RIC
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
1.Qualify to be treated as a business development company or be registered as a management investment company under the 1940 Act at all times during each taxable year;
2.Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock or other securities or currencies or other income derived with respect to our business of investing in such stock, securities or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code) (the “90% Income Test”); and
3.Diversify our holdings so that at the end of each quarter of the taxable year:
a.At least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly traded partnership”); and
b.No more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, (i) of one issuer (ii) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or similar or related trades or businesses or (iii) of one or more “qualified publicly traded partnerships,” (the “Diversification Tests”).
To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a “qualified publicly traded partnership”), we generally must include the items of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that is derived from a partnership (other than a “qualified publicly traded partnership”) will be treated as qualifying income for purposes of the 90% Income Test only to the extent that such income is attributable to items of income of the partnership which would be qualifying income if realized by us directly. In addition, we generally must take into account our proportionate share of the assets held by partnerships (other than a “qualified publicly traded partnership”) in which we are a partner for purposes of the Diversification Tests. If the partnership is a “qualified publicly traded partnership,” the net income derived from such partnership will be qualifying income for purposes of the 90% Income Test, and interests in the partnership will be “securities” for purposes of the Diversification Tests. We monitor our investments in equity securities of entities that are treated as partnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC.
In order to meet the 90% Income Test, we may establish one or more special purpose corporations to hold assets from which we do not anticipate earning dividend, interest or other qualifying income under the 90% Income Test. Any such special purpose corporation would generally be subject to U.S. federal income tax, and could result in a reduced after-tax yield on the portion of our assets held by such corporation.
Provided that we qualify as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our investment company taxable income and net capital gain (which we define as net long-term capital gains in excess of net short-term capital losses) we timely distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed distributed) to our stockholders. Any undistributed taxable income is subject to U.S. federal income tax.
We will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income recognized during the calendar year, (ii) 98.2% of our capital gain net income, as defined by the Code, recognized for the one year period ending October 31 in that calendar year and (iii) any income recognized, but not distributed, in preceding years.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount, we must include in income each year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
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Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant. As a RIC, we are not allowed to carry forward or carry back a net operating loss for purposes of computing our investment company taxable income in other taxable years.
Guidance from the IRS generally permits publicly offered RICs to pay cash/stock dividends consisting of up to 80% stock if certain requirements are met. Any dividends paid in stock in accordance with such guidance will be taxable to the shareholder as if the dividend had been paid in cash and we will receive a dividend paid deduction for such distribution.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the 1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset coverage” tests are met. See “Regulation as a Business Development Company – Senior Securities.” Moreover, our ability to dispose of assets to meet our distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions at times that, from an investment standpoint, are not advantageous.
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 Code, corporate distributees 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 shareholdersstockholders our accumulated earnings and profits attributable to non-RIC years. 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 five years. The remainder of this discussion assumes we will qualify for taxation as a RIC.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain and qualified dividend income into higher taxed short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause us to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur, (vi) adversely alter the characterization of certain complex financial transactions, and (vii) produce income that will not be qualifying income for purposes of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions.
We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may be unclear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the expected tax treatment, it could affect the timing or character of income recognized, requiring us to purchase or sell securities, or otherwise change our portfolio, in order to comply with the tax rules applicable to RICs under the Code.
Taxation of U.S. Stockholders
Distributions by us generally are taxable to U.S. Stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income” (which is, generally, our ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary income to U.S. Stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock. Provided that certain holding period and other requirements are met, such distributions (if properly reported by us) may qualify (i) for the dividends received deduction available to corporations, but only to the extent that our income consists of dividend income from U.S. corporations and (ii) in the case of individual shareholders,stockholders, as qualified dividend income eligible to be taxed at long-term capital gain rates to the extent that we receive qualified dividend income (generally, dividend income from taxable domestic corporations and certain qualified foreign corporations). There can be no assurance as to what portion, if any, of our distributions will qualify for favorable treatment as qualified dividend income.
Distributions of our net capital gain (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported by us as “capital gain dividends” will be taxable to a U.S. Stockholder as long-term capital gains, regardless of the U.S. Stockholder’s holding period for its common stock and regardless of whether paid in cash
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or reinvested in additional common stock. Distributions in excess of our current and accumulated earnings and profits first will reduce a U.S. Stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will constitute capital gains to such U.S. Stockholder. In determining the extent to which a distribution will be treated as being made from our earnings and profits, our earnings and profits will be allocated, on a pro rata basis, first to distributions with respect to our preferred stock, and then to our common stock. In addition, the IRS currently requires a RIC that has two or more classes of shares outstanding to designate to each such class proportionate amounts of each type of its income (e.g., ordinary income, capital gain dividends, qualified dividend income, dividends eligible for the dividends received deduction) for each tax year based upon the percentage of total dividends distributed to each class for such year.
Properly reported dividends paid by us that are attributable to our “qualified REIT dividends” (generally, ordinary income dividends paid by a REIT, not including capital gain dividends or dividends treated as qualified dividend income) may be eligible for the 20% deduction described in Section 199A of the Code in the case of non-corporate U.S. Stockholders, provided that certain holding period and other requirements are met by us and by such stockholder. There can be no assurance as to what portion, if any, of our distributions will qualify for such deduction. Subject to any future regulatory guidance to the contrary, any distribution of income attributable to income from our investment in a master limited partnership (“MLP”) will not qualify for the 20% deduction for “qualified PTP income” that would generally be available to a non-corporate U.S. Stockholder were the stockholder to own such MLP directly. As a result, it is possible that a non-corporate U.S. Stockholder will be subject to a higher effective tax rate on any such distributions received from us compared to the effective rate applicable to any income the U.S. Stockholder would receive if the stockholder invested directly in an MLP.
Although we currently intend to distribute any long-term capital gains at least annually, we may in the future decide to retain some or all of our long-term capital gains, and designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, and we may elect for each U.S. Stockholder will be required to include his, her or its proportionate share of the deemed distribution in income as if it had been actually distributed to the U.S. Stockholder, andin which case the U.S. Stockholder willwould be entitled to claim a credit equal to its allocable share of the tax paid thereon by us. The amount of the deemed distribution net of such tax will be added to the U.S. Stockholder’s tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, theThe amount of tax that individual stockholders willwould be treated as having paid and for which they will receive a credit willmay exceed the tax they owe on the retained net capital gain. Such excess generally may be claimed as a credit against the U.S. Stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it exceeds a stockholder’s liability for U.S. federal income tax. A stockholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable year. We cannot treat any of our investment company taxable income as a “deemed distribution.”
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in question. If we make such an election, the U.S. Stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made. However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in any such month and actually paid during January of the following year, will be treated as if it had been received by our U.S. Stockholders on December 31 of the year in which the dividend was declared.
If a U.S. Stockholder purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the distribution and the investor will be subject to tax on the distribution even though it represents a return of its investment.
A U.S. Stockholder generally will recognize taxable gain or loss if such U.S. Stockholder sells or otherwise disposes of its shares of our common stock. Any gain or loss arising from such sale or taxable disposition generally will be treated as long-term capital gain or loss if the U.S. Stockholder has held his, her or its shares for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or taxable disposition of shares of our common stock
held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a taxable disposition of shares of our common stock may be disallowed if other substantially identical shares are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the disposition. Capital losses are deductible only to the extent of capital gains (subject to an exception for individuals under which a limited amount of capital losses may be offset against ordinary income).
In general, individual U.S. Stockholders currently are subject to a preferential rate on their net capital gain, or the excess of realized net long-term capital gain over realized net short-term capital loss for a taxable year, including long-term capital gain
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derived from an investment in our shares. Such rate is lower than the maximum rate on ordinary income currently payable by individuals. Corporate U.S. Stockholders currently are subject to U.S. federal income tax on net capital gain at ordinary income rates.
Certain U.S. Stockholders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or a portion of their “net investment income,” which includes dividends received from us and capital gains from the sale or other disposition of our stock.
We will make available to each of our U.S. Stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share basis, the amounts includible in such U.S. Stockholder’s taxable income for such year as ordinary income and as long-term capital gain on form 1099-DIV. In addition, the amount and the U.S. federal tax status of each year’s distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local and foreign taxes depending on a U.S. Stockholder’s particular situation.
Payments of dividends, including deemed payments of constructive dividends, or the proceeds of the sale or other taxable disposition of our common stock generally are subject to information reporting unless the U.S. Stockholder is an exempt recipient. Such payments may also be subject to U.S. federal backup withholding at the applicable rate if the recipient of such payment fails to supply a taxpayer identification number and otherwise comply with the rules for establishing an exemption from backup withholding. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against the holder’s U.S. federal income tax liability, provided that certain information is provided timely to the IRS.
Taxation of Non-U.S. Stockholders
Whether an investment in our common stock is appropriate for a Non-U.S. Stockholder will depend upon that person’s particular circumstances. An investment in our common stock by a Non-U.S. Stockholder may have adverse tax consequences. Non-U.S. Stockholders should consult their tax advisers before investing in our common stock.
Distributions of our “investment company taxable income” to Non-U.S. Stockholders that are not “effectively connected” with a U.S. trade or business conducted by the Non-U.S. Stockholder, will generally be subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate) to the extent of our current and accumulated earnings and profits.
Properly reported distributions to Non-U.S. Stockholders are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of our “qualified net interest income” (generally, our U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which we are at least a 10% shareholder,stockholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of our “qualified short-term capital gains” (generally, the excess of our net short-term capital gain over our long-term capital loss for such taxable year). However, depending on our circumstances, we may report all, some or none of our potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains, and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a Non-U.S. Stockholder needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN, W-8BEN-E or substitute form). In the case of shares held through an intermediary, the intermediary may withhold even if we report the payment as qualified net interest income or qualified short-term capital gain. Non-U.S. Stockholders should contact their intermediaries with respect to the application of these rules to their accounts. There can be no assurance as to what portion of our distributions will qualify for favorable treatment as qualified net interest income or qualified short-term capital gains.
Actual or deemed distributions of our net capital gain to a Non-U.S. Stockholder, and gains recognized by a Non-U.S. Stockholder upon the sale of our common stock, that are not effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder, will generally not be subject to U.S. federal withholding tax and generally will not be subject to U.S. federal income tax unless (i) the Non-U.S. Stockholder is a nonresident alien individual and is physically present in the United States for 183 or more days during the taxable year and meets certain other requirements.
requirements, or (ii) subject to certain exceptions, we are or during prescribed testing periods have been a “United States real property holding corporation” or, in the case of certain distributions, a “qualified investment entity,” each within the meaning of the Foreign Investment in Real Property Tax Act of 1980. Although we do not expect to be a “United States real property holding corporation” or “qualified investment entity,” no assurances can be given in that regard.
Distributions of our “investment company taxable income” and net capital gain (including deemed distributions) to Non-U.S. Stockholders, and gains realized by Non-U.S. Stockholders upon the sale of our common stock, that are effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder, will be subject to U.S. federal income tax at the
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graduated rates applicable to U.S. citizens, residents and domestic corporations. In addition, if such Non-U.S. Stockholder is a foreign corporation, it may also be subject to a 30% (or lower applicable treaty rate) branch profits tax on its effectively connected earnings and profits for the taxable year, subject to adjustments, if its investment in our common stock is effectively connected with its conduct of a U.S. trade or business.
If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. Stockholder will be entitled to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed. In order to obtain the refund, the Non-U.S. Stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-U.S. Stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return.
In addition, withholding at a rate of 30% will be required on dividends in respect of, and after December 31, 2018, withholding at a rate of 30% will be required on gross proceeds from the sale of, shares of our stock held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution to the extent such interests or accounts are held by certain U.S. persons or by certain non-U.S. entities that are wholly or partially owned by U.S. persons and to withhold on certain payments. Accordingly, the entity through which our shares are held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of our shares held by an investor that is a non-financial non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which we or the applicable withholding agent will in turn provide to the IRS. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations or other guidance, may modify these requirements. We will not pay any additional amounts to stockholders in respect of any amounts withheld. Non-U.S. Stockholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our shares.
A Non-U.S. Stockholder generally will be required to comply with certain certification procedures to establish that such holder is not a U.S. person in order to avoid backup withholding with respect to payments of dividends, including deemed payments of constructive dividends, or the proceeds of a disposition of our common stock. In addition, we are required to annually report to the IRS and each Non-U.S. Stockholder the amount of any dividends or constructive dividends treated as paid to such Non-U.S. Stockholder, regardless of whether any tax was actually withheld. Copies of the information returns reporting such dividend or constructive dividend payments and the amount withheld may also be made available to the tax authorities in the country in which a Non-U.S. Stockholder resides under the provisions of an applicable income tax treaty. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules generally will be allowed as a refund or credit against a Non-U.S. Stockholder’s U.S. federal income tax liability, if any, provided that certain required information is provided timely to the IRS.
Non-U.S. persons should consult their tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of an investment in our common stock.
The discussion set forth herein does not constitute tax advice, and potential investors should consult their own tax advisors concerning the tax considerations relevant to their particular situation.
Regulation as a Business Development Company
General
We are a closed-end, non-diversified investment company that has filed an election to be treated as a BDC under the 1940 Act and has elected to be treated as a RIC under Subchapter M of the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our outstanding voting securities.
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We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may, for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933. Our intention is to not write (sell) or buy put or call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage the risks associated with interest rate, foreign currency and other market fluctuations. However, in connection with an investment or acquisition financing of a portfolio company, we may purchase or otherwise receive warrants to purchase the common stock of the portfolio company. Similarly, in connection with an acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except with respect to money market funds, we generally cannot acquire more than 3% of the voting stock of any regulated investment company, invest more than 5% of the value of our total assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company. With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments subject our stockholders indirectly to additional expenses. None of these policies are fundamental and may be changed without stockholder approval.
Qualifying Assets
Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal categories of qualifying assets relevant to our business are the following:
1.Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An “eligible portfolio company” is defined in the 1940 Act and rules adopted pursuant thereto as any issuer which:
a.is organized under the laws of, and has its principal place of business in, the United States;
b.is not an investment company (other than a small business investment company wholly-owned by the business development company) or a company that would be an investment company but for certain exclusions under the 1940 Act for certain financial companies such as banks, brokers, commercial finance companies, mortgage companies and insurance companies; and
c.satisfies any of the following:
i.does not have any class of securities with respect to which a broker or dealer may extend margin credit;
ii.is controlled by a business development company or a group of companies including a business development company and the business development company has an affiliated person who is a director of the eligible portfolio company;
iii.is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million;
iv.does not have any class of securities listed on a national securities exchange; or
v.has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting common equity of less than $250 million.
2.Securities in companies that were eligible portfolio companies when we made our initial investment if certain other requirements are satisfied.
3.Securities of any eligible portfolio company which we control.
4.Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities was unable to meet its obligations as they came due without material assistance other than conventional lending or financing agreements.
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5.Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we already own 60% of the outstanding equity of the eligible portfolio company.
6.Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of warrants or rights relating to such securities.
7.Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of securities described in (1), (2), (3) or (4) above.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test, a business development company must either control the issuer of the securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where the business development company purchases such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us will vary according to the particular needs of each portfolio company. Examples of such activities include advice on marketing, operations, fulfillment and overall strategy, capital budgeting, managing relationships with financing sources, recruiting management personnel, evaluating acquisition and divestiture opportunities, participating in board and management meetings, consulting with and advising officers of portfolio companies, and providing other organizational and financial guidance. We provide significant managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. Prospect Administration provides such managerial assistance on our behalf to portfolio companies, including controlled companies, when we are required to provide this assistance, utilizing personnel from Prospect Capital Management.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, including money market funds, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in money market funds, U.S. Treasury bills or in repurchase agreements that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the Diversification Tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a single counterparty in excess of this limit. The Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement transactions.
Senior Securities
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to Section 61(a)(1) of the 1940 Act. In other words, under the 1940 Act, the Company is now able to borrow $2 for investment purposes for every $1 of investor equity, as opposed to borrowing $1 for investment purposes for every $1 of investor equity. As a result, the Company may incur additional indebtedness and investors in the Company may face increased investment risk. In addition, while any preferred stock or public debt securities remain outstanding, we must make provisionsthe Company’s management fee payable to prohibit any distributionthe Investment Adviser is based on the Company’s average adjusted gross assets, which includes leverage and, as a result, if the Company incurs additional leverage, management fees paid to our stockholders or the repurchaseInvestment Adviser would increase. As of such securities or shares unless we meet the applicableJune 30, 2021, our asset coverage ratios after givingratio stood at 274.0% based on our outstanding senior securities representing indebtedness of $2.3 billion and our asset coverage ratio on our senior securities that are stock was 258.4%.
Code of Ethics
We, Prospect Capital Management and Prospect Administration have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements. For information on how to obtain a copy of each code of ethics, see “Available Information.”
Compliance Policies and Procedures
We and the Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the U.S. federal securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and to designate a Chief Compliance Officer to be responsible for administering the policies and procedures. Brian H. OswaldKristin L. Van Dask serves as our Chief Compliance Officer.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to Prospect Capital Management. The Proxy Voting Policies and Procedures of Prospect Capital Management are set forth below. The guidelines are reviewed periodically by Prospect Capital Management and our independent directors, and, accordingly, are subject to change.
Introduction.
As an investment adviser registered under the Advisers Act, Prospect Capital Management has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, Prospect Capital Management recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.
These policies and procedures for voting proxies for Prospect Capital Management’s Investment Advisory clients are intended to comply with Section 206 of, and Rule 206(4)-6 under, the Advisers Act.
Proxy policies.
These policies are designed to be responsive to the wide range of subjects that may be the subject of a proxy vote. These policies are not exhaustive due to the variety of proxy voting issues that Prospect Capital Management may be required to consider. In general, Prospect Capital Management will vote proxies in accordance with these guidelines unless: (1) Prospect Capital Management has determined to consider the matter on a case-by-case basis (as is stated in these guidelines), (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) Prospect Capital Management might find it necessary to vote contrary to its general guidelines to maximize stockholder value and vote in its clients’ best interests. In such cases, a decision on how to vote will be made by the Proxy Voting Committee (as described below). In reviewing proxy issues, Prospect Capital Management will apply the following general policies:
Elections of directors.
In general, Prospect Capital Management will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on the Board of Directors or Prospect Capital Management determines that there are other compelling reasons for withholding votes for directors, the Proxy Voting Committee will determine the appropriate vote on the matter. Prospect Capital Management believes that directors have a duty to respond to stockholder actions that have received significant stockholder support. Prospect Capital Management may withhold votes for directors that fail to act on key issues such as failure to implement proposals to declassify boards, failure to implement a majority vote requirement, failure to submit a rights plan to
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a stockholder vote and failure to act on tender offers where a majority of stockholders have tendered their shares. Finally, Prospect Capital Management may withhold votes for directors of non-U.S. issuers where there is insufficient information about the nominees disclosed in the proxy statement.
Appointment of auditors.
Our Audit Committee and Board of Directors believe that the company remains in the best position to choose the auditors and will generally support management’s recommendation.
Changes in capital structure.
Changes in a company’s charter, articles of incorporation or by-laws may be required by state or U.S. federal regulation. In general, Prospect Capital Management will cast its votes in accordance with the company’s management on such proposal. However, the Proxy Voting Committee will review and analyze on a case-by-case basis any proposals regarding changes in corporate structure that are not required by state or U.S. federal regulation.
Corporate restructurings, mergers and acquisitions.
Prospect Capital Management believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, the Proxy Voting Committee will analyze such proposals on a case-by-case basis.
Proposals affecting the rights of stockholders.
Prospect Capital Management will generally vote in favor of proposals that give stockholders a greater voice in the affairs of the company and oppose any measure that seeks to limit those rights. However, when analyzing such proposals, Prospect Capital Management will weigh the financial impact of the proposal against the impairment of the rights of stockholders.
Corporate governance.
Prospect Capital Management recognizes the importance of good corporate governance in ensuring that management and the Board of Directors fulfill their obligations to the stockholders. Prospect Capital Management favors proposals promoting transparency and accountability within a company.
Anti-takeover measures.
The Proxy Voting Committee will evaluate, on a case-by-case basis, proposals regarding anti-takeover measures to determine the measure’s likely effect on stockholder value dilution.
Stock splits.
Prospect Capital Management will generally vote with the management of the companyCompany on stock split matters.
Limited liability of directors.
Prospect Capital Management will generally vote with management on matters that would affect the limited liability of directors.
Social and corporate responsibility.
The Proxy Voting Committee may review and analyze on a case-by-case basis proposals relating to social, political and environmental issues to determine whether they will have a financial impact on stockholder value. Prospect Capital Management may abstain from voting on social proposals that do not have a readily determinable financial impact on stockholder value.
Proxy voting procedures.
Prospect Capital Management will generally vote proxies in accordance with these guidelines. In circumstances in which (1) Prospect Capital Management has determined to consider the matter on a case-by-case basis (as is stated in these guidelines), (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) Prospect Capital Management might find it necessary to vote contrary to its general guidelines to maximize stockholder value and vote in its clients’ best interests, the Proxy Voting Committee will vote the proxy.
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Proxy voting committee.
Prospect Capital Management has formed a proxy voting committee to establish general proxy policies and consider specific proxy voting matters as necessary. In addition, members of the committee may contact the management of the company and interested stockholder groups as necessary to discuss proxy issues. Members of the committee will include relevant senior personnel. The committee may also evaluate proxies where we face a potential conflict of interest (as discussed below). Finally, the committee monitors adherence to guidelines, and reviews the policies contained in this statement from time to time.
Conflicts of interest.
Prospect Capital Management recognizes that there may be a potential conflict of interest when it votes a proxy solicited by an issuer that is its advisory client or a client or customer of one of our affiliates or with whom it has another business or personal relationship that may affect how it votes on the issuer’s proxy. Prospect Capital Management believes that adherence to these policies and procedures ensures that proxies are voted with only its clients’ best interests in mind. To ensure that its votes are not the product of a conflict of interests, Prospect Capital Management requires that: (i) anyone involved in the decision making process (including members of the Proxy Voting Committee) disclose to the chairman of the Proxy Voting Committee any potential conflict that he or she is aware of and any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote administration are prohibited from revealing how Prospect Capital Management intends to vote on a proposal in order to reduce any attempted influence from interested parties.
Proxy voting.
Each account’s custodian will forward all relevant proxy materials to Prospect Capital Management, either electronically or in physical form to the address of record that Prospect Capital Management has provided to the custodian.
Proxy recordkeeping.
Prospect Capital Management must retain the following documents pertaining to proxy voting:
•copies of its proxy voting policies and procedures;
•copies of all proxy statements;
•records of all votes cast by Prospect Capital Management;
•copies of all documents created by Prospect Capital Management that were material to making a decision how to vote proxies or that memorializes the basis for that decision; and
•copies of all written client requests for information with regard to how Prospect Capital Management voted proxies on behalf of the client as well as any written responses provided.
All of the above-referenced records will be maintained and preserved for a period of not less than five years from the end of the fiscal year during which the last entry was made. The first two years of records must be maintained at our office.
Proxy voting records.
Clients may obtain information about how Prospect Capital Management voted proxies on their behalf by making a written request for proxy voting information to: Compliance Officer, Prospect Capital Management LLC, 10 East 40th Street, 42nd Floor, New York, NY 10016.700 S Rosemary Ave, Suite 204, West Palm Beach, FL 33401.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a variety of regulatory requirements on publicly-held companies. In addition to our Chief Executive and Chief Financial Officers’ required certifications as to the accuracy of our financial reporting, we are also required to disclose the effectiveness of our disclosure controls and procedures as well as report on our assessment of our internal controls over financial reporting, the latter of which must be audited by our independent registered public accounting firm.
The Sarbanes-Oxley Act of 2002 also requires us to continually review our policies and procedures to ensure that we remain in compliance with all rules promulgated thereunder.
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Available Information
We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information is available free of charge by contacting us at (212) 448-0702 or on our website at www.prospectstreet.com.www.prospectstreet.com. Information contained on our website is not incorporated into this Annual Report or other documents we file with or furnish to the SEC, and you should not consider such information to be part of this Annual Report.Report or other documents we file with or furnish to the SEC. You also may inspect and copy these reports, proxy statements and other information, as well as the Annual Report and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street NE, Washington, D.C. 20549. Such information is also available from the EDGAR database on the SEC’s website at http://www.sec.gov.www.sec.gov. You also can obtain copies of such information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov or by writing the SEC’s Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and Exchange Commission, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at (202) 551-8090 or (800) SEC-0330.
We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Those disclosures will be included on our website in the “Investors” or “News” section. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before you decide whether to make an investment in our securities. The risks set forth below are not the only risks we face. Additional risks and uncertainties not presently known to us, or not presently deemed material by us, may also impair our operations and performance. If any of the adverse events or conditions described below occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, our NAV, and the trading price of our common stock could decline, or the value of our preferred stock, debt securities, and warrants, if any are outstanding, may decline, and you may lose all or part of your investment. The risk factors described below are the principal risk factors associated with an investment in our securities as well as those factors generally associated with an investment company with investment objectives, investment policies, capital structure or trading markets similar to ours.
Our $50.7 million of 5.375% convertible notes due 2017 are referred to as the 2017 Notes. Our $85.4 million of 5.75% convertible notes due 2018 are referred to as the 2018 Notes. Our $200.0 million of 5.875% convertible notes due 2019 are referred to as the 2019 Notes. Our $392.0 million of 4.75% convertible notes due 2020 are referred to as the 2020 Notes. Our $225.0$111.1 million of 4.95% convertible notes due 2022 are referred to as the 2022 Notes,“2022 Notes”. Our $156.2 million of 6.375% convertible notes due 2025 are referred to as the “2025 Notes”, and collectively with the 2017 Notes, the 2018 Notes, the 2019 Notes and the 20202022 Notes, are the Convertible Notes.“Convertible Notes”. Our $250.0$284.2 million of 5.875% unsecured notes due 2023 are referred to as the 2023 Notes.“2023 Notes”. Our $199.3$81.4 million of 6.25%6.375% unsecured notes due 2024 are referred to as the “6.375% 2024 Notes.Notes”. Our $300.0$400.0 million of 5.00%3.706% unsecured notes due 20192026 are referred to as the 5.00% 2019 Notes,“2026 Notes”. Our $300.0 million of 3.364% unsecured notes due 2026 are referred to as the “3.364% 2026 Notes”. Our $69.2 million of 6.875% unsecured notes due 2029 are referred to as the “2029 Notes”, and collectively with the 2023 Notes, the 6.375% 2024 Notes, the 2026 Notes, and the 3.364% 2026 Notes are the Public Notes.“Public Notes”. Any corporate notes issued pursuant to our medium term notes program with IncapitalInspereX LLC (formerly known as “Incapital LLC”) are referred to as Prospect“Prospect Capital InterNotes®”. The Convertible Notes, Public Notes, and Prospect Capital InterNotes® are collectively referred to as the Unsecured Notes.“Unsecured Notes”.
Summary of Risk Factors
The summary below provides an overview of many of the risks we face that are described in this section. Additional risks, beyond those summarized below or discussed in this section, may also materially and adversely impact our business, financial conditions and results of operation. Consistent with the foregoing, the risks we face include, but are not limited to, the following:
Risks Relating to Our Business
•Capital markets may experience periods of disruption and instability.instability, and we cannot predict when these conditions occur. Such market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
•Events outside of our control, including the extreme volatility and disruption, have had, andpublic health crises, may in the future have a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.
•Legislative or other actions relating to taxes could have a negative effect on us.
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•Rising interest rates may adversely affect the value of our portfolio investments which could have an adverse effect on our business, financial condition and results of operations.
•Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio.portfolio or issued by us.
•Volatility in the global financial markets resulting from relapse of the Eurozone crisis, geopolitical developments in Eastern Europe, turbulence in the Chinese stock markets and global commodity markets, the United Kingdom’s vote to leave the European Union or otherwise could have a material adverse effect on our business, financial condition and results of operations.
•We may suffer credit losses.
•Our financial condition and results of operations will depend on our ability to manage our future growth effectively.
•We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
•Changes in interest rates may affect our cost of capital and net investment income.
•We need to raise additional capital to grow because we must distribute most of our income.
•Our business model depends upon the development and maintenance of strong referral relationships with other asset managers and investment banking firms.
Risks Relating to Our Operation as a Business Development Company
•If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
•If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income, and our income available for distribution would be reduced.
•We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
•Regulations governing our operation as a business development companyBDC affect our ability to raise, and the way in which we raise, additional capital.
•Securitization of our assets subjects us to various risks.
Risks Relating to Our Investments
•We may not realize gains or income from our investments.
•Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments.
•Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.
•Our investments in prospective portfolio companies may be risky and we could lose all or part of our investment.
•The lack of liquidity in our investments may adversely affect our business.
•Economic recessions or downturns could impair our portfolio companies and harm our operating results.
•Investments in equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk.
•Our portfolio contains a limited number of portfolio companies, some of which comprise a substantial percentage of our portfolio, which subjects us to a greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities.
•Our investments in CLOs may be riskier and less transparent to us and our stockholders than direct investments in the underlying companies.
Risks Relating to Our Securities
•Our credit ratings may not reflect all risks of an investment in our debt securities.
•Senior securities, including debt and preferred equity, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business, financial condition and results of operations.
•We have entered into dealer manager agreements and underwriting agreements pursuant to which we intend to sell shares of preferred stock, the terms of which could result in significant dilution to existing common stockholders.
•Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters.
•The trading market or market value of our publicly traded preferred stock may fluctuate.
•In addition to regulatory restrictions that restrict our ability to raise capital, our credit facility contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
•Failure to refinance our existing Unsecured Notes could have a material adverse effect on our results of operations and financial position.
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•The trading market or market value of our publicly issued debt securities may fluctuate.
•Our shares of common stock currently trade at a discount from net asset value and may continue to do so in the future, which could limit our ability to raise additional equity capital.
•Investing in our securities may involve a high degree of risk and is highly speculative.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
Risks Relating to Our Business
Capital markets may experience periods of disruption and instability, and we cannot predict when these conditions occur. Such market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations.
From time to time, capital markets may experience periods of disruption and instability, including as recently as 2020 as a result of the novel coronavirus (“COVID-19”) pandemic. For example, between 2007 and 2009, the global capital markets were unstable as evidenced by periodic disruptions in liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk and the failure of major financial institutions. Despite actions of the United States federal government and foreign governments, these events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the availability of debt and equity capital for the market as a whole and financial services firms in particular. While the adverse effects of these conditions have abated to a degree, global financial markets experienced significant volatility following the downgrade by Standard & Poor’s on August 5, 2011 of the long-term credit rating of U.S. Treasury debt from AAA to AA+. These market conditions have historically had, and could again have, a material adverse effect on debt and equity capital markets in the United States and Europe, which could have a materially negative impact on our business, financial condition and results of operations. We and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital. Equity capital may be difficult to raise during such periods of adverse or volatile market conditions because subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without general approval by our stockholders, which we currently have until June 11, 2022, and approval of the specific issuance by our Board of Directors. In addition, our ability to incur indebtedness or issue preferred stock is limited by applicable regulations such that our asset coverage, as defined in the 1940 Act, must equal at least 150% immediately after each time we incur indebtedness or issue preferred stock. The debt capital that may be available, if at all, may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial condition and results of operations.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness, including the final maturity of our revolving credit facility in September 2024, and any failure to do so could have a material adverse effect on our business. The re-appearance of market conditions similar to those experienced during portions of 2020 and from 2007 through 2009 for any substantial length of time or worsened market conditions, including as a result of U.S. government shutdowns or the perceived creditworthiness of the United States, could make it difficult to extend the maturity of, or refinance, our existing indebtedness, or obtain new indebtedness with similar terms and any failure to do so could have a material adverse effect on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we currently experience. Further, if we are unable to raise or refinance debt, then our equity investors may not benefit from the potential for increased returns on equity resulting from leverage and we may be limited in our ability to make new commitments or to fund existing commitments to our portfolio companies.
The illiquidity of our investments may make it difficult for us to sell such investments, if required. As a result, we may realize significantly less than the value at which we have recorded our investments if forced to liquidate quickly.
Given the extreme volatility and dislocation that the capital markets have historically experienced, many BDCs have faced, and may in the future face, a challenging environment in which to raise capital. We may in the future have difficulty accessing debt and equity capital, and a severe disruption in the global financial markets or deterioration in credit and financing conditions could have a material adverse effect on our business, financial condition and results of operations. In addition, significant changes in the capital markets, including the extreme volatility and disruption, have had, and may in the future have, a negative effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.
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The Investment Adviser does not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar events in the future on the United States economy and securities markets or on our investments. The Investment Adviser monitors developments and seeks to manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that it will be successful in doing so; and the Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments in the current or future market environment.
We are required to record certain of our assets at fair value, as determined in good faith by our Board of Directors in accordance with our valuation policy. As a result, volatility in the capital markets may have a material adverse effect on our investment valuations and our net asset value, even if we plan to hold investments to maturity.
Global economic, political and market conditions, including uncertainty about the financial stability of the United States, could have a significant adverse effect on our business, financial condition and results of operations.
Downgrades by rating agencies to the U.S. government’s credit rating or concerns about its credit and deficit levels in general could cause interest rates and borrowing costs to rise, which may negatively impact both the perception of credit risk associated with our debt portfolio and our ability to access the debt markets on favorable terms. In addition, a decreased U.S. government credit rating could create broader financial turmoil and uncertainty, which may weigh heavily on our financial performance and the value of our common stock.
Deterioration in the economic conditions in the Eurozone and globally, including instability in financial markets, may pose a risk to our business. In recent years, financial markets have been affected at times by a number of global macroeconomic and political events, including the following: large sovereign debts and fiscal deficits of several countries in Europe and in emerging markets jurisdictions, levels of non‑performing loans on the balance sheets of European banks, the potential effect of any European country leaving the Eurozone, the effect of the United Kingdom leaving the European Union (the “EU”), and market volatility and loss of investor confidence driven by political events. The decision made in the United Kingdom to leave the EU has led to volatility in global financial markets and may lead to weakening in consumer, corporate and financial confidence in the United Kingdom and Europe. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.
The Chinese capital markets have also experienced periods of instability over the past several years. The current political climate has also intensified concerns about a potential trade war between the U.S. and China in connection with each country’s recent or proposed tariffs on the other country’s products. These market and economic disruptions and the potential trade war with China have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
The current global financial market situation, as well as various social and political circumstances in the U.S. and around the world (including wars and other forms of conflict, terrorist acts, security operations and catastrophic events such as fires, floods, earthquakes, tornadoes, hurricanes and global health epidemics and pandemics), may contribute to increased market volatility and economic uncertainties or deterioration in the U.S. and worldwide, which could adversely affect our business, financial condition or results of operations. For example, the recent outbreak of the COVID-19 in many countries continues to adversely impact global commercial activity, and has contributed to significant volatility in financial markets. The outbreak of the COVID-19 may have a material adverse impact on the ability of our portfolio companies to fulfill their end customers’ orders due to supply chain delays, limited access to key commodities or technologies or other events that impact their manufacturers or their suppliers. See “—Events outside of our control, including public health crises, may have a negative impact on our portfolio companies and our business and operations.” Such events have affected, and may in the future affect, the global and U.S. capital markets, and our business, financial condition or results of operations.
Additionally, the U.S. government’s credit and deficit concerns, the European sovereign debt crisis, and the potential trade war with China could cause interest rates to be volatile, which may negatively impact our and our portfolio companies’ ability to access the debt markets on favorable terms.
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Events outside of our control, including public health crises, may have a negative impact on our portfolio companies and our business and operations.
As of the filing date of this Annual Report, there is a continued outbreak of COVID-19, which the World Health Organization has declared a global pandemic and the United States has declared a national emergency.
Many states, including those in which we and our portfolio companies operate, have issued orders requiring the closure of non-essential businesses and/or requiring or encouraging residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of and restrictions on events and travel, significant reductions in demand for certain goods and services, reductions in and restrictions on business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their economies, many cities, both globally and in the United States, experienced a surge in the reported number of cases and hospitalizations related to the COVID-19 pandemic. This increase in cases led to the re-introduction of restrictions and business shutdowns in certain states, counties and cities in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, vaccines produced by Moderna and Johnson & Johnson are currently authorized for emergency use, and in August 2021, the U.S. Food and Drug Administration (“FDA”) granted full approval to the vaccines produced by Pfizer-BioNTech, which will now be marketed as Comirnaty. However, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. The delay in distributing the vaccines could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a substantial economic downturn or recession, and our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged economic downtown or recession in the United States and other major markets. Potential consequences of the current unprecedented measures taken in response to the spread of COVID-19, and current market disruptions and volatility that may impact our business include, but are not limited to:
•sudden, unexpected and/or severe declines in the market price of our securities or net asset value;
•inability of the Company to accurately or reliably value its portfolio;
•inability of the Company to comply with certain asset coverage ratios that would prevent the Company from paying dividends to our stockholders and that could result in breaches of covenants or events of default under our credit agreement or debt indentures;
•inability of the Company to pay any dividends and distributions or service its debt;
•inability of the Company to maintain its status as a regulated investment company under the Code;
•potentially severe, sudden and unexpected declines in the value of our investments;
•increased risk of default or bankruptcy by the companies in which we invest;
•increased risk of companies in which we invest being unable to weather an extended cessation of normal economic activity and thereby impairing their ability to continue functioning as a going concern;
•reduced economic demand resulting from changes in consumer behavior, mass employee layoffs or furloughs in response to governmental action taken to slow the spread of COVID-19, which could impact the continued viability of the companies in which we invest;
•companies in which we invest being disproportionally impacted by governmental action aimed at slowing the spread of COVID-19 or mitigating its economic effects;
•limited availability of new investment opportunities;
•inability for us to replace our existing leverage when it becomes due or replace it on terms as favorable as our existing leverage;
•a reduction in interest rates, including interest rates based on LIBOR and similar benchmarks, which may adversely impact our ability to lend money at attractive rates; and
•general threats to the Company’s ability to continue investment operations and to operate successfully as a business development company.
The COVID-19 pandemic (including the preventative measures taken in response thereto) has to date (i) created significant business disruption issues for certain of our portfolio companies, and (ii) materially and adversely impacted the value and performance of certain of our portfolio companies. The COVID-19 pandemic continues to have a particularly adverse impact on industries in which certain of our portfolio companies operate, including aircraft leasing, energy, hospitality, travel, retail and restaurants. Certain of our portfolio companies in other industries have also been significantly impacted. The COVID-19 pandemic is continuing as of the filing date of this Annual Report, and its extended duration may have further adverse impacts on our portfolio companies after June 30, 2021, including for the reasons described below. Although on March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which contains provisions intended to mitigate the adverse economic effects of the COVID-19 pandemic, it is uncertain whether, or how much,
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our portfolio companies will be able to benefit from the CARES Act or any other subsequent legislation intended to provide financial relief or assistance. As a result of this disruption and the pressures on their liquidity, certain of our portfolio companies have been, or may continue to be, incentivized to draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by us, subject to availability under the terms of such loans.
The effects described above on our portfolio companies have, for certain of our portfolio companies to date, impacted their ability to make payments on their loans on a timely basis and in some cases have required us to amend certain terms, including payment terms. In addition, an extended duration of the COVID-19 pandemic may impact the ability of our portfolio companies to continue making their loan payments on a timely basis or meeting their loan covenants. The inability of portfolio companies to make timely payments or meet loan covenants may in the future require us to undertake similar amendment actions with respect to other of our investments or to restructure our investments. The amendment or restructuring of our investments may include the need for us to make additional investments in our portfolio companies (including debt or equity investments) beyond any existing commitments, exchange debt for equity, or change the payment terms of our investments to permit a portfolio company to pay a portion of its interest through payment-in-kind, which would defer the cash collection of such interest and add it to the principal balance, which would generally be due upon repayment of the outstanding principal.
The COVID-19 pandemic has adversely impacted the fair value of some of our investments as of June 30, 2021, and the values assigned as of this date may differ materially from the values that we may ultimately realize with respect to our investments. The impact of the ongoing COVID-19 pandemic may not yet be fully reflected in the valuation of our investments as our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the period for which we are reporting. Additionally, we may not have yet received information or certifications from our portfolio companies that indicate any or the full extent of declining performance or non-compliance with debt covenants, as applicable, as a result of the COVID-19 pandemic. As a result, our valuations at June 30, 2021 may not show the complete or continuing impact of the COVID-19 pandemic and the resulting measures taken in response thereto. In addition, write downs in the value of some of our investments have reduced, and any additional write downs may further reduce, our net asset value (and, as a result, our asset coverage calculation). Accordingly, we may incur net unrealized losses or may incur realized losses after June 30, 2021, which could have a material adverse effect on our business, financial condition and results of operations.
The volatility and disruption to the global economy from the COVID-19 pandemic has affected, and is expected to continue to affect, the pace of our investment activity, which may have a material adverse impact on our results of operations. Such volatility and disruption have also led to the increased credit spreads in the private debt capital markets.
In response to the COVID-19 pandemic, Prospect Capital Management L.P. instituted a work from home policy until it is deemed safe to return to the office. Although certain employees are currently allowed to return to the office in certain circumstances, subject to health and safety protocols, it is expected that most employees will continue to work remotely for the foreseeable future. Extended period of remote working by our Investment Adviser and/or its affiliate’s employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic.
Despite actions of the U.S. federal government and foreign governments, the uncertainty surrounding the COVID-19 pandemic and other factors has contributed to significant volatility and declines in the global public equity markets and global debt capital markets, including the market price of shares of our common stock and the trading prices of our issued debt securities. Shares of our common stock are trading below our net asset value as of the filing date of this Annual Report. Market conditions may make it difficult for us to raise equity capital because, subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at a price less than net asset value without general approval by our stockholders, which we currently have until June 11, 2022, and approval of the specific issuance by our Board of Directors. Moreover, these market conditions may make it difficult to access or obtain new indebtedness with similar terms to our existing indebtedness or otherwise have a negative effect on our cost of capital. See “Capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations” above.
It is virtually impossible to determine the ultimate impact of COVID-19 at this time. Further, the extent and strength of any economic recovery after the COVID-19 pandemic abates, including following any “second wave,” “third wave” or other intensifying of the pandemic, is uncertain and subject to various factors and conditions. Accordingly, an investment in the Company is subject to an elevated degree of risk as compared to other market environments.
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Legislative or other actions relating to taxes could have a negative effect on us.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department. The Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes were a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various previously allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, certain preferential rates of taxation on certain dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers, and significant changes to the international tax rules. In addition, the Biden administration has indicated that it intends to modify key aspects of the Code, including by increasing corporate and individual tax rates. The effect of these and other changes is uncertain, both in terms of the direct effect on the taxation of an investment in the Fund’s shares and their indirect effect on the value of the Fund’s assets, the Fund’s shares or market conditions generally.
Rising interest rates may adversely affect the value of our portfolio investments which could have an adverse effect on our business, financial condition and results of operations.
Our debt investments may be based on floating rates, such as London Interbank Offer Rate (“LIBOR”), EURIBOR, the Federal Funds Rate or the Prime Rate. General interest rate fluctuations may have a substantial negative impact on our investments, the value of our common stock and our rate of return on invested capital. A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on our net interest income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates, including subordinated loans, senior and junior secured and unsecured debt securities and loans and high-yield bonds, and also could increase our interest expense, thereby decreasing our net investment income. Also, an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock.
Because we have borrowed money, and intend to issue preferred stock to finance investments, our net investment income depends, in part, upon the difference between the rate at which we borrow funds or pay distributions on preferred stock and the rate that our investments yield. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds would increase except to the extent we have issued fixed rate debt or preferred stock, which could reduce our net investment income.
You should also be aware that a change in the general level of interest rates can be expected to lead to a change in the interest rate we receive on many of our debt investments. Accordingly, a change in the interest rate could make it easier for us to meet or exceed the performance threshold and may result in a substantial increase in the amount of incentive fees payable to our Investment Adviser with respect to the portion of the Incentive Fee based on income.
Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio or issued by us.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. The announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. It is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Actions by the British Bankers Association, the United Kingdom Financial Conduct Authority or other regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is determined. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio of LIBOR-indexed, floating-rate debt securities.
At this time, no consensus exists as to what rate or rates will become accepted alternatives to LIBOR, although on July 29, 2021, the Alternative Reference Rates Committee (“ARRC”), a U.S.-based group convened by the U.S. Federal Reserve Board and the Federal Reserve Bank of New York, formally recommended the Secured Overnight Financing Rate (“SOFR”) as its preferred replacement rate for LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments, or whether the COVID-19 pandemic will have further effect on LIBOR transition plans. In addition, SOFR or other replacement rates may fail to gain market acceptance. The elimination of LIBOR or
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any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Recently, the CLOs we are invested in have included, or have been amended to include, language permitting the CLO investment manager to implement a market replacement rate (like SOFR) upon the occurrence of certain material disruption events. However, we cannot ensure that all CLOs in which we are invested will have such provisions, nor can we ensure the CLO investment managers will undertake the suggested amendments when able. We believe that because CLO managers and other CLO market participants have been preparing for an eventual transition away from LIBOR, we do not anticipate such a transition to have a material impact on the liquidity or value of any of our LIBOR-referenced CLO investments. However, because the future of LIBOR at this time is uncertain and the specific effects of a transition away from LIBOR cannot be determined with certainty as of the date of this filing, a transition away from LIBOR could:
•adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked CLO investments;
•require extensive changes to documentation that governs or references LIBOR or LIBOR-based products, including, for example, pursuant to time-consuming renegotiations of existing documentation to modify the terms of outstanding investments;
•result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with one or more alternative reference rates;
•result in disputes, litigation or other actions with CLO investment managers, regarding the interpretation and enforceability of provisions in our LIBOR-based CLO investments, such as fallback language or other related provisions, including, in the case of fallbacks to the alternative reference rates, any economic, legal, operational or other impact resulting from the fundamental differences between LIBOR and the various alternative reference rates;
•require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on one or more alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and
•cause us to incur additional costs in relation to any of the above factors.
In addition, the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear. To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans, the CLO would experience an interest rate mismatch between its assets and liabilities which could have an adverse impact on our net investment income and portfolio returns.
Many underlying corporate borrowers can elect to pay interest based on 1-month LIBOR, 3-month LIBOR and/or other rates in respect of the loans held by CLOs in which we are invested, in each case plus an applicable spread, whereas CLOs generally pay interest to holders of the CLO’s debt tranches based on 3-month LIBOR plus a spread. The 3-month LIBOR currently exceeds the 1-month LIBOR, which may result in many underlying corporate borrowers electing to pay interest based on 1-month LIBOR. This mismatch in the rate at which CLOs earn interest and the rate at which they pay interest on their debt tranches negatively impacts the cash flows on a CLO’s equity tranche, which may in turn adversely affect our cash flows and results of operations. Unless spreads are adjusted to account for such increases, these negative impacts may worsen as the amount by which the 3-month LIBOR exceeds the 1-month LIBOR increases.
The senior secured loans underlying the CLOs in which we invest typically have floating interest rates. A rising interest rate environment may increase loan defaults, resulting in losses for the CLOs in which we invest. In addition, increasing interest rates may lead to higher prepayment rates, as corporate borrowers look to avoid escalating interest payments or refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of the CLOs. However, since many of the senior secured loans within CLOs have LIBOR floors, if LIBOR is below the average LIBOR floor, there may not be corresponding increases in investment income resulting in smaller distributions to equity investors in these CLOs.
The actual effects of the establishment of alternative reference rates or any other reforms to LIBOR or other reference rates (including whether LIBOR will continue to be an acceptable market benchmark) cannot be predicted at this time, and the transition away from LIBOR and other current reference rates to alternative reference rates is complex and could have a material adverse effect on our business, financial condition and results of operations. Factors such as the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates could also have a material adverse effect on our business, financial condition and results of operations.
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Volatility in the global financial markets resulting from relapse of the Eurozone crisis, geopolitical developments in Eastern Europe, turbulence in the Chinese stock markets and global commodity markets, the United Kingdom’s vote to leave the European Union or otherwise could have a material adverse effect on our business, financial condition and results of operations.
Volatility in the global financial markets could have an adverse effect on the economic recovery in the United States and could result from a number of causes, including a relapse in the Eurozone crisis, geopolitical developments in Eastern Europe, turbulence in the Chinese stock markets and global commodity markets or otherwise. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy, Portugal and Spain, which created concerns about the ability of these nations to continue to service their sovereign debt obligations. While the financial stability of many of such countries has improved significantly, risks resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial institutions. Market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence of and default on consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available or, if available, be sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and adversely affected.
In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from continued sell-off of shares trading in Chinese markets. In addition, in August 2015, Chinese authorities sharply devalued China’s currency. Since then, the Chinese capital markets have continued to experience periods of instability. The current political climate has also intensified concerns about a potential trade war between the United States and China. These market and economic disruptions and the potential trade war with China have affected, and may in the future affect, the U.S. capital markets, which could adversely affect our business, financial condition or results of operations.
Pursuant to an agreement setting out the terms on which the United Kingdom may leave the European Union (the “EU”)(“Brexit”), the United Kingdom formally withdrew from the EU, effective January 31, 2020, and the United Kingdom remained in the EU’s customs union and single market until December 31, 2020. The United Kingdom and the EU have entered into a Trade and Cooperation Agreement (the “TCA”). While the TCA regulates a number of important areas, significant parts of the United Kingdom economy are not addressed in detail by the TCA, including in particular the services sector, which represents the largest component of the United Kingdom’s economy. Due to political uncertainty, it is not possible to anticipate the form or nature of the future trading relationship between the United Kingdom and the EU. While certain measures have been proposed and/or implemented within the United Kingdom and at the EU level or at the member state level, which are designed to minimize disruption in the financial markets, it is not currently possible to determine whether such measures would achieve their intended effects. Notwithstanding the foregoing, the extent of the impact of the withdrawal and the resulting economic arrangements in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear and may lead to ongoing political and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. For example, during this period of uncertainty, the negative impact on not only the United Kingdom and European economies, but the broader global economy, could be significant, potentially resulting in increased market and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and other currencies and volatility in global currency markets generally), and illiquidity and lower economic growth for companies that rely significantly on Europe for their business activities and revenues. Additional risks associated with Brexit include macroeconomic risk to the United Kingdom and European economies, impetus for further disintegration of the EU and related political stresses (including those related to sentiment against cross border capital movements and activities of investors like us), prejudice to financial services businesses that are conducting business in the EU and which are based in the United Kingdom, legal uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations, and the unavailability of timely information as to expected legal, tax and other regimes. Any further exits from the EU, or the possibility of such exits, would likely cause additional market disruption globally and introduce new legal and regulatory uncertainties.
The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine, North Korea and the Middle East, pandemics (such as COVID-19), epidemics or outbreaks of infectious diseases in certain parts of the world, natural/environmental disasters in certain parts of the world, terrorist attacks in the U.S. and around the world, trade or tariff arrangements, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades, increasingly strained relations between the United States and a number of foreign countries including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran,
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China and Russia, and the international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries from the EU or the Economic and Monetary Union, continued changes in the balance of political power among and within the branches of the U.S. government, and government shutdowns, among others, may result in market volatility, may have long-term effects on the United States and worldwide financial markets, and may cause further economic uncertainties in the United States and worldwide.
While the extreme volatility and disruption that U.S. and global markets experienced for an extended period of time beginning in 2007 and 2008 had, until the recent COVID-19 pandemic outbreak, generally subsided, uncertainty and periods of volatility still remain, and risks to a robust resumption of growth persist. Federal Reserve policy, including with respect to certain interest rates, may adversely affect the value, volatility and liquidity of dividend and interest paying securities. Market volatility, dramatic changes to interest rates and/or a return to unfavorable economic conditions may lower the Company’s performance or impair the Company’s ability to achieve its investment objective
The occurrence of any of these above events could have a significant adverse impact on the value and risk profile of our portfolio. We do not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the U.S. economy and securities markets. Non-investment grade and equity securities tend to be more volatile than investment-grade fixed income securities; therefore, these events and other market disruptions may have a greater impact on the prices and volatility of non-investment grade and equity securities than on investment-grade fixed income securities. There can be no assurances that similar events and other market disruptions will not have other material and adverse implications.
Economic sanction laws in the United States and other jurisdictions may prohibit us and our affiliates from transacting with certain countries, individuals and companies.
Economic sanction laws in the United States and other jurisdictions may prohibit us or our affiliates from transacting with certain countries, individuals and companies. In the United States, the U.S. Department of the Treasury’s Office of Foreign Assets Control administers and enforces laws, executive orders and regulations establishing U.S. economic and trade sanctions, which prohibit, among other things, transactions with, and the provision of services to, certain non-U.S. countries, territories, entities and individuals. These types of sanctions may significantly restrict or completely prohibit investment activities in certain jurisdictions, and if we, our portfolio companies or other issuers in which we invest were to violate any such laws or regulations, we may face significant legal and monetary penalties.
The U.S. Foreign Corrupt Practices Act, or FCPA, and other anti-corruption laws and regulations, as well as anti-boycott regulations, may also apply to and restrict our activities, our portfolio companies and other issuers of our investments. If an issuer or we were to violate any such laws or regulations, such issuer or we may face significant legal and monetary penalties. The U.S. government has indicated that it is particularly focused on FCPA enforcement, which may increase the risk that an issuer or us becomes the subject of such actual or threatened enforcement. In addition, certain commentators have suggested that private investment firms and the funds that they manage may face increased scrutiny and/or liability with respect to the activities of their underlying portfolio companies. As such, a violation of the FCPA or other applicable regulations by us or an issuer of our portfolio investments could have a material adverse effect on us. We are committed to complying with the FCPA and other anti-corruption laws and regulations, as well as anti-boycott regulations, to which we are subject. As a result, we may be adversely affected because of our unwillingness to enter into transactions that violate any such laws or regulations.
We may suffer credit losses.
Investment in small and middle-market companies is highly speculative and involves a high degree of risk of credit loss. These risks are likely to increase during volatile economic periods. See “Risks Related to Our Investments.”
Our financial condition and results of operations will depend on our ability to manage our future growth effectively.
Prospect Capital Management has been registered as an investment adviser since March 31, 2004, and we have been organized as a closed-end investment company since April 13, 2004. Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on the Investment Adviser’s ability to continue to identify, analyze, invest in and monitor companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of the Investment Adviser’s structuring of investments, its ability to provide competent, attentive and efficient services to us and our access to financing on acceptable terms. As we continue to grow, Prospect Capital Management will need to continue to hire, train, supervise and manage new employees. Failure to manage our future growth effectively could have a materially adverse effect on our business, financial condition and results of operations.
We are dependent upon Prospect Capital Management’s key management personnel for our future success.
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We depend on the diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent, on the Investment Adviser’s access to the investment professionals and the information and deal flow generated by these investment professionals in the course of their investment and portfolio management activities. The senior management team of the Investment Adviser evaluates, negotiates, structures, closes, monitors and services our investments. Our success depends to a significant extent on the continued service of the senior management team, particularly John F. Barry III and M. Grier Eliasek. The departure of any of the senior management team could have a materially adverse effect on our ability to achieve our investment objective. In addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to its investment professionals or its information and deal flow.
We operate in a highly competitive market for investment opportunities.
A number of entities compete with us to make the types of investments that we make in middle-market companies. We compete with other BDCs, public and private funds, commercial and investment banks, commercial financing companies, insurance companies, hedge funds, and, to the extent they provide an alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC and that the Code imposes on us as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to pursue attractive investment opportunities from time to time.
We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our existing investment platform, seasoned investment professionals, experience and focus on middle-market companies, disciplined investment philosophy, extensive industry focus and flexible transaction structuring.
We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure, we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make investments that are on less favorable terms than what we may have originally anticipated, which may impact our return on these investments.
We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us.
Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks associated with investing in our securities. Our lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or any preferred stockholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.
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Changes in interest rates may affect our cost of capital and net investment income.
A portion of the debt investments we make bears interest at fixed rates and other debt investments bear interest at variable rates with floors and the value of these investments could be negatively affected by increases in market interest rates. In addition, as the interest rate on our revolving credit facility is at a variable rate based on an index, an increase in interest rates would make it more expensive to use debt to finance our investments. As a result, an increase in market interest rates could both reduce the value of our portfolio investments and increase our cost of capital, which could reduce our net investment income or net increase in net assets resulting from operations. A portion of our floating rate investments may include features such as LIBOR floors. To the extent we invest in credit instruments with LIBOR floors, we may lose some of the benefits of incurring leverage. Specifically, if we issue preferred stock or debt (or otherwise borrow money), our costs of leverage will increase as rates increase. However, we may not benefit from the higher coupon payments resulting from increased interest rates if our investments in LIBOR floors and rates do not rise to levels above the LIBOR floors. In this situation, we will experience increased financing costs without the benefit of receiving higher income. This, in turn, may result in the potential for a decrease in the level of income available for dividends or other distributions made by us.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. See “—Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio or issued by us.”
We need to raise additional capital to grow because we must distribute most of our income.
We need additional capital to fund growth in our investments. A reduction in the availability of new capital could limit our ability to grow. We must distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders to maintain our status as a RIC for U.S. federal income tax purposes. As a result, such earnings are not available to fund investment originations. We have sought additional capital by borrowing from financial institutions and may issue debt securities or additional equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, we could be limited in our ability to grow, which may have an adverse effect on the value of our common stock. In addition, as a BDC, we generally may not borrow money or issue debt securities or issue preferred stock unless immediately thereafter our ratio of total assets to total borrowings and other senior securities is at least 150%. This may restrict our ability to obtain additional leverage in certain circumstances.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the level of structuring fees received, the interest or dividend rates payable on the debt or equity securities we hold, the default rate on debt securities, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets, and general economic conditions. As a result of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our most recent NAV was calculated on June 30, 2021 and our NAV when calculated effective September 30, 2021 and thereafter may be higher or lower.
Our NAV per common share is $9.81 as of June 30, 2021. NAV per common share as of September 30, 2021 may be higher or lower than $9.81 based on potential changes in valuations, issuances of securities, repurchases of securities, dividends paid and earnings for the quarter then ended. Our Board of Directors has not yet determined the fair value of portfolio investments at any date subsequent to June 30, 2021. Our Board of Directors determines the fair value of our portfolio investments on a quarterly basis in connection with the preparation of quarterly financial statements and based on input from independent valuation firms, the Investment Adviser, the Administrator and the Audit Committee of our Board of Directors.
Our business model depends upon the development and maintenance of strong referral relationships with other asset managers and investment banking firms.
We are substantially dependent on our informal relationships, which we use to help identify and gain access to investment opportunities. If we fail to maintain our relationships with key firms, or if we fail to establish strong referral relationships with other firms or other sources of investment opportunities, we will not be able to grow our portfolio of equity investments and achieve our investment objective. In addition, persons with whom we have informal relationships are not obligated to inform us of investment opportunities, and therefore such relationships may not lead to the origination of equity or other investments. Any loss or diminishment of such relationships could effectively reduce our ability to identify attractive portfolio companies that meet our investment criteria, either for direct equity investments or for investments through private secondary market transactions or other secondary transactions.
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The Investment Adviser’s liability is limited under the Investment Advisory Agreement, and we are required to indemnify the Investment Adviser against certain liabilities, which may lead the Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account.
The Investment Adviser has not assumed any responsibility to us other than to render the services described in the Investment Advisory Agreement, and it will not be responsible for any action of our Board of Directors in declining to follow the Investment Adviser’s advice or recommendations. Pursuant to the Investment Advisory Agreement, the Investment Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and members and any other person or entity affiliated with it will not be liable to us for their acts under the Investment Advisory Agreement, absent willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect the Investment Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and members and any other person or entity affiliated with it with respect to all damages, liabilities, costs and expenses resulting from acts of the Investment Adviser not arising out of willful misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties under the Investment Advisory Agreement. These protections may lead the Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Potential conflicts of interest could impact our investment returns.
Our executive officers and directors, and the executive officers of the Investment Adviser, may serve as officers, directors or principals of entities that operate in the same or related lines of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those entities, the fulfillment of which might not be in our best interests or those of our stockholders. Nevertheless, it is possible that new investment opportunities that meet our investment objective may come to the attention of one of these entities in connection with another investment advisory client or program, and, if so, such opportunity might not be offered, or otherwise made available, to us. However, as an investment adviser, Prospect Capital Management has a fiduciary obligation to act in the best interests of its clients, including us. To that end, if Prospect Capital Management or its affiliates manage any additional investment vehicles or client accounts in the future, Prospect Capital Management will endeavor to allocate investment opportunities in a fair and equitable manner over time so as not to discriminate unfairly against any client. If Prospect Capital Management chooses to establish another investment fund in the future, when the investment professionals of Prospect Capital Management identify an investment, they will have to choose which investment fund should make the investment.
In the course of our investing activities, under the Investment Advisory Agreement we pay base management and incentive fees to Prospect Capital Management and reimburse Prospect Capital Management for certain expenses it incurs. As a result of the Investment Advisory Agreement, there may be times when the senior management team of Prospect Capital Management has interests that differ from those of our stockholders, giving rise to a conflict.
The Investment Adviser receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the immediately preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income incentive fee return to Prospect Capital Management. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it would become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Prospect Capital Management will receive an income incentive fee than if interest rates on our investments remained constant or decreased. Subject to the receipt of any requisite stockholder approval under the 1940 Act, our Board of Directors may adjust the hurdle rate by amending the Investment Advisory Agreement.
The income incentive fee payable by us is computed and paid on income that may include interest that has been accrued but not yet received in cash. If a portfolio company defaults on a loan that has a deferred interest feature, it is possible that interest accrued under such loan that has previously been included in the calculation of the income incentive fee will become uncollectible. If this happens, we will reverse the interest that was recorded but Prospect Capital Management is not required to reimburse us for any such income incentive fee payments that were received in the past but would reduce the current period incentive fee for the effects of the reversal, if any. If we do not have sufficient liquid assets to pay this incentive fee or distributions to stockholders on such accrued income, we may be required to liquidate assets in order to do so. This fee structure could give rise to a conflict of interest for Prospect Capital Management to the extent that it may encourage Prospect Capital Management to favor debt financings that provide for deferred interest, rather than current cash payments of interest.
We have entered into a royalty-free license agreement with Prospect Capital Management. Under this agreement, Prospect Capital Management agrees to grant us a non-exclusive license to use the name “Prospect Capital.” Under the license agreement, we have the right to use the “Prospect Capital” name for so long as Prospect Capital Management or one of its affiliates remains our investment adviser. In addition, we rent office space from Prospect Administration, an affiliate of
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Prospect Capital Management, and pay Prospect Administration our allocable portion of overhead and other expenses incurred by Prospect Administration in performing its obligations as Administrator under the Administration Agreement, including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and their respective staffs. This may create conflicts of interest that our Board of Directors monitors.
Our incentive fee could induce Prospect Capital Management to make speculative investments.
The incentive fee payable by us to Prospect Capital Management may create an incentive for the Investment Adviser to make investments on our behalf that are more speculative or involve more risk than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable is determined (calculated as a percentage of the return on invested capital) may encourage the Investment Adviser to use leverage to increase the return on our investments. Increased use of leverage and this increased risk of replacement of that leverage at maturity would increase the likelihood of default, which would disfavor holders of our common stock. Similarly, because the Investment Adviser will receive an incentive fee based, in part, upon net capital gains realized on our investments, the Investment Adviser may invest more than would otherwise be appropriate in companies whose securities are likely to yield capital gains, as compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which could result in higher investment losses, particularly during economic downturns.
The incentive fee payable by us to Prospect Capital Management could create an incentive for the Investment Adviser to invest on our behalf in instruments, such as zero coupon bonds, that have a deferred interest feature. Under these investments, we would accrue interest income over the life of the investment but would not receive payments in cash on the investment until the end of the term. Our net investment income used to calculate the income incentive fee, however, includes accrued interest. For example, accrued interest, if any, on our investments in zero coupon bonds will be included in the calculation of our incentive fee, even though we will not receive any cash interest payments in respect of payment on the bond until its maturity date. Thus, a portion of this incentive fee would be based on income that we may not have yet received in cash in the event of default may never receive.
We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss.
The Investment Adviser is entitled to incentive compensation for each fiscal quarter based, in part, on our pre-incentive fee net investment income if any, for the immediately preceding calendar quarter above a performance threshold for that quarter. Accordingly, since the performance threshold is based on a percentage of our net asset value, decreases in our net asset value make it easier to achieve the performance threshold. Our pre-incentive fee net investment income for incentive compensation purposes excludes realized and unrealized capital losses or depreciation that we may incur in the fiscal quarter, even if such capital losses or depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Investment Adviser incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter. In addition, increases in interest rates may increase the amount of incentive fees we pay to our Investment Adviser even though our performance relative to the market has not increased.
The Investment Adviser and the Administrator have the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations.
The Investment Adviser and the Administrator have the right, under the Investment Advisory Agreement and the Administration Agreement, respectively, to resign at any time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Investment Adviser or the Administrator resigns, we may not be able to find a replacement or hire internal management or administration with similar expertise and ability to provide the same or equivalent services on acceptable terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our business, financial condition and results of operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination of our internal management and investment activities or our internal administration activities, as applicable, is likely to suffer if we are unable to identify and reach an agreement with a single institution or group of executives having the expertise possessed by the Investment Adviser and its affiliates or the Administrator and its affiliates. Even if we are able to retain comparable management or administration, whether internal or external, the integration of such management or administration and their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition and results of operations.
Changes in the laws or regulations governing our business or the businesses of our portfolio companies and any failure by us or our portfolio companies to comply with these laws or regulations could negatively affect the profitability of our operations or the profitability of our portfolio companies.
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We are subject to changing rules and regulations of federal and state governments, as well as the stock exchange on which our common stock is listed. These entities, including the Public Company Accounting Oversight Board, the SEC, the NASDAQ Global Select Market and the New York Stock Exchange LLC (“NYSE”), have issued a significant number of new and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations. In particular, changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material adverse effect upon our business, financial condition and results of operations.
Foreign and domestic political risk may adversely affect our business.
We are exposed to political risk to the extent that Prospect Capital Management, on its behalf and subject to its investment guidelines, transacts in securities in the U.S. and foreign markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material adverse impact on our strategy.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act of 2002, or the subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or identify other areas for further attention or improvement. Inferior internal controls could also cause investors and lenders to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
We may experience cyber-security incidents and are subject to cyber-security risks. The failure in cyber-security systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively.
Our business operations rely upon secure information technology systems for data processing, storage and reporting. We are dependent on the effectiveness of the information and cybersecurity policies, procedures and capabilities maintained by our Investment Adviser and other service providers to protect their computer and telecommunications systems and the data that reside on or are transmitted through them. Our portfolio companies similarly are dependent on the effectiveness of the information and cybersecurity policies that they and their service providers maintain. Despite careful security and controls design, implementation and updating, our information technology systems could become subject to cyber-attacks and unauthorized access, such as physical and electronic break-ins or unauthorized tampering. Cyber-attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Network, system, application and data breaches could result in operational disruptions or information misappropriation, which could have a material adverse effect on our business, results of operations and financial condition. Like other companies, we may experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. Moreover, the increased use of mobile and cloud technologies could heighten these and other operational risks as certain aspects of the security of such technologies may be complex and unpredictable. Reliance on mobile or cloud technology or any failure by mobile technology and cloud service providers to adequately safeguard their systems and prevent cyber-attacks could disrupt our operations, the operations of a portfolio company or the operations of our or their service providers and result in misappropriation, corruption or loss of personal, confidential or proprietary information or the inability to conduct ordinary business operations. In addition, there is a risk that encryption and other protective measures may be circumvented, particularly to the extent that new computing technologies increase the speed and computing power available. There have been a number of
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recent highly publicized cases of companies reporting the unauthorized disclosure of client or customer information, as well as cyber-attacks involving the dissemination, theft and destruction of corporate information or other assets, as a result of failure to follow procedures by employees or contractors or as a result of actions by third parties, including actions by terrorist organizations and hostile foreign governments. If one or more of these cyber-attacks occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
The occurrence of a disaster, such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
Cyber-security failures or breaches by the Investment Adviser, any future sub-adviser(s), the Administrator and other service providers (including, but not limited to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with our ability to calculate our net asset value, impediments to trading, the inability of our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. We and our Investment Adviser’s employees have been and expect to continue to be the target of fraudulent calls, emails and other forms of activities. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. The costs related to cyber or other security threats or disruptions may not be fully insured or indemnified by other means. While we have established a business continuity plan in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, we cannot control the cyber-security plans and systems put in place by our service providers and issuers in which we invest. We and our stockholders could be negatively impacted as a result. In addition, cyber-security has become a top priority for regulators around the world, and some jurisdictions have enacted laws requiring companies to notify individuals of data security breaches involving certain types of personal data. If we fail to comply with the relevant laws and regulations, we could suffer financial losses, a disruption of our business, liability to investors, regulatory intervention or reputational damage.
We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.
Our business is dependent on our and third parties’ communications and information systems. Further, in the ordinary course of our business we or our Investment Adviser may engage certain third party service providers to provide us with services necessary for our business. Any failure or interruption of those systems or services, including as a result of the termination or suspension of an agreement with any third-party service providers, could cause delays or other problems in our business activities. Our financial, accounting, data processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control and adversely affect our business. There could be:
•sudden electrical or telecommunications outages;
•natural disasters such as earthquakes, tornadoes and hurricanes;
•disease epidemics or pandemics;
•events arising from local or larger scale political or social matters, including terrorist acts; and
•cyber-attacks.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends to our stockholders.
Risks Relating to Our Operation as a Business Development Company
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total assets are qualifying assets. We may be precluded from investing in what we believe are
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attractive investments if such investments are not qualifying assets for purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions applicable to BDCs, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of investments at inappropriate times in order to come into compliance with the 1940 Act. Because most of our investments will be in private companies, and therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.
If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income, and our income available for distribution would be reduced.
To maintain our qualification for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and obtain RIC tax treatment, we must meet certain source of income, annual distribution and asset diversification requirements.
The source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.
The annual distribution requirement for a RIC will generally be satisfied if we distribute at least 90% of our ordinary income and net short-term capital gains in excess of net long-term capital losses, if any, to our stockholders on an annual basis. Because we use debt financing, we are subject to certain asset coverage ratio requirements under the 1940 Act and financial covenants that could, under certain circumstances, restrict us from making distributions necessary to qualify for RIC tax treatment. If we are unable to obtain cash from other sources, we may fail to qualify for RIC tax treatment and, thus, may be subject to corporate-level income tax on all of our taxable income.
To maintain our qualification as a RIC, we must also meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses.
If we fail to qualify as a RIC for any reason or become subject to corporate income tax, the resulting corporate taxes would substantially reduce our net assets, the amount of income available for distribution, and the actual amount of our distributions. Such a failure could have a materially adverse effect on us and our stockholders. For additional information regarding asset coverage ratio and RIC requirements, see “Business—Material U.S. Federal Income Tax Considerations” and “Business— Regulation as a Business Development Company.”
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount or payment-in-kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such amounts could be significant relative to our overall investment activities. We also may be required to include in taxable income certain other amounts that we do not receive in cash. While we focus primarily on investments that will generate a current cash return, our investment portfolio currently includes, and we may continue to invest in, securities that do not pay some or all of their return in periodic current cash distributions.
Since in some cases we may recognize taxable income before or without receiving cash representing such income, we may have difficulty distributing at least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, as required to maintain RIC tax treatment. Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC treatment and thus become subject to corporate-level income tax. See “Business—Material U.S. Federal Income Tax Considerations” and “Business—Regulation as a Business Development Company.”
Regulations governing our operation as a BDC affect our ability to raise, and the way in which we raise, additional capital. These constraints may hinder our Investment Adviser’s ability to take advantage of attractive investment opportunities and to achieve our investment objective.
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We have incurred indebtedness under our revolving credit facility and through the issuance of the Unsecured Notes and, in the future, may issue preferred stock or debt securities and/or borrow additional money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at least 150% after each issuance of senior securities. If the value of our assets declines, we may be unable to satisfy this test, which would prohibit us from paying dividends in cash or other property and could prohibit us from qualifying as a RIC. If we cannot satisfy this test, we may be required to sell a portion of our investments or sell additional shares of common stock at a time when such sales may be disadvantageous in order to repay a portion of our indebtedness or otherwise increase our net assets. Sales of common stock at prices below net asset value per share dilute the interests of existing stockholders, have the effect of reducing our net asset value per share and may reduce our market price per share. In addition, continuous sales of common stock below net asset value may have a negative impact on total returns and could have a negative impact on the market price of our shares of common stock. If we raise additional funds by issuing common stock or senior securities convertible into, or exchangeable for, our common stock, then the percentage ownership of our stockholders at that time will decrease, and you may experience dilution.
As a BDC regulated under provisions of the 1940 Act, we are not generally able to issue and sell our common stock at a price below the current net asset value per share without stockholder approval. If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital. We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of our common stock in certain circumstances, one of which is if (i)(1) the holders of a majority of our shares (or, if less, at least 67% of a quorum consisting of a majority of our shares) and a similar majority of the holders of our shares who are not affiliated persons of us approve the sale of our common stock at a price that is less than the current net asset value (which has currently occurred and is effective through June 11, 2022), and (2) a majority of our Directors who have no financial interest in the transaction and a majority of our independent Directors (a) determine that such sale is in our and our stockholders’ best interests and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the issuance of such shares, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of such shares, less any distributing commission or discount or (ii) a majority of the number of the beneficial holders of our common stock entitled to vote at our annual meeting, without regard to whether a majority of such shares are voted in favor of the proposal, approve the sale of our common stock at a price that is less than the current net asset value per share.
To generate cash for funding new investments, we pledged a substantial portion of our portfolio investments under our revolving credit facility. These assets are not available to secure other sources of funding or for securitization. Our ability to obtain additional secured or unsecured financing on attractive terms in the future is uncertain.
Alternatively, we may securitize our future loans to generate cash for funding new investments. See “Securitization of our assets subjects us to various risks.”
Securitization of our assets subjects us to various risks.
We may securitize assets to generate cash for funding new investments. We refer to the term securitize to describe a form of leverage under which a company such as us (sometimes referred to as an “originator” or “sponsor”) transfers income producing assets to a single-purpose, bankruptcy-remote subsidiary (also referred to as a “special purpose entity” or “SPE”), which is established solely for the purpose of holding such assets and entering into a structured finance transaction. The SPE then issues notes secured by such assets. The special purpose entity may issue the notes in the capital markets either publicly or privately to a variety of investors, including banks, non-bank financial institutions and other investors. There may be a single class of notes or multiple classes of notes, the most senior of which carries less credit risk and the most junior of which may carry substantially the same credit risk as the equity of the SPE.
An important aspect of most debt securitization transactions is that the sale and/or contribution of assets into the SPE be considered a true sale and/or contribution for accounting purposes and that a reviewing court would not consolidate the SPE with the operations of the originator in the event of the originator’s bankruptcy based on equitable principles. Viewed as a whole, a debt securitization seeks to lower risk to the note purchasers by isolating the assets collateralizing the securitization in an SPE that is not subject to the credit and bankruptcy risks of the originator. As a result of this perceived reduction of risk, debt securitization transactions frequently achieve lower overall leverage costs for originators as compared to traditional secured lending transactions.
In accordance with the above description, to securitize loans, we may create a wholly-owned subsidiary and contribute a pool of our assets to such subsidiary. The SPE may be funded with, among other things, whole loans or interests from other pools and such loans may or may not be rated. The SPE would then sell its notes to purchasers who we would expect to be willing to
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accept a lower interest rate and the absence of any recourse against us to invest in a pool of income producing assets to which none of our creditors would have access. We would retain all or a portion of the equity in the SPE. An inability to successfully securitize portions of our portfolio or otherwise leverage our portfolio through secured and unsecured borrowings could limit our ability to grow our business and fully execute our business strategy, and could decrease our earnings. However, the successful securitization of portions of our portfolio exposes us to a risk of loss for the equity we retain in the SPE and might expose us to greater risk on our remaining portfolio because the assets we retain may tend to be those that are riskier and more likely to generate losses. A successful securitization may also impose financial and operating covenants that restrict our business activities and may include limitations that could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the Code. The 1940 Act may also impose restrictions on the structure of any securitizations.
Interests we hold in the SPE, if any, will be subordinated to the other interests issued by the SPE. As such, we will only receive cash distributions on such interests if the SPE has made all cash interest and other required payments on all other interests it has issued. In addition, our subordinated interests will likely be unsecured and rank behind all of the secured creditors, known or unknown, of the SPE, including the holders of the senior interests it has issued. Consequently, to the extent that the value of the SPE’s portfolio of assets has been reduced as a result of conditions in the credit markets, or as a result of defaults, the value of the subordinated interests we retain would be reduced. Securitization imposes on us the same risks as borrowing except that our risk in a securitization is limited to the amount of subordinated interests we retain, whereas in a borrowing or debt issuance by us directly we would be at risk for the entire amount of the borrowing or debt issuance.
If the SPE is not consolidated with us, our only interest will be the value of our retained subordinated interest and the income allocated to us, which may be more or less than the cash we receive from the SPE, and none of the SPE’s liabilities will be reflected as our liabilities. If the assets of the SPE are not consolidated with our assets and liabilities, then our interest in the SPE may be deemed not to be a qualifying asset for purposes of determining whether 70% of our assets are qualifying assets and the leverage incurred by such SPE may or may not be treated as borrowings by us for purposes of the requirement that we not issue senior securities in an amount in excess of our net assets.
We may also engage in transactions utilizing SPEs and securitization techniques where the assets sold or contributed to the SPE remain on our balance sheet for accounting purposes. If, for example, we sell the assets to the SPE with recourse or provide a guarantee or other credit support to the SPE, its assets will remain on our balance sheet. Consolidation would also generally result if we, in consultation with the SEC, determine that consolidation would result in a more accurate reflection of our assets, liabilities and results of operations. In these structures, the risks will be essentially the same as in other securitization transactions but the assets will remain our assets for purposes of the limitations described above on investing in assets that are not qualifying assets and the leverage incurred by the SPE will be treated as borrowings incurred by us for purposes of our limitation on the issuance of senior securities.
The Investment Adviser may have conflicts of interest with respect to potential securitizations in as much as securitizations that are not consolidated may reduce our assets for purposes of determining its investment advisory fee although in some circumstances the Investment Adviser may be paid certain fees for managing the assets of the SPE so as to reduce or eliminate any potential bias against securitizations.
Our ability to invest in public companies may be limited in certain circumstances.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a market capitalization that is less than $250 million at the time of such investment.
We elected to rely on certain relief granted by the SEC related to the COVID-19 pandemic that may have the effect of allowing us to incur more leverage than we otherwise would be permitted to incur.
On April 8, 2020, in connection with the outbreak of the COVID-19 pandemic, the SEC issued an Order Under Sections 6(c), 17(d), 38(a) and 57(i) of the Investment Company Act of 1940 and Rule 17d-1 Thereunder Granting Exemptions from Specified Provisions of the Investment Company Act and Certain Rules Thereunder, 1940 Act Release No. 33837 (Apr. 8, 2020) (the “April 2020 Order”), which provides exemptions from certain requirements of the 1940 Act. Section II of the April 2020 Order (i) affords BDCs greater flexibility in calculating asset coverage ratios for purposes of the 1940 Act asset coverage requirements, (ii) requires a BDC's board of directors, including a required majority of such board, as defined in Section 57(o) of the 1940 Act, to determine that the issuance or sale of covered senior securities is permitted by this April 2020 Order and is in the best interests of the BDC and its stockholders, (iii) requires prior disclosure on Form 8-K of an election to rely on Section
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II of the April 2020 Order (an “Election”), and (iv) includes certain limitations on new investments, among other requirements detailed in the April 2020 Order.
The Company's Board of Directors, including a required majority of the Board (as defined in section 57(o) of the 1940 Act), approved the Election on April 13, 2020. In approving the Election the Board of Directors considered, among other things, the conditions to rely on and be subject to the April 2020 Order and determined that the issuance and sale of the Company's senior securities is permitted by the April 2020 Order and is in the best interests of the Company and its stockholders. The Election permitted us to use a modified formula to calculate our asset coverage ratios for purposes of the 1940 Act asset coverage requirements and, in doing so, permitted us to rely in part on the fair value of our assets as of December 31, 2019. The overall effect of the Election was to make it easier for us to meet our applicable asset coverage ratios for purposes of the 1940 Act asset coverage requirements, as well as for purposes of covenants referencing the 1940 Act asset coverage requirements, which could result in the Company incurring additional leverage and being subject to the risks associated with additional leverage, but while also providing the Company with additional flexibility to manage its portfolio and support its portfolio companies during the economic disruption caused by the COVID-19 pandemic. The Election was effective through December 31, 2020. The Election did not impact calculation of the Company’s asset coverage ratios for purposes of the declaration or payment of any dividend or any other distribution.
Risks Relating to Our Investments
We may not realize gains or income from our investments.
We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate and, in fact, may decline in value, and the issuers of debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains from our investments, and any gains that we do realize may not be sufficient to offset any losses we experience. See “Business—Our Investment Objective and Policies.”
Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments.
A large percentage of our portfolio investments consist of securities of privately held companies. Hence, market quotations are generally not readily available for determining the fair values of such investments. The determination of fair value, and thus the amount of unrealized losses we may incur in any year, is to a degree subjective, and the Investment Adviser has a conflict of interest in making the determination. We value these securities quarterly at fair value as determined in good faith by our Board of Directors based on input from the Investment Adviser, our Administrator, a third party independent valuation firm and our Audit Committee. Our Board of Directors utilizes the services of an independent valuation firm to aid it in determining the fair value of any securities. The types of factors that may be considered in determining the fair values of our investments include the nature and realizable value of any collateral, the portfolio company’s ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash flow, current market interest rates and other relevant factors.
Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate significantly over short periods of time due to changes in current market conditions. The determinations of fair value by our Board of Directors may differ materially from the values that would have been used if an active market and market quotations existed for these investments. Our net asset value could be adversely affected if the determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
In addition, decreases in the market values or fair values of our investments are recorded as unrealized depreciation. Declines in prices and liquidity in the corporate debt markets experienced during a financial crisis will result in significant net unrealized depreciation in our portfolio. The effect of all of these factors increases the net unrealized depreciation in our portfolio and reduces our NAV. Depending on market conditions, we could incur substantial realized losses which could have a material adverse impact on our business, financial condition and results of operations. We have no policy regarding holding a minimum level of liquid assets. As such, a high percentage of our portfolio generally is not liquid at any given point in time. See “—The lack of liquidity in our investments may adversely affect our business.”
Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the direction of our Board of Directors. As part of the valuation process, the types of
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factors that we may take into account in determining the fair value of our investments include, as relevant and among other factors: 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, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise values of our portfolio companies. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse impact on our business, financial condition and results of operations.
Our investments in prospective portfolio companies may be risky and we could lose all or part of our investment.
Some of our portfolio companies have relatively short or no operating histories. These companies are and will be subject to all of the business risks and uncertainties associated with any new business enterprise, including the risk that these companies may not reach their investment objective, and the value of our investment in them may decline substantially or fall to zero. In addition, investment in the middle-market companies that we are targeting involves a number of other significant risks, including:
•These companies may have limited financial resources and may be unable to meet their obligations under their securities that we hold, which may be accompanied by a deterioration in the value of their securities or of any collateral with respect to any securities, and a reduction in the likelihood of our realizing on any guarantees we may have obtained in connection with our investment.
•They may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more vulnerable to competitors’ actions and market conditions as well as general economic downturns.
•Because many of these companies are privately held companies, public information is generally not available about these companies. As a result, we will depend on the ability of the Investment Adviser to obtain adequate information to evaluate these companies in making investment decisions. If the Investment Adviser is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and we may lose money on our investments.
•They are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or termination of one or more of these persons could have a materially adverse impact on our portfolio company and, in turn, on us.
•They may have less predictable operating results, may from time to time be parties to litigation, may be engaged in changing businesses with products subject to a risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive position.
•They may have difficulty accessing the capital markets to meet future capital needs.
•Changes in laws and regulations, as well as their interpretations, may adversely affect their business, financial structure or prospects.
•Increased taxes, regulatory expense or the costs of changes to the way they conduct business due to the effects of climate change may adversely affect their business, financial structure or prospects.
We acquire majority interests in operating companies engaged in a variety of industries. When we acquire these companies we generally seek to apply financial leverage to them in the form of debt. In most cases all or a portion of this debt is held by us, with the obligor being either the operating company itself, a holding company through which we own our majority interest or both. The level of debt leverage utilized by these companies makes them susceptible to the risks identified above.
In addition, our executive officers, directors and the Investment Adviser could, in the ordinary course of business, be named as defendants in litigation arising from proposed investments or from our investments in the portfolio companies and may, as a result, incur significant costs and expenses in connection with such litigation.
The lack of liquidity in our investments may adversely affect our business.
We make investments in private companies. A portion of these investments may be subject to legal and other restrictions on resale, transfer, pledge or other disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our
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investments. In addition, we face other restrictions on our ability to liquidate an investment in a business entity to the extent that we or the Investment Adviser has or could be deemed to have material non-public information regarding such business entity.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans or meet other obligations during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these periods. Adverse economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. In addition, if one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt or preferred equity, depending on the facts and circumstances, including the extent to which we actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt or equity holding and subordinate all or a portion of our claim to those of other creditors.
Investments in equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk.
We may purchase common and other equity securities. Although common stock has historically generated higher average total returns than fixed income securities over the long-term, common stock has significantly more volatility in those returns and may significantly underperform relative to fixed income securities. The equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our portfolio company’s success. Investments in equity securities involve a number of significant risks, including:
•Any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to serious risks as a junior security that will be subordinate to all indebtedness (including trade creditors) or senior securities in the event that the issuer is unable to meet its obligations or becomes subject to a bankruptcy process.
•To the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment.
•In some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to recover our investment, will be dependent on the success of the portfolio company. Even if the portfolio company is successful, our ability to realize the value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely to take a significant amount of time before a liquidity event occurs or we can otherwise sell our investment. In addition, the equity securities we receive or invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell them.
There are special risks associated with investing in preferred securities, including:
•Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes before we receive such distributions.
•Preferred securities are subordinated to debt in terms of priority to income and liquidation payments, and therefore will be subject to greater credit risk than debt.
•Preferred securities may be substantially less liquid than many other securities, such as common stock or U.S. government securities.
•Generally, preferred security holders have no voting rights with respect to the issuing company, subject to limited exceptions.
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Additionally, when we invest in first lien senior secured loans (including unitranche loans), second lien senior secured loans or unsecured debt, we may acquire warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests. However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
We may invest, to the extent permitted by law, in the equity securities of investment funds that are operating pursuant to certain exceptions to the 1940 Act and in advisers to similar investment funds and, to the extent we so invest, will bear our ratable share of any such company’s expenses, including management and performance fees. We will also remain obligated to pay management and incentive fees to Prospect Capital Management with respect to the assets invested in the securities and instruments of such companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the management and incentive fee of Prospect Capital Management as well as indirectly bearing the management and performance fees and other expenses of any such investment funds or advisers.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, a bankruptcy court might recharacterize our debt holding as an equity investment and subordinate all or a portion of our claim to that of other creditors. In addition, lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the borrower. For example, we could become subject to a lender’s liability claim, if, among other things, we actually render significant managerial assistance.
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
Our portfolio companies may have, or may be permitted to incur, other debt or issue other equity securities that rank equally with or senior to our investments. By their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company typically are entitled to receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the terms of one or more intercreditor agreements (including agreements governing “first out” and “last out” structures) that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely affected.
This risk is characteristic of many of the majority-owned operating companies in our portfolio in that any debt to us from a holding company and the holding company’s substantial equity investments in the related operating company are subordinated to any creditors of the operating company.
When we are a debt or minority equity investor in a portfolio company, we are often not in a position to exert influence on the entity, and other debt holders, other equity holders and/or portfolio company management may make decisions that could decrease the value of our portfolio holdings.
When we make debt or minority equity investments, we are subject to the risk that a portfolio company may make business decisions with which we disagree and the other equity holders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company may make decisions that could decrease the value of
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our investment. In addition, when we hold a subordinate debt position, other more senior debt holders may make decisions that could decrease the value of our investment.
Our portfolio companies may be highly leveraged.
Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
Our portfolio contains a limited number of portfolio companies, some of which comprise a substantial percentage of our portfolio, which subjects us to a greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities.
A consequence of the limited number of investments in our portfolio is that the aggregate returns we realize may be significantly adversely affected if one or more of our significant portfolio company investments perform poorly or if we need to write down the value of any one significant investment. Beyond our income tax diversification requirements, we do not have fixed guidelines for diversification, and our portfolio could contain relatively few portfolio companies.
Our failure to make follow-on investments in our existing portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to: (1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the original or subsequent financing or (3) attempt to preserve or enhance the value of our investment.
We may elect not to make follow-on investments, may be constrained in our ability to employ available funds, or otherwise may lack sufficient funds to make those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are inhibited by compliance with BDC requirements or the desire to maintain our tax status.
We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial condition and operating results.
Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings and repayments from investments in interest-bearing deposits or other short-term instruments or use the net proceeds from such offerings to reduce then-outstanding obligations under our revolving credit facility. We cannot assure you that we will be able to find enough appropriate investments that meet our investment criteria or that any investment we complete using the proceeds from an offering or repayments will produce a sufficient return.
We may have limited access to information about privately-held companies in which we invest.
We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of the Investment Adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investment.
We may not be able to fully realize the value of the collateral securing our debt investments.
Although a substantial amount of our debt investments are protected by holding security interests in the assets or equity interests of the portfolio companies, we may not be able to fully realize the value of the collateral securing our investments due to one or more of the following factors:
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•Our debt investments may be in the form of unsecured loans, therefore our liens on the collateral, if any, are subordinated to those of the senior secured debt of the portfolio companies, if any. As a result, we may not be able to control remedies with respect to the collateral.
•The collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of secured debt of the portfolio company that ranks senior to our loan.
•Bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process.
•Our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral.
•The need to obtain regulatory and contractual consents could impair or impede how effectively the collateral would be liquidated and could affect the value received.
•Some or all of the collateral may be illiquid and may have no readily ascertainable market value. The liquidity and value of the collateral could be impaired as a result of changing economic conditions, competition, and other factors, including the availability of suitable buyers.
Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our investment strategy contemplates potential investments in securities of foreign companies, including those located in emerging market countries. Investing in foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Such risks are more pronounced in emerging market countries.
Although currently substantially all of our investments are, and we expect that most of our investments will be, U.S. dollar-denominated, investments that are denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different currencies, long-term opportunities for investment and capital appreciation, and political developments.
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We may expose ourselves to risks if we engage in hedging transactions.
We may employ hedging techniques to minimize certain investment risks, such as fluctuations in interest and currency exchange rates, but we can offer no assurance that such strategies will be effective. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price. Furthermore, our ability to engage in hedging transactions may also be adversely affected by rules adopted by the U.S. Commodity Futures Trading Commission, or the “CFTC”. The Dodd-Frank Act has made broad changes to the OTC derivatives market, granted significant new authority to the CFTC and the SEC to regulate OTC derivatives (swaps and security-based swaps) and participants in these markets. The Dodd-Frank Act is intended to regulate the OTC derivatives market by requiring many derivative transactions to be cleared and traded on an exchange, expanding entity registration requirements, imposing business conduct requirements on dealers and requiring banks to move some derivatives trading units to a non-guaranteed affiliate separate from the deposit-taking bank or divest them altogether. The CFTC has implemented mandatory clearing and exchange-trading of certain OTC derivatives contracts including many standardized interest rate swaps and credit default index swaps. The CFTC continues to approve contracts for central clearing. Exchange-trading and central clearing are expected to reduce counterparty credit risk by substituting the clearinghouse as the counterparty to a swap and increase liquidity, but exchange-trading and central clearing do not make swap transactions risk-free. Uncleared swaps, such as non-deliverable foreign currency forwards, are subject to certain margin requirements that mandate the posting and collection of minimum margin amounts. This requirement may result in the portfolio and its counterparties posting higher margin amounts for uncleared swaps than would otherwise be the case. Certain rules require centralized reporting of detailed information about many types of cleared and uncleared swaps. Reporting of swap data may result in greater market transparency, but may subject a portfolio to additional administrative burdens, and the safeguards established to protect trader anonymity may not function as expected. Future CFTC or SEC rulemakings to implement the Dodd-Frank Act requirements could potentially limit or completely restrict our ability to use these instruments as a part of our investment strategy, increase the costs of using these instruments or make them less effective. Limits or restrictions applicable to the counterparties with which we engage in derivative transactions could also prevent us from using these instruments or affect the pricing or other factors relating to these instruments, or may change availability of certain investments. The SEC has also proposed new rules on the use of derivatives by registered investment companies and BDCs. Such rules could affect the nature and extent of our use of derivatives.
The success of our hedging transactions depends on our ability to correctly predict movements, currencies and interest rates. Therefore, while we may enter into such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. The degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the value of securities denominated in non-U.S. currencies. We have no current intention of engaging in any of the hedging transaction described above, although it reserves the right to do so in the future.
Our Board of Directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to us and could impair the value of our stockholders’ investment.
Our Board of Directors has the authority to modify or waive our current operating policies and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause stockholders to lose all or part of their investment.
Investments in the energy sector are subject to many risks.
We have made certain investments in and relating to the energy sector. The operations of energy companies are subject to many risks inherent in the transporting, processing, storing, distributing, mining or marketing of natural gas, natural gas liquids, crude
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oil, coal, refined petroleum products or other hydrocarbons, or in the exploring, managing or producing of such commodities, including, without limitation: damage to pipelines, storage tanks or related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters or by acts of terrorism, inadvertent damage from construction and farm equipment, leaks of natural gas, natural gas liquids, crude oil, refined petroleum products or other hydrocarbons, and fires and explosions. These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental damage, and may result in the curtailment or suspension of their related operations, any and all of which could adversely affect our portfolio companies in the energy sector. In addition, the energy sector commodity prices have experienced significant volatility at times, which may occur in the future, and which could negatively affect the returns on any investment made by us in this sector. In addition, valuation of certain investments includes the probability weighting of future events which are outside of management’s control. The final outcome of such events could increase or decrease the fair value of the investment in a future period.
Our investments in CLOs may be riskier and less transparent to us and our stockholders than direct investments in the underlying companies.
We invest in CLOs. Generally, there may be less information available to us regarding the underlying debt investments held by CLOs than if we had invested directly in the debt of the underlying companies. As a result, our stockholders will not know the details of the underlying securities of the CLOs in which we will invest. Our CLO investments are subject to the risk of leverage associated with the debt issued by such CLOs and the repayment priority of senior debt holders in such CLOs. Additionally, CLOs in which we invest are often governed by a complex series of legal documents and contracts. As a result, the risk of dispute over interpretation or enforceability of the documentation may be higher relative to other types of investments. For example, some documents governing the loans underlying our CLO investments may allow for “priming transactions,” in connection with which majority lenders or debtors can amend loan documents to the detriment of other lenders, amend loan documents in order to move collateral, or amend documents in order to facilitate capital outflow to other parties/subsidiaries in a capital structure, any of which may adversely affect the rights and security priority of the CLOs in which we are invested.
The accounting and tax implications of such investments are complicated. In particular, reported earnings from the equity tranche investments of these CLO vehicles are recorded under GAAP based upon an effective yield calculation. Current taxable earnings on these investments, however, will generally not be determinable until after the end of the fiscal year of each individual CLO vehicle that ends within the Company’s fiscal year, even though the investments are generating cash flow. In general, the tax treatment of these investments may result in higher distributable earnings in the early years and a capital loss at maturity, while for reporting purposes the totality of cash flows are reflected in a constant yield to maturity.
Some instruments issued by CLO vehicles may not be readily marketable and may be subject to restrictions on resale. Securities issued by CLO vehicles are generally not listed on any U.S. national securities exchange and no active trading market may exist for the securities of CLO vehicles in which we may invest. Although a secondary market may exist for our investments in CLO vehicles, the market for our investments in CLO vehicles may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. As a result, these types of investments may be more difficult to value.
Our investments in portfolio companies may be risky, and we could lose all or part of our investment.
Failure by a CLO vehicle in which we are invested to satisfy certain tests will harm our operating results.
The failure by a CLO investment in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO fails certain tests, holders of debt senior to us would be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.
CLOs typically will have no significant assets other than their underlying senior secured loans; payments on CLO investments are and will be payable solely from the cash flows from such senior secured loans.
CLOs typically will have no significant assets other than their underlying senior secured loans. Accordingly, payments on CLO investments are and will be payable solely from the cash flows from such senior secured loans, net of all management fees and other expenses. Payments to us as a holder of CLO junior securities are and will be made only after payments due on the senior secured notes, and, where appropriate, the junior secured notes, have been made in full. This means that relatively small numbers of defaults of senior secured loans may adversely impact our returns.
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Our CLO investments are exposed to leveraged credit risk.
Generally, we are in a subordinated position with respect to realized losses on the senior secured loans underlying our investments in CLOs. The leveraged nature of CLOs, in particular, magnifies the adverse impact of senior secured loan defaults. CLO investments represent a leveraged investment with respect to the underlying senior secured loans. Therefore, changes in the market value of the CLO investments could be greater than the change in the market value of the underlying senior secured loans, which are subject to credit, liquidity and interest rate risk.
There is the potential for interruption and deferral of cash flow from CLO investments.
If certain minimum collateral value ratios and/or interest coverage ratios are not met by a CLO, primarily due to senior secured loan defaults, then cash flow that otherwise would have been available to pay distributions to us on our CLO investments may instead be used to redeem any senior notes or to purchase additional senior secured loans, until the ratios again exceed the minimum required levels or any senior notes are repaid in full. This could result in an elimination, reduction or deferral in the distribution and/or principal paid to the holders of the CLO investments, which would adversely impact our returns.
Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our CLO investment strategy allows investments in foreign CLOs. Investing in foreign entities may expose us to additional risks not typically associated with investing in U.S. issuers. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Further, we, and the CLOs in which we invest, may have difficulty enforcing creditor’s rights in foreign jurisdictions. In addition, the underlying companies of the CLOs in which we invest may be foreign, which may create greater exposure for us to foreign economic developments.
The payment of underlying portfolio manager fees and other charges on CLO investments could adversely impact our returns.
We may invest in CLO investments where the underlying portfolio securities may be subject to management, administration and incentive or performance fees, in addition to those payable by us. Payment of such additional fees could adversely impact the returns we achieve.
The inability of a CLO collateral manager to reinvest the proceeds of the prepayment of senior secured loans at equivalent rates may adversely affect us.
There can be no assurance that for any CLO investment, in the event that any of the senior secured loans of a CLO underlying such investment are prepaid, the CLO collateral manager will be able to reinvest such proceeds in new senior secured loans with equivalent investment returns. If the CLO collateral manager cannot reinvest in new senior secured loans with equivalent investment returns, the interest proceeds available to pay interest on the rated liabilities and investments may be adversely affected.
Our CLO investments are subject to prepayments and calls, increasing re-investment risk.
Our CLO investments and/or the underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on our value. Prepayment rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond our control and consequently cannot be predicted with certainty. In addition, for a CLO collateral manager there is often a strong incentive to refinance well performing portfolios once the senior tranches amortize. The yield to maturity of the investments will depend on the amount and timing of payments of principal on the loans and the price paid for the investments. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments of the debt.
Furthermore, our CLO investments generally do not contain optional call provisions, other than a call at the option of the holders of the equity tranches for the senior notes and the junior secured notes to be paid in full after the expiration of an initial period in the deal (referred to as the “non-call period”).
The exercise of the call option is by the relevant percentage (usually a majority) of the holders of the equity tranches and, therefore, where we do not hold the relevant percentage we will not be able to control the timing of the exercise of the call option. The equity tranches also generally have a call at any time based on certain tax event triggers. In any event, the call can only be exercised by the holders of equity tranches if they can demonstrate (in accordance with the detailed provisions in the transaction) that the senior notes and junior secured notes will be paid in full if the call is exercised.
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Early prepayments and/or the exercise of a call option otherwise than at our request may also give rise to increased re-investment risk with respect to certain investments, as we may realize excess cash earlier than expected. If we are unable to reinvest such cash in a new investment with an expected rate of return at least equal to that of the investment repaid, this may reduce our net income and, consequently, could have an adverse impact on our ability to pay dividends.
We have limited control of the administration and amendment of senior secured loans owned by the CLOs in which we invest.
We are not able to directly enforce any rights and remedies in the event of a default of a senior secured loan held by a CLO vehicle. In addition, the terms and conditions of the senior secured loans underlying our CLO investments may be amended, modified or waived only by the agreement of the underlying lenders. Generally, any such agreement must include a majority or a super majority (measured by outstanding loans or commitments) or, in certain circumstances, a unanimous vote of the lenders. Consequently, the terms and conditions of the payment obligations arising from senior secured loans could be modified, amended or waived in a manner contrary to our preferences.
We have limited control of the administration and amendment of any CLO in which we invest.
The terms and conditions of target securities may be amended, modified or waived only by the agreement of the underlying security holders. Generally, any such agreement must include a majority or a super majority (measured by outstanding amounts) or, in certain circumstances, a unanimous vote of the security holders. Consequently, the terms and conditions of the payment obligation arising from the CLOs in which we invest be modified, amended or waived in a manner contrary to our preferences.
Senior secured loans of CLOs may be sold and replaced resulting in a loss to us.
The senior secured loans underlying our CLO investments may be sold and replacement collateral purchased within the parameters set out in the relevant CLO indenture between the CLO and the CLO trustee and those parameters may typically only be amended, modified or waived by the agreement of a majority of the holders of the senior notes and/or the junior secured notes and/or the equity tranche once the CLO has been established. If these transactions result in a net loss, the magnitude of the loss from the perspective of the equity tranche would be increased by the leveraged nature of the investment.
Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment obligations or fails to perform as we expect.
We expect that a majority of our portfolio will consist of equity and junior debt investments in CLOs, which involve a number of significant risks. CLOs are typically highly levered up to approximately 10 times, and therefore the junior debt and equity tranches that we will invest in are subject to a higher risk of total loss. In particular, investors in CLOs indirectly bear risks of the underlying debt investments held by such CLOs. We will generally have the right to receive payments only from the CLOs, and will generally not have direct rights against the underlying borrowers or the entities that sponsored the CLOs. Although it is difficult to predict whether the prices of indices and securities underlying CLOs will rise or fall, these prices, and, therefore, the prices of the CLOs will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally.
The investments we make in CLOs are thinly traded or have only a limited trading market. CLO investments are typically privately offered and sold, in the primary and secondary markets. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in debt securities, CLOs carry additional risks, including, but not limited to: (i) the possibility that distributions from the underlying senior secured loans will not be adequate to make interest or other payments; (ii) the quality of the underlying senior secured loans may decline in value or default; and (iii) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO or unexpected investment results. Further, our investments in equity and junior debt tranches of CLOs are subordinate to the senior debt tranches thereof.
Investments in structured vehicles, including equity and junior debt instruments issued by CLOs, involve risks, including credit risk and market risk. Changes in interest rates and credit quality may cause significant price fluctuations. Additionally, changes in the underlying senior secured loans held by a CLO may cause payments on the instruments we hold to be reduced, either temporarily or permanently. Structured investments, particularly the subordinated interests in which we invest, are less liquid than many other types of securities and may be more volatile than the senior secured loans underlying the CLOs in which we invest.
Non-investment grade debt involves a greater risk of default and higher price volatility than investment grade debt.
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The senior secured loans underlying our CLO investments typically are BB or B rated (non-investment grade) and in limited circumstances, unrated, senior secured loans. Non-investment grade securities are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default and higher price volatility than investment grade debt.
We will have no influence on management of underlying investments managed by non-affiliated third party CLO collateral managers.
We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold as those portfolios are managed by non-affiliated third party CLO collateral managers. Similarly, we are not responsible for and have no influence over the day-to-day management, administration or any other aspect of the issuers of the individual securities. As a result, the values of the portfolios underlying our CLO investments could decrease as a result of decisions made by third party CLO collateral managers.
The application of the risk retention rules under Section 941 of the Dodd-Frank Act to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for us.
Section 941 of the Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) added a provision to the Exchange Act, requiring the seller, sponsor or securitizer of a securitization vehicle to retain no less than five percent of the credit risk in assets it sells into a securitization and prohibiting such securitizer from directly or indirectly hedging or otherwise transferring the retained credit risk. The responsible federal agencies adopted final rules implementing these restrictions on October 22, 2014. The risk retention rules became effective with respect to CLOs two years after publication in the Federal Register. Under the final rules, the asset manager of a CLO is considered the sponsor of a securitization vehicle and is required to retain five percent of the credit risk in the CLO, which may be retained horizontally in the equity tranche of the CLO or vertically as a five percent interest in each tranche of the securities issued by the CLO. Although the final rules contain an exemption from such requirements for the asset manager of a CLO if, among other things, the originator or lead arranger of all of the loans acquired by the CLO retain such risk at the asset level and, at origination of such asset, takes a loan tranche of at least 20% of the aggregate principal balance, it is possible that the originators and lead arrangers of loans in this market will not agree to assume this risk or provide such retention at origination of the asset in a manner that would provide meaningful relief from the risk retention requirements for CLO managers.
We believe that the U.S. risk retention requirements imposed for CLO managers under Section 941 of the Dodd-Frank Act has created some uncertainty in the market in regard to future CLO issuance. Given that certain CLO managers may require capital provider partners to satisfy this requirement, we believe that this may create additional risks for us in the future.
On February 9, 2018, a panel of the United States Court of Appeals for the District of Columbia Circuit ruled (the “D.C. Circuit Ruling”) that the federal agencies exceeded their authority under the Dodd-Frank Act in adopting the final rules as applied to asset managers of open-market CLOs. On April 5, 2018, the United States District Court for the District of Columbia entered an order implementing the D.C. Circuit Ruling and thereby vacated the U.S. Risk Retention Rules insofar as they apply to CLO managers of “open market CLOs”.
As of the date of hereof, there has been no petition for writ of certiorari filed requesting the case to be heard by the United States Supreme Court. Since there hasn’t been a successful challenge to the D.C. Circuit Ruling and the United States District Court for the District of Columbia has issued the above described order implementing the D.C. Circuit Ruling, collateral managers of open market CLOs are no longer required to comply with the U.S. Risk Retention Rules at this time. As such, it is possible that some collateral managers of open market CLOs will decide to dispose of the notes constituting the “eligible vertical interest” or “eligible horizontal interest” they were previously required to retain, or decide to take other action with respect to such notes that is not otherwise permitted by the U.S. risk retention rules. As a result of this decision, certain CLO managers of “open market CLOs” will no longer be required to comply with the U.S. risk retention rules solely because of their roles as managers of “open market CLOs”, and there may be no “sponsor” of such securitization transactions and no party may be required to acquire and retain an economic interest in the credit risk of the securitized assets of such transactions.
There can be no assurance or representation that any of the transactions, structures or arrangements currently under consideration by or currently used by CLO market participants will comply with the U.S. risk retention rules to the extent such rules are reinstated or otherwise become applicable to open market CLOs. The ultimate impact of the U.S. risk retention rules on the loan securitization market and the leveraged loan market generally remains uncertain, and any negative impact on secondary market liquidity for securities comprising a CLO may be experienced due to the effects of the U.S. risk retention
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rules on market expectations or uncertainty, the relative appeal of other investments not impacted by the U.S. risk retention rules and other factors.
Changes in credit spreads may adversely affect our profitability and result in realized and unrealized depreciation on our investments.
The performance of our CLO equity investments will depend, in a large part, upon the spread between the rate at which the CLO borrows funds and the rate at which it lends these funds. Any reduction of the spread between the rate at which the CLO invests and the rate at which it borrows may adversely affect the CLO equity investor’s profitability. Additionally, changes in credit spreads could lead to refinancing (paying off the existing senior secured loan with the proceeds from a new loan) or repricing (reducing the interest rate on an existing senior secured loan) of the senior secured loans that make up a CLO’s portfolio, which would result in a decline in the yield to the CLO’s equity investors and a corresponding loss on investment.
Because CLO equity investors are paid the residual income after the CLO debt tranches receive contractual interest payments, a reduction in the weighted average spread of the senior secured loans underlying a CLO will reduce the income flowing to CLO equity investors. As a result, CLO investors will experience realized and unrealized depreciation in periods of prolonged spread compression. If these conditions continue, the CLO investors, such as us, may lose some or all of their investment.
With respect to our online consumer lending initiative, we are dependent on the business performance and competitiveness of marketplace lending platforms and our ability to assess loan underwriting performance and, if the marketplace lending platforms from which we currently purchase consumer loans are unable to maintain or increase consumer loan originations, or if such marketplace lending platforms do not continue to sell consumer loans to us, or we are unable to otherwise purchase additional loans, our business and results of operations will be adversely affected.
With respect to our online consumer lending initiative, we invest primarily in marketplace loans through marketplace lending platforms. We do not conduct loan origination activities ourselves. Therefore, our ability to purchase consumer loans, and our ability to grow our portfolio of consumer loans, is directly influenced by the business performance and competitiveness of the marketplace loan origination business of the marketplace lending platforms from which we purchase consumer loans.
In addition, our ability to analyze the risk-return profile of consumer loans is significantly dependent on the marketplace platforms’ ability to effectively evaluate a borrower’s credit profile and likelihood of default. The platforms from which we purchase such loans utilize credit decisioning and scoring models that assign each such loan offered a corresponding interest rate and origination fee. Our returns are a function of the assigned interest rate for each such particular loan purchased less any defaults over the term of the applicable loan. We evaluate the credit decisioning and scoring models implemented by each platform on a regular basis and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve our own decisioning model. If we are unable to effectively evaluate borrowers’ credit profiles or the credit decisioning and scoring models implemented by each platform, we may incur unanticipated losses which could adversely impact our operating results. Further, if the interest rates for consumer loans available through marketplace lending platforms are set too high or too low, it may adversely impact our ability to receive returns on our investment that are commensurate with the risks we incur in purchasing the loans.
With respect to our online consumer lending initiative, we rely on the marketplace lending platforms to service loans including pursuing collections against borrowers. Personal loans facilitated through the marketplace lending platforms are not secured by any collateral, are not guaranteed or insured by any third-party and are not backed by any governmental authority in any way. Marketplace lending platforms are therefore limited in their ability to collect on the loans if a borrower is unwilling or unable to repay. A borrower’s ability to repay can be negatively impacted by increases in their payment obligations to other lenders under mortgage, credit card and other loans, including student loans and home equity lines of credit. These changes can result from increases in base lending rates or structured increases in payment obligations and could reduce the ability of the borrowers to meet their payment obligations to other lenders and under the loans purchased by us. If a borrower defaults on a loan, the marketplace lending platforms may outsource subsequent servicing efforts to third-party collection agencies, which may be unsuccessful in their efforts to collect the amount of the loan. Marketplace lending platforms make payments ratably on an investor’s investment only if they receive the borrower’s payments on the corresponding loan. If they do not receive payments on the corresponding loan related to an investment, we are not entitled to any payments under the terms of the investment.
As servicers of the loans we purchase as part of our online consumer lending initiative, the marketplace lending platforms have the authority to waive or modify the terms of a consumer loan without our consent or allow the postponement of strict compliance with any such term or in any manner grant any other indulgence to any borrower. If the marketplace lending platforms approve a modification to the terms of any consumer loan it may adversely impact our revenues.
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To continue to grow our online consumer lending initiative business, we rely on marketplace lending platforms from which we purchase loans to maintain or increase their consumer loan originations and to agree to sell their consumer loans to us. However, we do not have any exclusive arrangements with any of the marketplace lending platforms and have no agreements with them to provide us with a guaranteed source of supply. There can be no assurance that such marketplace lending platforms will be able to maintain or increase consumer loan originations or will continue to sell their consumer loans to us, or that we will be able to otherwise purchase additional loans and, consequently, there can be no assurance that we will be able to grow our business through investment in additional loans. The consumer marketplace lending platforms could elect to become investors in their own marketplace loans which would limit the amount of supply available for our own investments. An inability to expand our business through investments in additional consumer loans would reduce the return on investment that we might otherwise be able to realize from an increased portfolio of such investments. If we are unable to expand our business relating to our online consumer lending initiative, this may have a material adverse effect on our business, financial condition, results of operations and prospects.
Additionally, if marketplace lending platforms are unable to attract qualified borrowers and sufficient investor commitments or borrowers and investors do not continue to participate in marketplace lending at current rates, the growth of loan originations will slow or loan originations will decrease. As a result of any of these factors, we may be unable to increase our consumer loan investments and our revenue may grow more slowly than expected or decline, which could have a material adverse effect on our business, financial condition and results of operations.
Marketplace lending platforms on which we rely as part of the online consumer lending initiative by NPRC depend on issuing banks to originate all loans and to comply with various federal, state and other laws.
Typically, the contracts between marketplace lending platforms and their loan issuing banks are non-exclusive and do not prohibit the issuing banks from working with other marketplace lending platforms or from offering competing services. Issuing banks could decide that working with marketplace lending platforms is not in their interests, could make working with marketplace lending platforms cost prohibitive or could decide to enter into exclusive or more favorable relationships with other marketplace lending platforms that do not provide consumer loans to us. In addition, issuing banks may not perform as expected under their agreements. Marketplace lending platforms could in the future have disagreements or disputes with their issuing banks. Any of these factors could negatively impact or threaten our ability to obtain consumer loans and consequently could have a material adverse effect on our business, financial condition, results of operations and prospects.
Issuing banks are subject to oversight by the FDIC and the states where they are organized and operate and must comply with complex rules and regulations, as well as licensing and examination requirements, including requirements to maintain a certain amount of regulatory capital relative to their outstanding loans. If issuing banks were to suspend, limit or cease their operations or the relationship between the marketplace lending platforms and the issuing bank were to otherwise terminate, the marketplace lending platforms would need to implement a substantially similar arrangement with another issuing bank, obtain additional state licenses or curtail their operations. If the marketplace lending platforms are required to enter into alternative arrangements with a different issuing bank to replace their existing arrangements, they may not be able to negotiate a comparable alternative arrangement. This may result in their inability to facilitate loans through their platform and accordingly our inability to operate the business of our online consumer lending initiative. If the marketplace lending platforms were unable to enter into an alternative arrangement with a different issuing bank, they would need to obtain a state license in each state in which they operate in order to enable them to originate loans, as well as comply with other state and federal laws, which would be costly and time-consuming and could have a material adverse effect on our business, financial condition, results of operations and prospects. If the marketplace lending platforms are unsuccessful in maintaining their relationships with the issuing banks, their ability to provide loan products could be materially impaired and our operating results could suffer.
Credit and other information that is received about a borrower may be inaccurate or may not accurately reflect the borrower’s creditworthiness, which may cause the loans to be inaccurately priced and affect the value of our portfolio.
The marketplace lending platforms obtain borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign loan grades to loan requests based on credit decisioning and scoring models that take into account reported credit scores and the requested loan amount, in addition to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrower’s actual creditworthiness because the credit score may be based on incomplete or inaccurate consumer reporting data, and typically, the marketplace lending platforms do not verify the information obtained from the borrower’s credit report. Additionally, there is a risk that, following the date of the credit report that the models are based on, a borrower may have:
•become delinquent in the payment of an outstanding obligation;
•defaulted on a pre-existing debt obligation;
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•taken on additional debt; or
•sustained other adverse financial events.
Borrowers supply a variety of information to the marketplace lending platforms based on which the platforms price the loans. In a number of cases, marketplace lending platforms do not verify all of this information, and it may be inaccurate or incomplete. For example, marketplace lending platforms do not always verify a borrower’s stated tenure, job title, home ownership status or intention for the use of loan proceeds. Moreover, we do not, and will not, have access to financial statements of borrowers or to other detailed financial information about the borrowers. If we invest in loans through the marketplace provided by the marketplace lending platforms based on information supplied by borrowers or third parties that is inaccurate, misleading or incomplete, we may not receive expected returns on our investments and this could have a material adverse impact on our business, financial condition, results of operations and prospects and our reputation may be harmed.
Marketplace lending is a relatively new lending method and the platforms of marketplace lending platforms have a limited operating history relative to established consumer banks. Borrowers may not view or treat their obligations under any such loans we purchase as having the same significance as loans from traditional lending sources, such as bank loans.
The return on our investment in consumer loans depends on borrowers fulfilling their payment obligations in a timely and complete manner under the corresponding consumer loan. Borrowers may not view their obligations originated on the lending platforms that the marketplace lending platforms provide as having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial institutions. If a borrower neglects his or her payment obligations on a consumer loan or chooses not to repay his or her consumer loan entirely, we may not be able to recover any portion of our investment in the consumer loans. This will adversely impact our business, financial condition, results of operations and prospects.
Risks affecting investments in real estate.
NPRC invests in commercial multi-family residential and student-housing real estate. A number of factors may prevent each of NPRC’s properties and assets from generating sufficient net cash flow or may adversely affect their value, or both, resulting in less cash available for distribution, or a loss, to us. These factors include, but are not limited to:
•national economic conditions;
•regional and local economic conditions (which may be adversely impacted by plant closings, business layoffs, industry slow-downs, weather conditions, natural disasters, and other factors);
•local real estate conditions (such as over-supply of or insufficient demand for office space);
•changing demographics;
•perceptions by prospective tenants of the convenience, services, safety, and attractiveness of a property;
•the ability of property managers to provide capable management and adequate maintenance;
•the quality of a property’s construction and design;
•increases in costs of maintenance, insurance, and operations (including energy costs and real estate taxes);
•changes in applicable laws or regulations (including tax laws, zoning laws, or building codes);
•potential environmental and other legal liabilities;
•the level of financing used by NPRC in respect of its properties, increases in interest rate levels on such financings and the risk that NPRC will default on such financings, each of which increases the risk of loss to us;
•the availability and cost of refinancing;
•the ability to find suitable tenants for a property and to replace any departing tenants with new tenants;
•potential instability, default or bankruptcy of tenants in the properties owned by NPRC;
•potential limited number of prospective buyers interested in purchasing a property that NPRC wishes to sell; and
•the relative illiquidity of real estate investments in general, which may make it difficult to sell a property at an attractive price or within a reasonable time frame.
In addition, the full extent of the impact and effects of the recent outbreak of COVID-19 on the future financial performance of NPRC are uncertain at this time. The outbreak could have a continued adverse impact on economic and market conditions and trigger a period of global economic slowdown.
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To the extent original issue discount (“OID”) and payment in kind (“PIK”) interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income.
Our investments may include OID instruments and PIK interest arrangements, which represents contractual interest added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:
•The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID and PIK instruments generally represent a significantly higher credit risk than coupon loans.
•Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the maturity of the obligation.
•OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectability of the deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions.
For accounting purposes, any cash distributions to stockholders representing OID and PIK income are not treated as coming from paid-in capital, even if the cash to pay them comes from offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.
Capitalizing PIK interest to loan principal increases our gross assets, thus increasing our Investment Adviser’s future base management fees, and increases future investment income, thus increasing our Investment Adviser’s future income incentive fees at a compounding rate.
Market prices of zero-coupon or PIK securities may be affected to a greater extent by interest rate changes and may be more volatile than securities that pay interest periodically and in cash.
For accounting purposes, any cash distributions to stockholders representing OID and PIK income are not designated as paid-in capital, even if the cash to pay them derives from offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.
Risks Relating to Our Securities
Our credit ratings may not reflect all risks of an investment in our debt or preferred equity securities.
Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will generally affect the market value of our debt and preferred equity securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions generally or other factors discussed above on the market value of or trading market for the publicly issued debt or preferred equity securities.
Senior securities, including debt and preferred equity, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business, financial condition and results of operations.
We currently use our revolving credit facility to leverage our portfolio and we expect in the future to borrow from and issue senior debt securities to banks and other lenders and may securitize certain of our portfolio investments. We also have the Unsecured Notes outstanding and have launched a convertible preferred share offering program, which are a formforms of leverage and are senior in payment rights to our common stock.
Business development companies are generally able to issue senior securities such that their asset coverage, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. In March 2018, the Small Business Credit Availability Act added Section 61(a)(2) to the 1940 Act, a successor provision to Section 61(a)(1) referenced therein, which reduces the asset coverage requirement applicable to business development companies from 200% to 150% so long as the business development company meets certain disclosure requirements and obtains certain approvals. On March 30, 2020, our Board of Directors approved, and on May 5, 2020, at a special meeting of our stockholders, our stockholders approved, the application to us of the reduced asset coverage requirements in Section 61(a) of the 1940 Act. The application of the reduced asset coverage requirement, which became
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effective on May 6, 2020, permits us, provided certain requirements are satisfied, to double the maximum amount of leverage that it is permitted to incur by reducing the asset coverage requirement applicable to us from 200% to 150% (a 2:1 debt to equity ratio, as opposed to a 1:1 debt to equity ratio), as provided for in Section 61(a)(2) of the 1940 Act, a successor provision to Section 61(a)(1) of the 1940 Act. In other words, under the 1940 Act, the Company is now able to borrow $2 for investment purposes for every $1 of investor equity, as opposed to borrowing $1 for investment purposes for every $1 of investor equity. As a result, the Company may incur additional indebtedness and investors in the Company may face increased investment risk. In addition, the Company’s management fee payable to the Investment Adviser is based on the Company’s average adjusted gross assets, which includes leverage and, as a result, if the Company incurs additional leverage, management fees paid to the Investment Adviser would increase.
With certain limited exceptions, as a BDC, we are only allowed to borrow amounts or otherwise issue senior securities such that our asset coverage, as defined in the 1940 Act, is at least 200%150% after such borrowing or other issuance. The amount of leverage that we employ will depend on the Investment Adviser’s and our Board of Directors’ assessment of market conditions and other factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for stockholders, any of which could adversely affect our business, financial condition and results of operations, including the following:
•A likelihood of greater volatility in the net asset value and market price of our common stock;
•Diminished operating flexibility as a result of asset coverage or investment portfolio composition requirements required by lenders or investors that are more stringent than those imposed by the 1940 Act;
•The possibility that investments will have to be liquidated at less than full value or at inopportune times to comply with debt covenants or to pay interest or dividends on the leverage;
•Increased operating expenses due to the cost of leverage, including issuance and servicing costs;
•Convertible or exchangeable securities, such as the Convertible Notes and the 5.50% Preferred Stock outstanding or those issued in the future, may have rights, preferences and privileges more favorable than those of our common stock;stock including, the case of the 5.50% Preferred Stock (or any other preferred stock), the statutory right under the 1940 Act to vote, as a separate class, on the election of two of our directors and approval of certain fundamental transactions in certain circumstances;
•Subordination to lenders’ superior claims on our assets as a result of which lenders will be able to receive proceeds available in the case of our liquidation before any proceeds will be distributed to our stockholders;
•Difficulty meeting our payment and other obligations under the Unsecured Notes and our other outstanding debt;debt or preferred equity;
•The occurrence of an event of default if we fail to comply with the financial and/or other restrictive covenants contained in our debt agreements, including the credit agreement and each indenture governing the Unsecured Notes, which event of default could result in all or some of our debt becoming immediately due and payable;
•Reduced availability of our cash flow to fund investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
•The risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our amended senior credit facility; and
•Reduced flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy.
For example, the amount we may borrow under our revolving credit facility is determined, in part, by the fair value of our investments. If the fair value of our investments declines, we may be forced to sell investments at a loss to maintain compliance with our borrowing limits. Other debt facilities we may enter into in the future may contain similar provisions. Any such forced sales would reduce our net asset value and also make it difficult for the net asset value to recover. The Investment Adviser and our Board of Directors in their best judgment nevertheless may determine to use leverage if they expect that the benefits to our stockholders of maintaining the leveraged position will outweigh the risks.
•In addition, our ability to meet our payment and other obligations of the 5.50 % Preferred Stock (or any other preferred stock), the Unsecured Notes and our credit facility depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot provide assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the 5.50% Preferred Stock (or any other preferred stock), the Unsecured Notes and our other debt and to fund other liquidity needs. If we are not able to
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generate sufficient cash flow to service our debt and preferred equity obligations, we may need to refinance or restructure our debt or preferred equity, including the Unsecured Notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or
more of these alternatives, we may not be able to meet our payment obligations under the 5.50% Preferred Stock (or any other preferred stock), the Unsecured Notes and our other debt.
Illustration. The following table illustratestables illustrate the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of interest expense. The calculations in the tabletables below are hypothetical and actual returns may be higher or lower than those appearing below.
The below calculation assumes (i) $6.2$7.3 billion in total assets, (ii) an average cost of funds of 5.32%4.80% (including preferred dividend payments), (iii) $2.7$2.3 billion in debt outstanding, (iv) $1.25 billion in liquidation preference of the 5.50% Preferred Stock, and (v) $3.7 billion of common stockholders’ equity.
| Assumed Return on Our Portfolio (net of expenses) | (10)% | (5)% | 0% | 5% | 10% | ||||||||||||
| Corresponding Return to Common Stockholder(1) | (24.4)% | (14.5)% | (4.7)% | 5.2% | 15.1% | ||||||||||||
The below calculation assumes (i) $7.3 billion in total assets, (ii) an average cost of funds of 4.42%, (iii) $2.4 billion in debt outstanding and (iv) $3.5$4.9 billion of shareholders’common stockholders’ equity.
| Assumed Return on Our Portfolio (net of expenses) | (10)% | (5)% | 0% | 5% | 10% | ||||||||||||
| Corresponding Return to Common Stockholder(2) | (17.1)% | (9.6)% | (2.2%) | 5.3% | 12.7% | ||||||||||||
| Assumed Return on Our Portfolio (net of expenses) | (10 | )% | (5 | )% | 0 | % | 5 | % | 10 | % | |||||
| Corresponding Return to Stockholder | (21.8 | )% | (13.0 | )% | (4.1 | )% | 4.8 | % | 13.6 | % | |||||
(2) Assumes the conversion of $1.25 billion in 5.50% Preferred Stock at a conversion rate based on the 5-day VWAP of our common stock on June 30, 2021, which was $8.75, and a Holder Optional Conversion Fee (as defined in the prospectus supplement relating to the applicable offering) of 9.50% and 9.00% on Series A Preferred Stock and Series AA Preferred Stock, respectively, of the maximum public offering price disclosed within the applicable prospectus supplements. The actual 5-day VWAP of our common stock on a Holder Conversion Exercise Date may be more or less than $8.75, which may result in more or less shares of common stock issued.
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance. Actual returns may be greater or less than those appearing in the table.
Pursuant to SEC regulations, this table is calculated as of June 30, 2021. As a result, it has not been updated to take into account any changes in assets or leverage since June 30, 2021, including the issuance of the 5.35% Preferred Stock.
The Convertible Notes and the Public Notes present other risks to holders of our common stock, including the possibility that such notes could discourage an acquisition of us by a third party and accounting uncertainty.
Certain provisions of the Convertible Notes and the Public Notes could make it more difficult or more expensive for a third party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of the Convertible Notes and the Public Notes will have the right, at their option, to require us to repurchase all of their notes or any portion of the principal amount of such notes in integral multiples of $1,000. We may also be required to increase the conversion rate or provide for conversion into the acquirer’s capital stock in the event of certain fundamental changes with respect to the Convertible Notes. These provisions could discourage an acquisition of us by a third party.
The accounting for convertible debt securities is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or when any such change could be made and any such change could have an adverse impact on our reported or future financial results. Any such impacts could adversely affect the market price of our common stock.
Our obligations to pay dividends or make distributions and, upon liquidation of the Company, liquidation payments in respect of our preferred stock is subordinate to our obligations to make any principal and interest payments due and owing with respect to our outstanding Convertible Notes and Public Notes. Accordingly, our Convertible Notes and Public Notes have the future determine toeffect of creating special risks for our preferred stockholders that would not be present in a capital structure that did not include such securities.
We fund a portion of our investments with preferred stock, which would magnifymagnifies the potential for gain or loss and the risks of investing in us in the same way as our borrowings.
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Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any income or appreciation in excess of their stated preference.
We have entered into dealer manager agreements and underwriting agreements pursuant to which we intend to sell shares of 5.50% Preferred Stock, the terms of which could result in significant dilution to existing common stockholders.
On August 3, 2020, we entered into a Dealer Manager Agreement with Preferred Capital Securities, LLC (“PCS”) (the “Original Dealer Manager Agreement”), pursuant to which PCS has agreed to serve as the Company’s agent, principal distributor and exclusive dealer manager for the Company’s offering of up to 40,000,000 shares, par value $0.001 per share, of preferred stock, with a $1,000,000,000 aggregate liquidation preference. On February 25, 2021, we and PCS amended and restated the Original Dealer Manager Agreement in its entirety (as so amended, the “Amended and Restated Dealer Manager Agreement”). The terms of the Amended and Restated Dealer Manager Agreement are substantially similar to the terms of the Original Dealer Manager Agreement, except that provisions have been made permit the preferred stock to be offered outside of the United States as well. Under the Amended and Restated Dealer Manager Agreement, the preferred stock is being issued in multiple series, including the Series A1 Preferred Stock, the Series M1 Preferred Stock, and the Series M2 Preferred Stock, and the Company may offer any future series of preferred stock, provided that the aggregate number of shares issued across all series of preferred stock under the Amended and Restated Dealer Manager Agreement shall not exceed 40,000,000 shares.
On October 30, 2020, we entered into a Dealer Manager Agreement with InspereX LLC (formerly known as “Incapital LLC”) (“InspereX Dealer Manager Agreement”), pursuant to which InspereX LLC has agreed to serve as the Company’s agent and dealer manager for the Company’s offering of up to 10,000,000 shares, par value $0.001 per share, of 5.50% Series AA1 Preferred Stock, with a liquidation preference of $25.00 per share. The Company may offer any future series of preferred stock, provided that the aggregate number of shares issued across all series of preferred stock offered pursuant to the InspereX Dealer Manager Agreement shall not exceed 10,000,000 shares.
On May 19, 2021, we entered into an Underwriting Agreement with UBS Securities LLC, relating to the offer and sale of 187,000 shares, par value $0.001 per share, of Series A2 Preferred Stock, with a liquidation preference of $25.00 per share.
At any time prior to the listing of the 5.50% Preferred Stock on a national securities exchange, shares of the 5.50% Preferred Stock will be convertible, at the option of the holder of the 5.50% Preferred Stock (the “Holder Optional Conversion”). We will settle any Holder Optional Conversion by paying or delivering, as the case may be, (A) any portion of the Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the Settlement Amount, minus (b) any portion of the Settlement Amount that we elect to pay in cash, divided by (2) the arithmetic average of the daily volume weighted average price of shares of our common stock over each of the five consecutive trading days ending on the Holder Conversion Exercise Date (as defined herein) (such arithmetic average, the “5-day VWAP”). For the Series A1 Preferred Stock, the Series AA1 Preferred Stock, and the Series A2 Preferred Stock, “Settlement Amount” means (A) $25.00 per share (the “Stated Value”), plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the Holder Optional Conversion Fee (as described in the prospectus supplements relating to the Series A1 Preferred Stock, the Series AA1 Preferred Stock, or the Series A2 Preferred Stock, as applicable) applicable on the respective Holder Conversion Deadline (as defined in the applicable prospectus supplement). For the Series M Preferred Stock, “Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable Series M Clawback, if any (as described in the prospectus supplements relating to the Series M Preferred Stock. “Series M Clawback”, if applicable, means an amount equal to the aggregate amount of all dividends, whether paid or accrued, on such share of Series M Stock in the three full months prior to the Holder Conversion Exercise Date. Subject to certain limited exceptions, we will not pay any portion of the Settlement Amount in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction. The right of holders to convert a share of 5.50% Preferred Stock will terminate upon the listing of such share on a national securities exchange.
Holders of 5.50% Preferred Stock may elect to convert their shares of 5.50% Preferred Stock at any time by delivering a notice of conversion (the “Holder Conversion Notice”). A Holder Conversion Notice will be effective as of the 15th day of the month (or, if the 15th day of the month is not a business day, then on the business day immediately preceding the 15th day) or the last business day of the month, whichever occurs first after a Holder Conversion Notice is duly received (each such date, a “Holder Conversion Deadline”). Any Holder Conversion Notice received after 5:00 p.m. Eastern time on a Holder Conversion Deadline will be effective as of the next Holder Conversion Deadline. For all shares of 5.50% Preferred Stock duly submitted to us for
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conversion on or before a Holder Conversion Deadline, we will determine the Settlement Amount on any business day after such Holder Conversion Deadline but before the next Holder Conversion Deadline (such date, the “Holder Conversion Exercise Date”). Within such period, we may select the Holder Conversion Exercise Date in our sole discretion. We may, in our sole discretion, permit a holder to revoke their Holder Conversion Notice at any time prior to 5:00 pm, Eastern time, on the business day immediately preceding the Holder Conversion Exercise Date.
Subject to certain limited exceptions allowing earlier redemption, beginning on the earlier of the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued, or, for listed shares of 5.50% Preferred Stock, five years from the earliest date on which any series that has been listed was first issued (the earlier of such dates, the “Redemption Eligibility Date”), such share of 5.50% Preferred Stock may be redeemed at any time or from time to time at our option (the “Issuer Optional Redemption”) upon not less than 10 calendar days nor more than 90 calendar days written notice to the holder prior to the date fixed for redemption thereof, at a redemption price of 100% of the Stated Value of the shares of 5.50% Preferred Stock to be redeemed plus unpaid dividends accrued to, but not including, the date fixed for redemption.
Subject to certain limitations, each share of 5.50% Preferred Stock will be convertible at our option, upon not less than 30 calendar days nor more than 90 calendar days written notice to the holder (the “Issuer Optional Conversion”) prior to the date fixed for conversion thereof. We will settle any Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the 5-day VWAP, subject to our ability to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value if the 5-day VWAP represents a discount to our net asset value per share of common stock. For the 5.50% Preferred Stock, “IOC Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the date fixed for conversion. Subject to certain limited exceptions, we will not exercise an Issuer Optional Conversion with respect to a share of 5.50% Preferred Stock until after the date set forth in the applicable prospectus supplement with respect to the 5.50% Preferred Stock. In connection with an Issuer Optional Conversion, we will use commercially reasonable efforts to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value and the 5-day VWAP is at a discount to our net asset value per share of common stock, we will settle any conversions in connection with an Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the NAV per share of common stock at the close of business on the business day immediately preceding the date of conversion (the "NAV-Based Conversion Rate"). We will not pay any portion of the IOC Settlement Amount from an Issuer Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the Redemption Eligibility Date. Beginning on the Redemption Eligibility Date, we may elect to settle any Issuer Optional Conversion in cash without limitation or restriction. In the event that we exercise an Issuer Optional Conversion with respect to any shares of 5.50% Preferred Stock, the holder of such 5.50% Preferred Stock may instead elect a Holder Optional Conversion with respect to such 5.50% Preferred Stock provided that the date of conversion for such Holder Optional Conversion would occur prior to the date of conversion for an Issuer Optional Conversion.
On June 12, 2020, we obtained stockholder approval under Section 63 of the 1940 Act to issue shares of common stock below net asset value until June 12, 2021. On June 11, 2021, at a special meeting of our stockholders, our stockholders again authorized us to issue shares of our common stock below net asset value during the next 12 months until June 11, 2022. We believe that pursuant to this approval any shares of 5.50% Preferred Stock issued prior to June 11, 2022 may be converted into shares of common stock pursuant to the Issuer Optional Conversion using the 5-day VWAP to determine the conversion rate at any time, including after June 11, 2022. We believe any shares of 5.50% Preferred Stock issued after June 11, 2022 may be converted into shares of common stock pursuant to the Issuer Optional Conversion using the 5-day VWAP to determine the conversion rate only if we have obtained stockholder approval for the period in which such shares of 5.50% Preferred Stock were issued (assuming the 5-day VWAP results in a price below net asset value).
The application of Section 63 of the 1940 Act with respect to the conversion of the 5.50% Preferred Stock under the Issuer Optional Conversion is unclear. It is possible the SEC will assert a position that stockholder approval to issue shares of common stock below net asset value must be obtained for the year in which the Issuer Optional Conversion is exercised, instead of the time at which the 5.50% Preferred Stock is issued. If the SEC asserted this position and prevailed, we would be required to obtain stockholder approval under the 1940 Act for the years in which we exercise the Issuer Optional Conversion. Obtaining this approval may cause us to incur additional costs and there can be no assurance such stockholder approval will be obtained. If we cannot obtain stockholder approval required by the 1940 Act to issue shares of common stock below net asset value at the
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time of an Issuer Optional Conversion, then the Issuer Optional Conversion will be effected at the NAV-Based Conversion Rate.
An investment in shares of the 5.50% Preferred Stock involves certain additional risks, including the risks discussed herein. For additional information on the 5.50% Preferred Stock, including the risks involved in investing in the 5.50% Preferred Stock, please refer to the applicable prospectus supplement pursuant to which such sale is made.
The price of our common stock may fluctuate significantly during the period used to calculate any 5-day VWAP with respect to the 5.50% Preferred Stock, and this may make it difficult for holders of the 5.50% Preferred Stock to resell the 5.50% Preferred Stock or common stock issuable upon conversion of the 5.50% Preferred Stock when such holder wants or at prices such holder finds attractive.
The price of our common stock on the Nasdaq Global Select Market constantly changes. We expect that the market price of our common stock will continue to fluctuate. Because the 5.50% Preferred Stock is convertible into our common stock based on the 5-day VWAP, volatility or declining prices for our common stock during the period used to determine the 5-day VWAP or during the period between when a holder delivers a Holder Conversion Notice and the related Holder Conversion Exercise Date, could have a similar effect on the value of the 5.50% Preferred Stock or the trading price thereof when and if the 5.50% Preferred Stock is ever listed.
Our stock price may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
•quarterly variations in our investment results;
•operating results that vary from the expectations of management, securities analysts and investors;
•changes in expectations as to our future financial performance;
•the operating and securities price performance of other companies that investors believe are comparable to us;
•future sales of our equity or equity‑related securities;
•the rate at which investors purchase, sell, short sell or otherwise transact in shares of our common stock;
•changes in general conditions in our industry and in the economy and the financial markets; and
•departures of key personnel.
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market fluctuations may adversely affect our stock price, regardless of our operating results.
With respect to the 5.50% Preferred Stock, the consideration paid upon a Holder Optional Conversion and Issuer Optional Conversion is uncertain.
Under the terms of the 5.50% Preferred Stock, we or holders of shares of the 5.50% Preferred Stock may choose to convert shares of 5.50% Preferred Stock at a time when the market price of common stock has dropped significantly. If we elect to settle conversions in shares of our common stock, this may cause significant dilution to the net asset value per share of our outstanding shares of common stock, including shares of common stock owned by holders of 5.50% Preferred Stock that had previously converted their 5.50% Preferred Stock into common stock. With respect to any conversion of the 5.50% Preferred Stock, we may elect, at our sole discretion and subject to certain restrictions and limitations, to pay any portion (or no portion) of the amount owed in cash and settle the remaining portion in shares of our common stock. We will not pay any portion of the conversion proceeds for a share of 5.50% Preferred Stock from a Holder Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which such share of 5.50% Preferred Stock has been issued, unless our Board of Directors determines, in its sole discretion, that the issuance of common stock in satisfaction of a Holder Optional Conversion would be materially detrimental to, and not in the best interest of, existing common stockholders. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction.
The conversion rates for the Holder Optional Conversion and, assuming we have the necessary approval under the 1940 Act, the Issuer Optional Conversion are both based on the 5-day VWAP, which may represent a discount to the NAV per share of our common stock. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value, 5.50% Preferred Stock may be converted into common stock in connection with an Issuer Optional Conversion at a conversion rate based on our NAV per share of common stock if the 5-day VWAP represents a discount to the
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NAV per share of our common stock. In this circumstance, there may be fewer shares of common stock issued upon conversion of the shares of 5.50% Preferred Stock; while this would reduce dilution to existing common stockholders, including former holders of 5.50% Preferred Stock who had previously converted their holdings to common stock, it would also reduce the proportionate interest in the Company (and thus the economic benefit to the holder of 5.50% Preferred Stock) for holders of 5.50% Preferred Stock subject to such an Issuer Optional Conversion. Conversely, a conversion rate based on the 5-day VWAP, if it represents a discount to our net asset value per share of common stock, would result in greater dilution to existing common stockholders (including former holders of 5.50% Preferred Stock who had previously converted their holdings to common stock), and this outcome may be more likely given that the notice period for a Holder Optional Conversion is shorter than the notice period for an Issuer Optional Conversion, so holders of 5.50% Preferred Stock can supersede any Issuer Optional Conversion and obtain a conversion rate based on the 5-day VWAP (assuming the 5.50% Preferred Stock is settled in shares of our common stock and not cash).
There is no cap on the number of shares of common stock that can be issued upon the conversion of shares of 5.50% Preferred Stock. The conversion of the 5.50% Preferred Stock into shares of common stock could cause the price of common stock to decline significantly.
There is no cap on the number of shares of common stock that can be issued upon the conversion of shares of 5.50% Preferred Stock. Because the number of shares of common stock issued upon conversion of the 5.50% Preferred Stock will be based on the price of shares of common stock, the lower the price of our common stock at the time of conversion, the more shares of our common stock into which the 5.50% Preferred Stock is convertible and the greater the dilution that will be experienced by holders of our common stock. Accordingly, there is no limit on the amount of dilution that may be experienced by holders of our common stock.
The issuance of the 5.50% Preferred Stock may be followed by a decline in the price of our common stock, creating additional dilution to the existing holders of the common stock. Such a price decline may allow holders of 5.50% Preferred Stock to convert shares of 5.50% Preferred Stock into large amounts of the Company’s common stock. As these shares of common stock are issued upon conversion of the 5.50% Preferred Stock, our common stock price may decline further.
Additionally, the issuance of the 5.50% Preferred Stock could result in our failure to comply with the Nasdaq Global Select Market’s listing standards. The Nasdaq Global Select Market’s listing standards that may be affected by the issuance of the 5.50% Preferred Stock include voting rights rules, bid price requirements, listing of additional shares rules, change in control rules and the Nasdaq Global Select Market’s discretionary authority rules. Failure to comply with any of these rules could result in the delisting of the Company’s common stock from the Nasdaq Global Select Market or impact the ability to list the 5.50% Preferred Stock on a national securities exchange.
The potential decline in the price of our common stock described above may negatively affect the price of our common stock and our ability to obtain financing in the future. In addition, the issuance of the 5.50% Preferred Stock may provide incentives for holders thereof that intend to convert their shares to seek to cause a decline in the price of our common stock (including through selling our common stock short) in order to receive an increased number of shares of our common stock upon such conversion of the 5.50% Preferred Stock, and may encourage other investors to sell short or otherwise dispose of our common stock.
Our charter currently authorizes us to issue approximately 1.43 billion shares of common stock, in addition to our shares of common stock currently outstanding or reserved for issuance upon conversion of the Convertible Notes, and after reflecting the reclassification of 141.0 million shares of common stock as 5.50% Preferred Stock and 6.9 million shares of common stock as 5.35% Series A Fixed Rate Cumulative Perpetual Preferred Stock (the “5.35% Preferred Stock”). Although the Board of Directors can increase the amount of our authorized common stock and reclassify unissued preferred stock as common stock without stockholder approval, if they did not do so for any reason and our 5-day VWAP fell below approximately $0.88 per share of common stock (assuming we might issueissued all 50,187,000 shares of the 5.50% Preferred Stock available pursuant to the respective offerings), we would be required to settle any conversion of 5.50% Preferred Stock in cash (to the extent we had cash available) or list the 5.50% Preferred Stock on a national securities exchange and the value of our shares of 5.50% Preferred Stock would then equal their market price, which may be less than $25.00 per share.
Future sales of our common stock in the public market or the issuance of securities senior to our common stock could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings, and may affect the value of the 5.50% Preferred Stock.
Future sales of substantial amounts of our common stock or equity‑related securities in the public market, or the perception that such sales could occur, could adversely affect prevailing trading prices of our common stock and could impair our ability to raise capital through future offerings of equity or equity‑related securities, and may affect the value of the 5.50% Preferred
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Stock. No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares of common stock for future sale, will have on the trading price of our common stock or the value of the 5.50% Preferred Stock.
Shares of common stock, which shares of 5.50% Preferred Stock may be converted into, rank junior to the 5.50% Preferred Stock with respect to dividends and upon liquidation.
We may choose to convert the 5.50% Preferred Stock to shares of our common stock. Holders of 5.50% Preferred Stock may also choose to convert their 5.50% Preferred Stock, subject to our election to settle conversions in cash or shares of our common stock or a combination thereof. The rights of the holders of shares of 5.50% Preferred Stock rank senior to the rights of the holders of shares of our common stock as to dividends and payments upon liquidation. Unless full cumulative dividends on our shares of 5.50% Preferred Stock for all past dividend periods have been declared and paid (or set apart for payment), we will not declare or pay dividends with respect to any shares of our common stock for any period. Upon liquidation, dissolution or winding up of the Company, the holders of shares of our 5.50% Preferred Stock are entitled to receive the Stated Value of $25.00 per share, plus an amount equal to any accumulated, accrued and unpaid dividends at the applicable rate, after provision is made for our senior liabilities, but prior and in preference to any distribution to the holders of shares of our common stock or any other class of our equity securities junior to any and all shares of our preferred stock outstanding (“Preferred Stock”).
Holders of our Preferred Stock have the right to elect members of the board of directors and class voting rights on certain matters.
Holders of any preferred stock we might issue,our Preferred Stock, voting separately as a single class, would have the right to elect two members of the board of directors at all times and in the event dividends become two full years in arrears, would have the right to elect a majority of the directors until such arrearage is completely eliminated. In addition, preferred stockholdersPreferred Stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions, and conversion to open-end status, and plans of reorganization that adversely affect the Preferred Stock and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of our common stock and preferred stock,Preferred Stock, both by the 1940 Act and by requirements imposed by rating agencies or the terms of our credit facilities, might impair our ability to maintain our qualification as a RIC for federal income tax purposes. While we would intend to redeem our preferred stockPreferred Stock to the extent necessary to enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet the tax requirements.
The trading market or market value of our publicly traded preferred stock may fluctuate.
The 5.35% Preferred Stock is listed on the NYSE under the symbol “PSEC PRA” and has a limited trading history. Additionally, we may list the 5.50% Preferred Stock on a national securities exchange upon notice to holders of 5.50% Preferred Stock. We cannot accurately predict the trading patterns of our Preferred Stock, including the effective costs of trading the stock, and a liquid secondary market may not develop. There is also a risk that our publicly traded preferred stock may be thinly traded, and the market for such shares may be relatively illiquid compared to the market for other types of securities, with the spread between the bid and asked prices considerably greater than the spreads of other securities with comparable terms and features. The trading price of any publicly traded preferred stock would depend on many factors, including:
•prevailing interest rates;
•the market for similar securities;
•general economic and financial market conditions;
•our issuance of debt or other preferred equity securities; and
•our financial condition, results of operations and prospects.
In addition, the Preferred Stock pays dividends at a fixed rate. Prices of fixed income investments tend to vary inversely with changes in market yields. The market yields on securities comparable to the Preferred Stock may increase, which would likely result in a decline in the value of the Preferred Stock. Additionally, if interest rates rise, securities comparable to the Preferred Stock may pay higher dividend rates and holders of the Preferred Stock may not be able to sell the Preferred Stock at the Stated Value or Liquidation Preference (as defined in the applicable prospectus supplement) and reinvest the proceeds at market rates. The Company may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates. There is a possibility that interest rates may rise, which would likely drive down the prices of income- or dividend-paying securities.
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Holders of the 5.35% Preferred Stock may not be permitted to exercise conversion rights upon a Change of Control Triggering Event. If exercisable, the Change of Control Triggering Event conversion feature of the 5.35% Preferred Stock may not adequately compensate such preferred stockholders, and the Change of Control Triggering Event conversion and redemption features of the 5.35% Preferred Stock may make it more difficult for a party to take over the Company or discourage a party from taking over the Company.
Upon the occurrence of a Change of Control Triggering Event (as defined in the applicable prospectus supplement), holders of 5.35% Preferred Stock will have the right to convert some or all of their 5.35% Preferred Stock into our common stock (or equivalent value of alternative consideration). Upon such a conversion, the holders will be limited to a maximum number of shares of our common stock equal to the Share Cap (as defined in the applicable prospectus supplement) multiplied by the number of shares of 5.35% Preferred Stock converted. Notwithstanding that we generally may not redeem the 5.35% Preferred Stock prior to July 19, 2026, we have a special optional redemption right to redeem the 5.35% Preferred Stock in the event of a Change of Control Triggering Event, and holders of 5.35% Preferred Stock will not have the right to convert any shares that we have elected to redeem prior to the “Change of Control Conversion Date” (i.e., the date the shares of 5.35% Preferred Stock are to be converted, which will be a business day selected by us that is no fewer than 20 days nor more than 35 days after the date on which we provide notice). In addition, those features of the 5.35% Preferred Stock may have the effect of inhibiting a third party from making an acquisition proposal for the Company or of delaying, deferring or preventing a change of control of the Company under circumstances that otherwise could provide the holders of our common stock and Preferred Stock with the opportunity to realize a premium over the then-current market price or that stockholders may otherwise believe is in their best interest.
In addition to regulatory restrictions that restrict our ability to raise capital, our credit facility contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
The agreement governing our credit facility requires us to comply with certain financial and operational covenants. These covenants include:
•Restrictions on the level of indebtedness that we are permitted to incur in relation to the value of our assets;
•Restrictions on our ability to incur liens; and
•Maintenance of a minimum level of stockholders’ equity.
As of June 30, 2017,2021, we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, some of which are beyond our control. Accordingly, there are no assurances that we will continue to comply with the covenants in our credit facility. Failure to comply with these covenants would result in a default under this facility which, if we were unable to obtain a waiver from the lenders thereunder, could result in an acceleration of repayments under the facility and thereby have a material adverse impact on our business, financial condition and results of operations.
Failure to extend our existing credit facility, the revolving period of which is currently scheduled to expire on March 27, 2019,September 9, 2023, could have a material adverse effect on our results of operations and financial position and our ability to pay expenses and make distributions.
The revolving period for our credit facility with a syndicate of lenders is currently scheduled to terminate on March 27, 2019,September 9, 2023, with an additional one year amortization period (with distributions allowed) after the completion of the revolving period. During such one year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one year amortization period, the remaining balance will become due, if required by the lenders. If the credit facility is not renewed or extended by the participant banks by March 27, 2019,September 9, 2023, we will not be able to make further borrowings under the facility after such date and the outstanding principal balance on that date will be due and payable on March 27, 2020.September 9, 2024. As of June 30, 2017,2021, we did not have anyhad $356.9 million of outstanding borrowings under our credit facility. Interest on borrowings under the credit facility is one-month LIBOR plus 225220 basis points with noa minimum LIBOR floor.floor of zero. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 50 basis points if at least 35%more than 60% of the credit facility is drawn, or 100 basis points otherwise.if more than 35% and an amount less than or equal to 60% of the credit facility is drawn, or 150 basis points if an amount less than or equal to 35% of the credit facility is drawn.
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The credit facility requires us to pledge assets as collateral in order to borrow under the credit facility. If we are unable to extend our facility or find a new source of borrowing on acceptable terms, we will be required to pay down the amounts outstanding under the facility during the two-year term-out period through one or more of the following: (1) principal collections on our securities pledged under the facility, (2) at our option, interest collections on our securities pledged under the facility and cash collections on our securities not pledged under the facility, or (3) possible liquidation of some or all of our loans and other assets, any of which could have a material adverse effect on our results of operations and financial position and may force us to decrease or stop paying certain expenses and making distributions until the facility is repaid. In addition, our stock price could decline significantly, we would be restricted in our ability to acquire new investments and, in connection with our year-end audit, and our independent registered accounting firm could raise an issue as to our ability to continue as a going concern.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. See “Risks Relating to Our business—Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio or issued by us.”
Failure to refinance our existing Unsecured Notes could have a material adverse effect on our results of operations and financial position.
The Unsecured Notes mature at various dates from OctoberJanuary 15, 20172024 to October 15, 2043. If we are unable to refinance the Unsecured Notes or find a new source of borrowing on acceptable terms, we will be required to pay down the amounts outstanding at maturity under the facility during the two-year term-out period through one or more of the following: (1) borrowing additional funds under our then current credit facility, (2) issuance of additional common stock or (3) possible liquidation of some or all of our loans and other assets, any of which could have a material adverse effect on our results of operations and financial position. In addition, our stock price could decline significantly; we would be restricted in our ability to acquire new investments and, in connection with our year-end audit, our independent registered accounting firm could raise an issue as to our ability to continue as a going concern.
The trading market or market value of our publicly issued debt securities may fluctuate.
Our publicly issued debt securities may or may not have an established trading market. We cannot assure our noteholders that a trading market for our publicly issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:
•the time remaining to the maturity of these debt securities;
•the outstanding principal amount of debt securities with terms identical to these debt securities;
•the ratings assigned by national statistical ratings agencies;
•the general economic environment;
•the supply of debt securities trading in the secondary market, if any;
•the redemption or repayment features, if any, of these debt securities;
•the level, direction and volatility of market interest rates generally; and
•market rates of interest higher or lower than rates borne by the debt securities.
Our noteholders should also be aware that there may be a limited number of buyers when they decide to sell their debt securities. This too may materially adversely affect the market value of the debt securities or the trading market for the debt securities.
Terms relating to redemption may materially adversely affect our noteholdersnoteholders’ or Preferred Stockholders’, as applicable, return on any debt or preferred equity securities that we may issue.
If our noteholders’ debt securities or Preferred Stock are redeemable at our option, we may choose to redeem their debtsuch securities at times when prevailing interest rates are lower than the interest rate paid by our noteholders or our Preferred Stockholders on their debtrespective securities. In addition, if our noteholders’ debt securities or Preferred Stock are subject to mandatory redemption, or optional redemption triggers in advance of a general no-call deadline, we may be required to, or choose to, redeem their debtsuch respective securities also at times when prevailing interest rates are lower than the interest rate paid by our noteholders or our Preferred Stockholders on their debtrespective securities. In this circumstance, our noteholders or Preferred Stockholders, as applicable, may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as their debt securities being redeemed.
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Our shares of common stock currently trade at a discount from net asset value and may continue to do so in the future, which could limit our ability to raise additional equity capital.
Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict whether any shares of our common stock will trade at, above, or below net asset value. The stocks of BDCs as an industry, including shares of our common stock, currently trade below net asset value as a result of concerns over liquidity, interest rate changes, leverage restrictions and distribution requirements. When
Under the 1940 Act, when our common stock is trading below its net asset value per share, we will not be able to issue additional shares of our common stock at its market price without first obtaining approval for such issuance from our stockholders and our independent directors. At our 2016 annualOn June 11, 2021, at a special meeting of stockholders, held on December 2, 2016, our stockholders approved our ability, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering,reauthorized us to sell shares of our common stock (during the following 12 months) at a price or prices below our net asset value per share at the time of sale in one or more offerings subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any levelgiven date does not exceed 25% of its outstanding common stock immediately prior to such sale).
On June 12, 2020, we entered into equity distribution agreements with each of RBC Capital Markets, LLC, Barclays Capital Inc., and KeyBanc Capital Markets Inc. pursuant to which we may offer and sell, by means of at-the-market offerings, up to 50,000,000 shares of our $0.001 par value common stock. Sales by us of our common stock at a discount from net asset value per share duringpose potential risks for our existing stockholders whether or not they participate in the 12 month period following December 2, 2016. We do not intend to seek stockholder approval at our 2017 annual meeting to continueoffering, as well as for an additional 12 month period our ability to sell sharesnew investors who participate in the offering. Any sale of common stock at any level of discount froma price below net asset value per share subjectwill result in an immediate dilution to many of our existing common stockholders even if they participate in such sale. For additional information and hypothetical examples of these risks, including actual dilution illustrations specific to an offering, please refer to the condition that the maximum number of shares salable below net asset valuecorresponding prospectus supplement pursuant to this authority in any particular offering that could result inwhich such dilution is limited to 25%sales by means of our then outstanding common stock immediately prior to each such offering, but may seek stockholder approval to do so in the future.at-the-market offerings are made.
There is a risk that investors in our common stock may not receive dividends or that our dividends may not grow over time and investors in our debt securities or preferred equity may not receive all of the interest or dividend income to which they are entitled. In addition, if the current period of capital market disruption and instability continues for an extended period of time, there is a risk that investors in our common stock may not receive distributions consistent with historical levels or at all or that our distributions may not grow over time and a portion of our distributions may be a return of capital.
We intend to make distributions on a quarterlymonthly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash dividend payments.
In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.
The above-referenced restrictions on distributions may also inhibit our ability to make required interest or dividend payments to holders of our debt and preferred equity, as applicable, which may cause a default under the terms of our debt agreements. Such a default could materially increase our cost of raising capital, as well as cause us to incur penalties under the terms of our debt agreements.
Moreover, while we have declared common stock distributions through October 2021 at the same rate as the 48 months prior to such declaration, we cannot assure you that we will achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. Our ability to pay common stock distributions might be adversely affected by the impact of one or more of the risk factors described in this Annual Report, including the COVID-19 pandemic described above. For example, if the temporary closure in 2020 of many corporate offices, retail stores, and manufacturing facilities and factories in the jurisdictions, including the United States, affected by the COVID-19 pandemic is reintroduced it could result in reduced cash flows to us from our existing portfolio companies, which could reduce cash available for distribution to our stockholders. In addition, if we are unable to satisfy the asset coverage test applicable to us under the 1940 Act as a business development company or if we violate certain covenants under our existing or future credit facilities or other leverage, we may be limited in our ability to make common stock distributions. If we declare a common stock distribution and if more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in order to make cash distribution payments. To the extent we make common
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stock distributions to stockholders that include a return of capital, such portion of the distribution essentially constitutes a return of the stockholder’s investment. Although such return of capital may not be taxable, such distributions would generally decrease a stockholder’s basis in our common stock and may therefore increase such stockholder’s tax liability for capital gains upon the future sale of such stock. A return of capital distribution may cause a stockholder to recognize a capital gain from the sale of our common stock even if the stockholder sells its shares for less than the original purchase price.
Investing in our securities may involve a high degree of risk and is highly speculative.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or loss of principal. Our investments in portfolio companies may be speculative and aggressive, and therefore, an investment in our shares may not be suitable for someone with low risk tolerance.
Our stockholders willmay experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan.
All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment planDRIP with respect to dividends declared by our Board of Directors on shares of our common stock, are automatically reinvested in shares of our common stock.stock based on a 5% discount to the market price of our common stock on the date fixed by our Board of Directors for such distribution. As a result, our stockholders that opt out of our dividend reinvestment planDRIP will experience dilution in their ownership percentage of our common stock over time. Stockholders who (or whose broker through which they hold shares) do not elect to receive distributions in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the proportion of our stockholders who participate in the Plan, the level of premium or discount at which our shares are trading and the amount of the distribution payable to a stockholder.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
Sales of substantial amounts of our common stock, or the availability of such common stock for sale (including as a result of the conversion of the 5.50% Preferred Stock or of the Convertible Notes into common stock), could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities should we desire to do so.
If we sell shares of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to our net asset value per share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may be material.
Our stockholders approved our ability to issue warrants, options or rights to acquire our common stock at our 2008 annual meeting of stockholders for an unlimited time period and in accordance with the 1940 Act which provides that the conversion or exercise price of such warrants, options or rights may seek stockholder approval to do so inbe less than net asset value per share at the future.date such securities are issued or at the date such securities are converted into or exercised for shares of our common stock. The issuance or sale by us of shares of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to net asset value poses a risk of dilution to our stockholders. In particular, stockholders who do not purchase additional shares of common stock at or below the discounted price in proportion to their current ownership will experience an immediate decrease in net asset value per share (as well as in the aggregate net asset value of their shares of common stock if they do not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely affect the price at which our common stock trades. We have sold shares of our common stock at prices below net asset value per share in the past and may do so to the future. We have not sold any
In addition, we may issue additional shares of preferred stock or debt securities that are convertible into shares of our common stock. The net effect of both types of offerings would be to increase the number of shares of our common stock outstanding or available, which could negatively impact the market price of our common stock and cause the market value of our common stock to become more volatile. Further, to the extent that shares of our common stock are offered or converted at pricesa price below the then net asset value per share, since December 3, 2014.existing stockholders who do not participate in such offerings would experience dilution of their interest (both voting and economic, in terms of net asset value) in the Company.
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Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent directors. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are generally prohibited from buying or selling any security or other property from or to such affiliate, absent the prior approval of our independent directors. The 1940 Act also prohibits “joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times), without prior approval of our independent directors. Subject to certain limited exceptions, we are prohibited from buying or selling any security or other property from or to the Investment Adviser and its affiliates and persons with whom we are in a control relationship, or entering into joint transactions with any such person, absent the prior approval of the SEC.
On February 10, 2014,January 13, 2020, we received an exemptive order from the SEC (the “Order”), which superseded a prior co-investment exemptive order granted on February 10, 2014, that gave us the ability to negotiate terms other than price and quantity of co-investment transactions with other funds managed by the Investment Adviser or certain affiliates, including Priority Income Fund, Inc. and Pathway Energy InfrastructureProspect Flexible Income Fund, Inc. (f/k/a TP Flexible Income Fund, Inc.), where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions included therein. Under the terms of the relief permitting us to co-invest with other funds managed by our Investment Adviser or its affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. In certain situations where co-investment with one or more funds managed by the Investment Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the same issuer, the personnel of the Investment Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on policies and procedures, which are designed to reasonably ensure that investment
opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. Moreover, except in certain circumstances, when relying on the Order, we will be unable to invest in any issuer in which one or more funds managed by the Investment Adviser or its affiliates has previously invested.
The market price of our securities may fluctuate significantly.
The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may not be directly related to our operating performance. These factors include:
•significant volatility in the market price and trading volume of securities of business development companiesBDCs or other companies in the energy industry, which are not necessarily related to the operating performance of these companies;
•price and volume fluctuations in the overall stock market from time to time;
•changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;
•loss of RIC qualification;
•changes or perceived changes in earnings or variations in operating results;
•changes or perceived changes in the value of our portfolio of investments;
•changes in accounting guidelines governing valuation of our investments;
•any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
•departure of one or more of Prospect Capital Management’s key personnel;
•operating performance of companies comparable to us;
•short-selling pressure with respect to shares of our common stock or BDCs generally;
•future sales of our securities convertible into or exchangeable or exercisable for our common stock or the conversion of such securities, including the 5.50% Preferred Stock and the Convertible Notes;
•concerns regarding European sovereign debt;
•changes in prevailing interest rates;
•litigation matters;
•general economic trends and other external factors;factors, including the current COVID-19 pandemic; and
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•loss of a major funding source.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has, from time to time, been brought against that company.
If our stock price fluctuates significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management’s attention and resources from our business.
There is a risk that you may not receive distributions or that our distributions may not grow over time.
We have made and intend to continue to make distributions on a monthly basis to our common stockholders out of assets legally available for distribution. We cannot assure you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions or year-to-year increases in cash distributions. In addition, due to the asset coverage test applicable to us as a business development company,BDC, we may be limited in our ability to make distributions.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock.
Our charter and bylaws and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a transaction or a change in control that might involve a premium price for our stockholders or otherwise
be in their best interest. These provisions may prevent stockholders from being able to sell shares of our common stock at a premium over the current of prevailing market prices.
Our charter provides for the classification of our Board of Directors into three classes of directors, serving staggered three-year terms, which may render a change of control or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our Board of Directors will be filled generally only by the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy will serve for the remainder of the full term until a successor is elected and qualifies.
Our Board of Directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of common stock that we have authority to issue, which could have the effect of diluting a stockholder’s ownership interest. Prior to the issuance of shares of common stock of each class or series, including any reclassified series, our Board of Directors is required by our governing documents to set the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares of stock.
Our charter and bylaws also provide that our Board of Directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new bylaws. The Maryland General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:
•The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the common stock or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special minimum price provisions and special stockholder voting requirements on these combinations.
•The Maryland Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation (defined as shares of common stock which, when aggregated with other shares of common stock controlled by the stockholder, entitles the stockholder to exercise one of three increasing ranges of voting power in electing directors, as described more fully below) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares of common stock.
The provisions of the Maryland Business Combination Act will not apply, however, if our Board of Directors adopts a resolution that any business combination between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Our Board of Directors has adopted a resolution that any business combination between us and any other person is exempted from the provisions of the Maryland Business Combination Act, provided that the business combination is first approved by the Board of Directors, including a majority of the directors who are not interested persons as
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defined in the 1940 Act. There can be no assurance that this resolution will not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of the Maryland Business Combination Act may discourage others from trying to acquire control of us.
As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our Board of Directors at any time in the future, provided that we will notify the Division of Investment Management at the SEC prior to amending or eliminating this provision. However, as noted above, the SEC has recently taken the position that the Maryland Control Share Acquisition Act is inconsistent with the 1940 Act and may not be invoked by a BDC. It is the view of the staff of the SEC that opting into the Maryland Control Share Acquisition Act would be acting in a manner inconsistent with section 18(i) of the 1940 Act.future.
Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.
In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights offering pursuant to thisthe applicable prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of such rights offering.
In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be purchased as a result of such rights offering. Such dilution could be substantial.
We may in the future choose to pay dividends in our own stock, in which case our stockholders may be required to pay tax in excess of the cash they receive.
We may distribute taxable dividends that are payable in part in our stock. In accordance with guidance issued by the Internal Revenue Service, subject to the satisfaction of certain guidelines, a publicly traded RIC should generally be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to receive his or her distribution in either cash or stock of the RIC, (eveneven where there is a limitation on the percentage of the aggregate distribution payable in cash, provided that the limitation is at least 20%), subject to the satisfaction of certain guidelines.. If too many stockholders elect to receive cash, each stockholder electing to receive cash generally must receive a portion of his or her distribution in cash (with the balance of the distribution paid in stock). If these and certain other requirements are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount of cash that could have been received instead of stock. Taxable stockholders receiving such dividends would be required to include the full amount of the dividend as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. Stockholder (as defined in “Material U.S. Federal Income Tax Considerations”) may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. Stockholder sells the stock it receives as a dividend in order to pay this tax, it may be subject to transaction fees (e.g., broker fees or transfer agent fees) and the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of its stock at the time of the sale. Furthermore, with respect to Non-U.S. Stockholders (as defined in “Material U.S. Federal Income Tax Considerations”), we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. It is unclear whether and to what extent we will be pay dividends in cash and our stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operation. Our principal executive officesWe are located at 10 East 40th Street, New York, New York 10016, where we occupy our office space pursuant to our Administration Agreement with Prospect Administration. The office facilities, which are shared with the Investment Adviser andleased by our Administrator, consist of approximately 31,700 square feet, with various leases expiring up to and through 2023. We believe that our office facilities are suitable and adequate for our business as currently conducted.
Item 3. Legal Proceedings
(All figures in this item are in thousands)
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 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 material legal proceedings as of June 30, 2017. Our Investment Adviser and Administrator were named as defendants in a lawsuit filed on April 21, 2016 by a purported shareholder2021.
After several years of Prospect inlitigation regarding the acquisition of United States District Court forEnvironmental Services and affiliates, we reached a settlement that resulted in $2,512 of the Southern District of New York under the caption Paskowitz v. Prospect Capital Management and Prospect Administration. The complaint alleged that the defendants received purportedly excessive management and administrative services fees fromindemnification escrow being released to us in violationpart for payment of Section 36(b) of the 1940 Act. The plaintiff sought to recover on behalf of us damages in an amount not specified in the complaint. On June 30, 2016, the Investment Adviserlitigation fees and the Administrator filed a motion to dismiss the complaint in its entirety. On January 24, 2017, the court granted the motion to dismiss, finding that the shareholder’s complaint failed to state a cause of action and entering judgment dismissing the action. On February 21, 2017, the shareholder filed a notice of appeal to the United States Court of Appeals for the Second Circuit of the district court’s judgment dismissing the action. On May 15, 2017, the United States Court of Appeals for the Second Circuit entered an order dismissing the shareholder’s appeal with prejudice, in accordance with the parties’ stipulation filed May 12, 2017.
expenses.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(All figures in this item are in thousands, except share and per share data)
Our common stock is traded on the NASDAQ Global Select Market under the symbol “PSEC.”
The following table sets forth, for the quarterly reporting periods indicated, the net asset value per common share of our common stock and the high and low sales prices for our common stock, as reported on the NASDAQ Global Select Market. Our common stock historically has traded at prices both above and below its net asset value. There can be no assurance, however, that such premium or discount, as applicable, to net asset value will be maintained. See also “Item 1A. Risk Factors” in Part I of this reportAnnual Report for additional information about the risks and uncertainties we face.
| Stock Price | Premium (Discount) of High to NAV | Premium (Discount) of Low to NAV | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended | Net Asset Value Per Share(1) | Sales Price | Premium (Discount) of High Sales Price to Net Asset Value | Premium (Discount) of Low Sales Price to Net Asset Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| High | Low | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2016 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NAV(1) | High(2) | Low(2) | Premium (Discount) of High to NAV | Premium (Discount) of Low to NAV | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended June 30, 2020 | Year Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| First quarter | $ | 10.17 | $ | 7.99 | $ | 6.98 | (21.4 | %) | (31.4 | %) | First quarter | $ | 8.87 | $ | 6.73 | $ | 6.30 | (24.1) | % | (29.0) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Second quarter | 9.65 | 7.63 | 6.20 | (20.9 | %) | (35.8 | %) | Second quarter | 8.66 | 6.70 | 6.37 | (22.6) | % | (26.4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Third quarter | 9.61 | 7.48 | 5.26 | (22.2 | %) | (45.3 | %) | Third quarter | 7.98 | 6.61 | 4.04 | (17.2) | % | (49.4) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fourth quarter | 9.62 | 7.86 | 7.15 | (18.3 | %) | (25.7 | %) | Fourth quarter | 8.18 | 5.74 | 3.78 | (29.8) | % | (53.8) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| June 30, 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Year Ended June 30, 2021 | Year Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| First quarter | $ | 9.60 | $ | 8.65 | $ | 7.80 | (9.9 | %) | (18.8 | %) | First quarter | $ | 8.40 | $ | 5.17 | $ | 4.69 | (38.5) | % | (44.2) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Second quarter | 9.62 | 8.50 | 7.46 | (11.6 | %) | (22.5 | %) | Second quarter | 8.96 | 5.60 | 4.95 | (37.5) | % | (44.8) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Third quarter | 9.43 | 9.53 | 8.42 | 1.1 | % | (10.7 | %) | Third quarter | 9.38 | 7.98 | 5.51 | (14.9) | % | (41.3) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fourth quarter | 9.32 | 9.40 | 7.95 | 0.9 | % | (14.7 | %) | Fourth quarter | 9.81 | 9.22 | 7.62 | (6.0) | % | (22.3) | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) Net asset value per common share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per common share on the date of the high or low sales price. The NAVs shown are based on outstanding shares of our common stock at the end of each period.
(2) The High/Low Stock Price is calculated as of the closing price on a given day in the applicable quarter.
As of August 28, 2017,23, 2021, there were 156 shareholders164 stockholders of record of our common stock. This figure does not include a substantially greater number of beneficial holders of our common stock, whose shares are held in the names of brokers, dealers and clearing agencies.
Recent Sales of Common Stock Below Net Asset Value
At our 2009, 2010, 2011, 2012 and 2013 annual meeting of stockholders, and at a special meetings of stockholders held on June 12, 2020 and June 11, 2021, our stockholders approved our ability to sell shares of our common stock at a price or prices below our NAV per share at the time of sale in one or more offerings. The current approval to sell shares of our common stock below our NAV per share is valid until June 11, 2022 and subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of our outstanding common stock immediately prior to such sale). Accordingly, we may make offerings of our common stock without any limitation on the total amount of dilution to stockholders. Our prospectus supplement and accompanying prospectus relating to this offering contains additional information about these offerings. Pursuant to the authority granted by our stockholders and the approval of our Board of Directors, we have made the following sales below NAV:
| Date of Offering | Price Per Share to Investors | Shares Issued | Estimated Net Asset Value per Share(1) | Percentage Dilution | ||||||||||
| June 15, 2020 to June 22, 2020(2) | $5.29 - $5.40 | 1,158,222 | $7.93 - 7.94 | 0.10% | ||||||||||
(1) The data for sales of shares below NAV pursuant to our equity distribution agreements are estimates based on our last reported NAV adjusted for capital events occurring during the period since the last calculated NAV. All amounts presented are approximations based on the best available data at the time of issuance.
(2) At the market offering. Dates of offering represent the sales dates of the stock. The settlement dates are two business days later than the sale dates.
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Distribution Policy
Through March 2010, we made quarterly distributions to our stockholders out of assets legally available for distribution. In June 2010, we changed our distribution policy from a quarterly payment to a monthly payment. To the extent prudent and practicable, we currently intend to continue making distributions on a monthly basis. Our ability to pay distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants. Our distributions, if any, will be determined by our Board of Directors. Certain amounts of the monthly distributions may from time to time be paid out of our capital rather than from earnings for the quarter as a result of our deliberate planning or by accounting reclassifications.
As a RIC, we generally are not subject to U.S. federal income tax on income and gains we distribute each taxable year to our stockholders, provided that in such taxable year, we distribute an amount equal to at least 90% of our investment company taxable income (as defined by the Code) to our stockholders. Any undistributed taxable income is subject to U.S. federal income tax. In addition, we will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income recognized during the calendar year, (ii) 98.2% of our capital gain net income, as defined by the Code, recognized for the one year period ending October 31 in that calendar year and (iii) any income recognized, but not distributed, in preceding years.
We did not have an excise tax liability for the calendar year ended December 31, 2016.2020. As of June 30, 2017,2021, we do not expect to have any excise tax due for the 20172021 calendar year. Tax characteristics of all distributions will be reported to stockholders, as appropriate, on Form 1099-DIV after the end of the calendar year.
In addition, although we currently intend to distribute realized net capital gains (which we define as net long-term capital gains in excess of short-term capital losses), if any, at least annually out of the assets legally available for such distributions, we may decide in the future to retain such capital gains for investment. In such event, the consequences of our retention of net capital gains are described under “Material U.S. Federal Income Tax Considerations.” We can offer no assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our borrowings.
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During the years ended June 30, 20172021 and June 30, 2016,2020, we distributed approximately $359.0$276.1 million and $356.1$265.3 million, respectively, to our common stockholders. The following table summarizes our distributions declared and payable for the years ended June 30, 20162020 and June 30, 2017.2021.
| Declaration Date | Record Date | Payment Date | Amount Per Share | Amount Distributed (in thousands) | ||||||||
| 5/6/2015 | 7/31/2015 | 8/20/2015 | $ | 0.083330 | $ | 29,909 | ||||||
| 5/6/2015 | 8/31/2015 | 9/17/2015 | 0.083330 | 29,605 | ||||||||
| 8/24/2015 | 9/30/2015 | 10/22/2015 | 0.083330 | 29,601 | ||||||||
| 8/24/2015 | 10/30/2015 | 11/19/2015 | 0.083330 | 29,600 | ||||||||
| 11/4/2015 | 11/30/2015 | 12/24/2015 | 0.083330 | 29,611 | ||||||||
| 11/4/2015 | 12/31/2015 | 1/21/2016 | 0.083330 | 29,616 | ||||||||
| 11/4/2015 | 1/29/2016 | 2/18/2016 | 0.083330 | 29,641 | ||||||||
| 2/9/2016 | 2/29/2016 | 3/24/2016 | 0.083330 | 29,663 | ||||||||
| 2/9/2016 | 3/31/2016 | 4/21/2016 | 0.083330 | 29,674 | ||||||||
| 2/9/2016 | 4/29/2016 | 5/19/2016 | 0.083330 | 29,702 | ||||||||
| 5/9/2016 | 5/31/2016 | 6/23/2016 | 0.083330 | 29,730 | ||||||||
| 5/9/2016 | 6/30/2016 | 7/21/2016 | 0.083330 | 29,758 | ||||||||
| Total declared and payable for the year ended June 30, 2016 | $ | 356,110 | ||||||||||
| 5/9/2016 | 7/29/2016 | 8/18/2016 | $ | 0.083330 | $ | 29,783 | ||||||
| 5/9/2016 | 8/31/2016 | 9/22/2016 | 0.083330 | 29,809 | ||||||||
| 8/25/2016 | 9/30/2016 | 10/20/2016 | 0.083330 | 29,837 | ||||||||
| 8/25/2016 | 10/31/2016 | 11/17/2016 | 0.083330 | 29,863 | ||||||||
| 11/8/2016 | 11/30/2016 | 12/22/2016 | 0.083330 | 29,890 | ||||||||
| 11/8/2016 | 12/30/2016 | 1/19/2017 | 0.083330 | 29,915 | ||||||||
| 11/8/2016 | 1/31/2017 | 2/16/2017 | 0.083330 | 29,940 | ||||||||
| 2/7/2017 | 2/28/2017 | 3/23/2017 | 0.083330 | 29,963 | ||||||||
| 2/7/2017 | 3/31/2017 | 4/20/2017 | 0.083330 | 29,989 | ||||||||
| 2/7/2017 | 4/28/2017 | 5/18/2017 | 0.083330 | 29,994 | ||||||||
| 5/9/2017 | 5/31/2017 | 6/22/2017 | 0.083330 | 29,999 | ||||||||
| 5/9/2017 | 6/30/2017 | 7/20/2017 | 0.083330 | 30,005 | ||||||||
| Total declared and payable for the year ended June 30, 2017 | $ | 358,987 | ||||||||||
| Declaration Date | Record Date | Payment Date | Amount Per Share | Amount Distributed (in thousands) | ||||||||||||||||||||||
| 5/7/2019 | 7/31/2019 | 8/22/2019 | $ | 0.060000 | $ | 22,032 | ||||||||||||||||||||
| 5/7/2019 | 8/30/2019 | 9/19/2019 | 0.060000 | 22,037 | ||||||||||||||||||||||
| 8/22/2019 | 9/30/2019 | 10/24/2019 | 0.060000 | 22,042 | ||||||||||||||||||||||
| 8/22/2019 | 10/31/2019 | 11/20/2019 | 0.060000 | 22,046 | ||||||||||||||||||||||
| 11/6/2019 | 11/29/2019 | 12/19/2019 | 0.060000 | 22,051 | ||||||||||||||||||||||
| 11/6/2019 | 1/2/2020 | 1/23/2020 | 0.060000 | 22,055 | ||||||||||||||||||||||
| 11/6/2019 | 1/31/2020 | 2/20/2020 | 0.060000 | 22,059 | ||||||||||||||||||||||
| 2/7/2020 | 2/28/2020 | 3/19/2020 | 0.060000 | 22,064 | ||||||||||||||||||||||
| 2/7/2020 | 3/31/2020 | 4/23/2020 | 0.060000 | 22,069 | ||||||||||||||||||||||
| 2/7/2020 | 4/30/2020 | 5/21/2020 | 0.060000 | 22,161 | ||||||||||||||||||||||
| 5/8/2020 | 5/29/2020 | 6/18/2020 | 0.060000 | 22,249 | ||||||||||||||||||||||
| 5/8/2020 | 6/30/2020 | 7/23/2020 | 0.060000 | 22,412 | ||||||||||||||||||||||
| Total declared and payable for the year ended June 30, 2020 | $ | 265,277 | ||||||||||||||||||||||||
| 5/8/2020 | 7/31/2020 | 8/20/2020 | $ | 0.060000 | $ | 22,515 | ||||||||||||||||||||
| 5/8/2020 | 8/31/2020 | 9/17/2020 | 0.060000 | 22,619 | ||||||||||||||||||||||
| 8/25/2020 | 9/30/2020 | 10/22/2020 | 0.060000 | 22,727 | ||||||||||||||||||||||
| 8/25/2020 | 10/30/2020 | 11/19/2020 | 0.060000 | 22,836 | ||||||||||||||||||||||
| 11/6/2020 | 11/30/2020 | 12/24/2020 | 0.060000 | 22,942 | ||||||||||||||||||||||
| 11/6/2020 | 12/31/2020 | 1/21/2021 | 0.060000 | 23,046 | ||||||||||||||||||||||
| 11/6/2020 | 1/29/2020 | 2/18/2021 | 0.060000 | 23,140 | ||||||||||||||||||||||
| 2/9/2021 | 2/26/2021 | 3/18/2021 | 0.060000 | 23,219 | ||||||||||||||||||||||
| 2/9/2021 | 3/31/2021 | 4/22/2021 | 0.060000 | 23,244 | ||||||||||||||||||||||
| 2/9/2021 | 4/30/2021 | 5/20/2021 | 0.060000 | 23,265 | ||||||||||||||||||||||
| 5/7/2021 | 5/27/2021 | 6/17/2021 | 0.060000 | 23,286 | ||||||||||||||||||||||
| 5/7/2021 | 6/28/2021 | 7/22/2021 | 0.060000 | 23,306 | ||||||||||||||||||||||
| Total declared and payable for the year ended June 30, 2021 | $ | 276,145 | ||||||||||||||||||||||||
Dividends and distributions to common stockholders are recorded on the ex-dividend date. As such, the table above includes distributions with record dates during the years ended June 30, 20172021 and June 30, 2016.2020. It does not include distributions previously declared to common stockholders of record on any future dates, as those amounts are not yet determinable. The following dividends were previously declared and will be recorded and payable subsequent to June 30, 2017:2021:
•$0.083330.06 per share for July 20172021 to holders of record on July 31, 201728, 2021 with a payment date of August 24, 2017.19, 2021.
•$0.083330.06 per share for August 20172021 to holders of record on August 31, 201727, 2021 with a payment date of September 21, 2017.23, 2021.
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Dividend Reinvestment Plan
We maintain an “opt out” common stock dividend reinvestment and direct stock purchase plan for our common stockholders. As a result, if we declare a distribution (as discussed above), common stockholders’ cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically(or their broker through which they hold shares) opt out of the dividend reinvestment planPlan so as to receive cash distributions. Stockholders who receive distributions in the form of stock are subject to the same U.S. federal, state and local tax consequences as are stockholders who elect to receive their distributions in cash. Stockholders are advised to consult with their brokers or financial institutions, as appropriate, with respect to the administration of their dividends and related instructions. See also “Dividend“Common Stock Dividend Reinvestment and Direct Stock Purchase Plan” in Part I of this reportAnnual Report for additional information.
We primarily use newly-issued shares of our common stock to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve the right to purchase shares of our common stock in the open market in connection with the implementation of the plan. Our Board of Directors determines how the common stock to be distributed as part of the plan is made available.
During the years ended June 30, 20172021 and June 30, 2016,2020, we distributed 2,969,70214,871,092 and 2,725,2225,249,252 shares of our common stock, respectively, in connection with the dividend reinvestment plan.Plan. All of the shares of common stock distributed to our stockholders were new issues. The following table summarizes the shares issued through the reinvestment of dividends in the years ended June 30, 20162020 and June 30, 2017.2021.
| Record Date | Payment Date | Shares Issued | Value of Shares (in thousands) | % of Distribution | ||||||||||||||||||||||
| 6/28/2019 | 7/18/2019 | 78,163 | $ | 520 | 2.4 | % | ||||||||||||||||||||
| 7/31/2019 | 8/22/2019 | 78,335 | 521 | 2.4 | % | |||||||||||||||||||||
| 8/30/2019 | 9/19/2019 | 76,349 | 503 | 2.3 | % | |||||||||||||||||||||
| 9/30/2019 | 10/24/2019 | 63,076 | 413 | 1.9 | % | |||||||||||||||||||||
| 10/31/2019 | 11/20/2019 | 82,501 | 535 | 2.4 | % | |||||||||||||||||||||
| 11/29/2019 | 12/19/2019 | 74,795 | 499 | 2.3 | % | |||||||||||||||||||||
| 1/2/2020 | 1/23/2020 | 74,108 | 490 | 2.2 | % | |||||||||||||||||||||
| 1/31/2020 | 2/20/2020 | 72,405 | 475 | 2.2 | % | |||||||||||||||||||||
| 2/28/2020 | 3/19/2020 | 87,169 | 436 | 2.0 | % | |||||||||||||||||||||
| 3/31/2020 | 4/23/2020 | 1,538,432 | 5,861 | 26.6 | % | |||||||||||||||||||||
| 4/30/2020 | 5/21/2020 | 1,467,398 | 6,733 | 30.4 | % | |||||||||||||||||||||
| 5/29/2020 | 6/18/2020 | 1,556,521 | 7,955 | 35.8 | % | |||||||||||||||||||||
| Total issued in the year ended June 30, 2020 | 5,249,252 | $ | 24,941 | |||||||||||||||||||||||
| 6/30/2020 | 7/23/2020 | 1,716,619 | $ | 8,235 | 36.7 | % | ||||||||||||||||||||
| 7/31/2020 | 8/20/2020 | 1,742,536 | 8,476 | 37.6 | % | |||||||||||||||||||||
| 8/31/2020 | 9/17/2020 | 1,779,304 | 8,570 | 37.9 | % | |||||||||||||||||||||
| 9/30/2020 | 10/22/2020 | 1,815,585 | 8,797 | 38.7 | % | |||||||||||||||||||||
| 10/30/2020 | 11/19/2020 | 1,772,218 | 8,856 | 38.8 | % | |||||||||||||||||||||
| 11/30/2020 | 12/24/2020 | 1,732,884 | 8,988 | 39.2 | % | |||||||||||||||||||||
| 12/31/2020 | 1/21/2021 | 1,563,270 | 9,104 | 39.5 | % | |||||||||||||||||||||
| 1/31/2021 | 2/18/2021 | 1,324,683 | 9,199 | 39.8 | % | |||||||||||||||||||||
| 2/28/2021 | 3/18/2021 | 404,974 | 2,997 | 12.9 | % | |||||||||||||||||||||
| 3/31/2021 | 4/22/2021 | 357,521 | 2,741 | 11.8 | % | |||||||||||||||||||||
| 4/30/2021 | 5/20/2021 | 344,487 | (1) | 2,706 | 11.6 | % | ||||||||||||||||||||
| 5/27/2021 | 6/17/2021 | 317,011 | (1) | 2,677 | 11.5 | % | ||||||||||||||||||||
| Total issued in the year ended June 30, 2021 | 14,871,092 | $ | 81,346 | |||||||||||||||||||||||
(1) Number of newly-issued shares to be credited to a stockholder’s account to be determined by dividing (i) the total dollar amount of the dividend payable to such stockholder by (ii) 95% of the closing market price per share of our stock on the date fixed by the Board of Directors for such distribution (thereby providing a 5% discount to the market price of our common stock on such date).
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| Record Date | Payment Date | Shares Issued | Value of Shares (in thousands) | % of Distribution | ||||||||
| 6/30/2015 | 7/23/2015 | 193,892 | $ | 1,425 | 4.8 | % | ||||||
| 7/31/2015 | 8/20/2015 | 152,896 | 1,115 | 3.7 | % | |||||||
| 8/31/2015 | 9/17/2015 | 143,685 | 1,142 | 3.9 | % | |||||||
| 9/30/2015 | 10/22/2015 | 189,172 | 1,402 | 4.7 | % | |||||||
| 10/30/2015 | 11/19/2015 | 182,331 | 1,349 | 4.6 | % | |||||||
| 11/30/2015 | 12/24/2015 | 167,727 | 1,211 | 4.1 | % | |||||||
| 12/31/2015 | 1/21/2016 | 299,423 | 1,749 | 5.9 | % | |||||||
| 1/29/2016 | 2/18/2016 | 255,743 | 1,685 | 5.7 | % | |||||||
| 2/29/2016 | 3/24/2016 | 146,899 | 1,027 | 3.5 | % | |||||||
| 3/31/2016 | 4/21/2016 | 324,060 | 2,430 | 8.2 | % | |||||||
| 4/29/2016 | 5/19/2016 | 338,027 | 2,522 | 8.5 | % | |||||||
| 5/31/2016 | 6/23/2016 | 331,367 | 2,581 | 8.7 | % | |||||||
| Total issued in the year ended June 30, 2016 | 2,725,222 | $ | 19,638 | |||||||||
| 6/30/2016 | 7/21/2016 | 307,564 | $ | 2,537 | 8.5 | % | ||||||
| 7/29/2016 | 8/18/2016 | 310,101 | 2,614 | 8.8 | % | |||||||
| 8/31/2016 | 9/22/2016 | 317,262 | 2,602 | 8.7 | % | |||||||
| 9/30/2016 | 10/20/2016 | 326,945 | 2,645 | 8.9 | % | |||||||
| 10/31/2016 | 11/17/2016 | 327,506 | 2,564 | 8.6 | % | |||||||
| 11/30/2016 | 12/22/2016 | 303,671 | 2,566 | 8.6 | % | |||||||
| 12/31/2016 | 1/19/2017 | 295,904 | 2,557 | 8.5 | % | |||||||
| 1/31/2017 | 2/16/2017 | 274,043 | 2,571 | 8.6 | % | |||||||
| 2/28/2017 | 3/23/2017 | 315,476 | 2,846 | 9.5 | % | |||||||
| 3/31/2017 | 4/20/2017 | 53,517 | 496 | 1.7 | % | |||||||
| 4/28/2017 | 5/18/2017 | 65,054 | 531 | 1.8 | % | |||||||
| 5/31/2017 | 6/22/2017 | 72,659 | 587 | 2.0 | % | |||||||
| Total issued in the year ended June 30, 2017 | 2,969,702 | $ | 25,116 | |||||||||
Registered common stockholders who opt out of the dividend reinvestment planPlan must notify the planPlan administrator prior to the payment date in order for that distribution to be paid in cash. As such, the table above includes distributions with payment dates during the years ended June 30, 20172021 and June 30, 2016.2020. It does not include distributions previously declared and recorded as payable to common stockholders on any future dates, as those amounts are not yet determinable.
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Purchases of equity securities by the issuer and affiliated purchasers
On August 24, 2011, our Board of Directors approved a share repurchase plan (the “Repurchase Program”) under which we may repurchase up to $100,000 of our common stock at prices below our net asset value per share. Prior to any repurchase, we are required to notify shareholdersstockholders of our intention to purchase our common stock. Our last notice was delivered with our annual proxy mailing on September 21, 2016 and our most recent notice was delivered with a shareholder letter mailing on August 2, 2017. This notice extends for six months after the date that notice is delivered.
We did not repurchase any shares of our common stock for the year ended June 30, 2017.
| Repurchases of Common Stock | Year Ended June 30, 2016 | ||
| Dollar amount repurchased | $ | 34,140 | |
| Shares Repurchased | 4,708,750 | ||
| Weighted average price per share | 7.25 | ||
| Weighted average discount to June 30, 2015 Net Asset Value | 30 | % | |
As of June 30, 2017,2021, the approximate dollar value of shares that may yet be purchased under the plan is $65,860.$65.9 million.
During the year ended June 30, 2017,2021, Prospect officers and directors purchased 2,104,7407,083,106 shares of our common stock, or 0.6%1.82% of total outstanding shares as of June 30, 2017,2021, both through the open market transactions and shares issued in connection with our common stock dividend reinvestment plan.
The following table summarizes the shares purchased by Prospect officers during the year ended June 30, 2017.2021.
| Period | Total Number of Shares Purchased in Open Market | Average price paid per share | Total Number of Shares Purchased Through Dividend Reinvestment Plan | ||||||||
| July 1, 2020 - July 31, 2020 | — | — | 916,116 | ||||||||
| August 1, 2020 - August 31, 2020 | 2,500 | $ | 5.10 | 914,887 | |||||||
| September 1, 2020 - September 30, 2020 | — | — | 935,803 | ||||||||
| October 1, 2020 - October 31, 2020 | — | — | 941,801 | ||||||||
| November 1, 2020 - November 30, 2020 | — | — | 924,542 | ||||||||
| December 31, 2020 - December 31, 2020 | — | — | 901,298 | ||||||||
| January 1, 2021 - January 31, 2021 | — | — | 812,034 | ||||||||
| February 1, 2021 - February 28, 2021 | — | — | 688,043 | ||||||||
| March 1, 2021 - March 31, 2021 | — | — | 20,521 | ||||||||
| April 1, 2021 - April 30, 2021 | — | — | 8,121 | ||||||||
| May 1, 2021 - May 30, 2021 | 2,000 | $ | 7.62 | 7,984 | |||||||
| June 1, 2021 - June 30, 2021 | — | — | 7,456 | ||||||||
| Total | 4,500 | 7,078,606 | |||||||||
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| Period | Total Number of Shares Purchased in Open Market | Average price paid per share | Total Number of Shares Purchased Through Dividend Reinvestment Plan | ||||
| July 1, 2016 - July 31, 2016 | — | $ | — | 222,466 | |||
| August 1, 2016 - August 31, 2016 | — | — | 219,916 | ||||
| September 1, 2016 - September 30, 2016 | 7,000 | 8.01 | 228,298 | ||||
| October 1, 2016 - October 31, 2016 | — | 233,762 | |||||
| November 1, 2016 - November 30, 2016 | 1,000 | 7.65 | 244,008 | ||||
| December 31, 2016 - December 31, 2016 | 5,000 | 8.18 | 228,531 | ||||
| January 1, 2017 - January 31, 2017 | — | — | 225,714 | ||||
| February 1, 2017 - February 28, 2017 | — | — | 209,912 | ||||
| March 1, 2017 - March 31, 2017 | 26,000 | 9.30 | 220,207 | ||||
| April 1, 2017 - April 30, 2017 | — | — | 3,280 | ||||
| May 1, 2017 - May 30, 2017 | 22,000 | 8.11 | 3,752 | ||||
| June 1, 2017 - June 30, 2017 | — | — | 3,894 | ||||
| Total | 61,000 | 2,043,740 | |||||
Stock Performance Graph
The following graph compares a shareholder’sstockholder’s cumulative total return for the last five fiscal years as if such amounts had been invested in: (i) our common stock; (ii) the stocks included in the S&P 500 Index; (iii) the stocks included in the S&P 500 Financials Sector Index; and (iv) a customized BDC Peer Group composed of Apollo Investment Corporation, Ares Capital Corporation, BlackRock Capital Investment Corporation, Gladstone Capital Corporation, and MVC Capital, Inc. The graph and other information furnished under the heading “Stock Performance Graph” shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference and shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under, or to the liabilities of Section 18 of, the Exchange Act.
The graph is based on historical stock prices and measures total shareholderstockholder return, which takes into account both changes in stock price and dividends. The total return assumes that dividends were reinvested daily and is based on a $100 investment on June 30, 2012.
Fees and Expenses
The following tables are intended to assist you in understanding the costs and expenses that an investor will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. These tables are based on our assets and common stock outstanding as of June 30, 2021, except that we assume that we have borrowed $1.11 billion under our credit facility, which is the maximum amount available under the credit facility with the current levels of other debt, in addition to our other indebtedness of $1.9 billion. Except where the context suggests otherwise, any reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, the Company will pay such fees and expenses out of our net assets and, consequently, you will indirectly bear such fees or expenses as an investor in the Company’s common stock. However, you will not be required to deliver any money or otherwise bear personal liability or responsibility for such fees or expenses.
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| Stockholder transaction expenses: | A1 Shares (14) | M Shares | AA Shares | ||||||||
| Sales Load (as a percentage of offering price) | 10.00% (1) | 3.00% (2) | 10.00% (3) | ||||||||
| Offering expenses borne by the Company (as a percentage of offering price) | (4) | (4) | (5) | ||||||||
| Preferred Stock Dividend reinvestment plan expenses (6) | None | None | None | ||||||||
| Total stockholder transaction expenses (as a percentage of offering price): | 11.5% | 4.5% | 10.5% | ||||||||
| Annual expenses (as a percentage of net assets attributable to common stock): | |||||||||||
| Management fees (7) | 4.37% | ||||||||||
| Incentive fees payable under Investment Advisory Agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income) (8) | 1.93% | ||||||||||
| Total advisory fees | 6.30% | ||||||||||
| Total interest expenses (9) | 3.36% | ||||||||||
| Other expenses (10) | 0.82% | ||||||||||
| Total annual expenses (8)(10)(11) | 10.48% | ||||||||||
| Dividends on Preferred Stock(12) | 1.87% | ||||||||||
| Total annual expenses after dividends on Preferred Stock (13) | 12.35% | ||||||||||
Example
The following table demonstrates the projected dollar amount of cumulative expenses we would pay out of net assets and that you would indirectly bear over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we have issued $1.25 billion in 5.50% Preferred Stock paying dividends of 5.50% per annum, we have borrowed $1.11 billion available under our line of credit, in addition to our other indebtedness of $1.9 billion, and that our annual operating expenses would remain at the levels set forth in the table above and that we would pay the costs shown in the table above.
| 1 Year | 3 Years | 5 Years | 10 Years | |||||||||||||||||||||||
| A1 Shares and AA Shares - You would pay the following expenses on a $1,000 investment in shares of our common stock, assuming a 5% annual return on our portfolio* | $ | 138 | $ | 323 | $ | 488 | $ | 828 | ||||||||||||||||||
| A1 Shares and AA Shares - You would pay the following expenses on a $1,000 investment in shares of our common stock, assuming a 5% annual return on our portfolio** | $ | 148 | $ | 347 | $ | 521 | $ | 868 | ||||||||||||||||||
* Assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation on our portfolio.
** Assumes no unrealized capital depreciation or realized capital losses and 5% annual return on our portfolio resulting entirely from net realized capital gains (and therefore subject to the capital gains incentive fee).
While the example assumes, as required by the SEC, a 5% annual return on our portfolio, our performance will vary and may result in a return greater or less than 5%. The income incentive fee under our Investment Advisory Agreement with Prospect Capital Management is unlikely to be material assuming a 5% annual return on our portfolio and is not included in the example. If we achieve sufficient returns on our portfolio, including through the realization of capital gains, to trigger an incentive fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. In addition, while the example assumes reinvestment of all dividends and other distributions at NAV, common stockholders that participate in our common stock dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by 95% of the market price per share of our common stock at the close of trading on the valuation date for the distribution.
This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
(1) Includes up to a 7.0% selling commission on the $25.00 per share (the “Stated Value”) paid by the Company and a dealer manager fee equal to 3.0% of the Stated Value paid by the Company. Reductions in selling commissions will be reflected in reduced public offering prices as described in the “Plan of Distribution” section of the applicable prospectus supplement and the net proceeds to us will not be impacted by such reductions; therefore, we will bear a reduction in net proceeds to us up to 7.0% of the Stated Value on all A1 Shares although the selling commission compensation paid by us to our dealer manager may
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represent less than 7.0% of the Stated Value. We may, through the Holder Optional Conversion Fee, recoup a portion of the Sales Load if stockholders exercise a Holder Optional Conversion (as defined in the prospectus supplement relating to the applicable offering) of their Preferred Stock prior to the 5-year anniversary of the original issue date. The Holder Optional Conversion Fee is 9.00% of the maximum public offering price disclosed herein prior to the first anniversary of the issuance of such Preferred Stock, 8.00% of the maximum public offering price disclosed herein on or after the first anniversary but prior to the second anniversary, 7.00% of the maximum public offering price disclosed herein on or after the second anniversary but prior to the third anniversary, 6.00% of the maximum public offering price disclosed herein on or after the third anniversary but prior to the fourth anniversary, 5.00% of the maximum public offering price disclosed herein on or after the fourth anniversary but prior to the fifth anniversary and 0.00% on or after the fifth anniversary.
(2) Includes a dealer manager fee equal to 3.0% of the Stated Value paid by the Company.
(3) Includes a 10% selling concession on the Stated Value paid by the Company. We may, through the Holder Optional Conversion Fee, recoup a portion of the Sales Load if stockholders exercise a Holder Optional Conversion of their Preferred Stock prior to the 5-year anniversary of the original issue date. The Holder Optional Conversion Fee is 9.50% of the maximum public offering price disclosed herein prior to the first anniversary of the issuance of such Preferred Stock, 8.50% of the maximum public offering price disclosed herein on or after the first anniversary but prior to the second anniversary, 7.50% of the maximum public offering price disclosed herein on or after the second anniversary but prior to the third anniversary, 6.50% of the maximum public offering price disclosed herein on or after the third anniversary but prior to the fifth anniversary and 0.00% on or after the fifth anniversary.
(4) The selling commission and dealer manager fee, when combined with organization and offering expenses (including due diligence expenses and fees for establishing servicing arrangements for new stockholder accounts), are not expected to exceed 11.5% of the gross offering proceeds. Our Board of Directors may, in its discretion, authorize the Company to incur underwriting and other offering expenses in excess of 11.5% of the gross offering proceeds. In no event will the combined selling commission, dealer manager fee and offering expenses exceed FINRA’s limit on underwriting and other offering expenses.
(5) The selling concession, when combined with organization and offering expenses (including due diligence expenses), are not expected to exceed 10.5% of the gross offering proceeds. Our Board of Directors may, in its discretion, authorize the Company to incur underwriting and other offering expenses in excess of 10.5% of the gross offering proceeds. In no event will the combined selling concession and offering expenses exceed FINRA’s limit on underwriting and other offering expenses.
(6) The expenses of the Preferred DRIP are included in “other expenses.” See “Capitalization” in the applicable prospectus supplement.
(7) Our base management fee is 2% of our gross assets (which include any amount borrowed, i.e., total assets without deduction for any liabilities, including any borrowed amounts for non-investment purposes, for which purpose we have not and have no intention of borrowing). Although no plans are in place to borrow the full amount under our line of credit, assuming that we borrowed $1.1 billion, the 2% management fee of gross assets equals approximately 4.37% of net assets.
(8) Based on our net investment income and realized capital gains, less realized and unrealized capital losses, earned on our portfolio for the year ended June 30, 2021, all of which consisted of an income incentive fee. This historical amount has been adjusted to reflect the issuance of 50,187,000 shares of 5.50% Preferred Stock. The capital gain incentive fee is paid without regard to pre-incentive fee income. For a more detailed discussion of the calculation of the two-part incentive fee, see “Management Services-Investment Advisory Agreement” in the applicable prospectus.
(9) As of June 30, 2021, we had $1.9 billion outstanding of Unsecured Notes (as defined below) in various maturities, ranging from July 15, 2022 to October 15, 2043, and interest rates, ranging from 1.50% to 6.88%, some of which are convertible into shares of the Company’s common stock at various conversion rates.
(10) “Other expenses” are based on estimated amounts for the current fiscal year. The amount shown above represents annualized expenses during our year ended June 30, 2021 representing all of our estimated recurring operating expenses (except fees and expenses reported in other items of this table) that are deducted from our operating income and reflected as expenses in our Statement of Operations. The estimate of our overhead expenses, including payments under an administration agreement with Prospect Administration, or the Administration Agreement is based on our projected allocable portion of overhead and other expenses incurred by Prospect Administration in performing its obligations under the Administration Agreement. See “Business-Management Services-Administration Agreement” in the applicable prospectus.
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(11) If all 50,187,000 shares of 5.50% Preferred Stock were converted into common stock and assuming all the Series A1, Series AA and Series A2 Shares of 5.50% Preferred Stock pay a Holder Optional Conversion Fee of 9.00%, 9.50% and 9.50%, respectively, of the maximum public offering price disclosed within the applicable prospectus supplement and are converted at a conversion rate based on the 5-day VWAP of our common stock on June 30, 2021, which was $8.75, then management fees would be 3.26%, incentive fees payable under our Investment Advisory Agreement would be 1.44%, total advisory fees would be 4.71%, total interest expenses would be 2.51%, other expenses would be 0.60%, and total annual expenses would be 7.82% of net assets attributable to our common stock. The actual 5-day VWAP of our common stock on a conversion date may be more or less than $8.75, which may result in fees that are higher or lower than those described herein. These figures are based on the same assumptions described in the other notes to this fee table.
(12) Based on the 5.50% per annum dividend rate applicable to the A1 Shares, M Shares, and AA Shares. Other series of preferred stock, including other series of preferred stock being sold in different offerings, may bear different annual dividend rates. No dividend will be paid on shares of 5.50% Preferred Stock after they have been converted to shares of common stock.
(13) The indirect expenses associated with the Company’s investments in collateralized loan obligations are not included in the fee table presentation, but if such expenses were included in the fee table presentation then the Company’s total annual expenses would have been 11.12%, or 12.99% after dividends on Preferred Stock.
(14) This table only represents stockholder transaction expenses for the A1 shares, which are continuously offered, and does not represent stockholder transaction expenses for the A2 Shares, which are not continuously offered, and which expenses were set forth in the applicable offering document for the A2 Shares.
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Item 6. Selected Financial Data[Reserved]
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| Year Ended June 30, | |||||||||||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Summary of Operations | |||||||||||||||||||
| Total investment income | $ | 701,046 | $ | 791,973 | $ | 791,084 | $ | 712,291 | $ | 576,336 | |||||||||
| Total operating expenses | 394,964 | 420,845 | 428,337 | 355,068 | 251,412 | ||||||||||||||
| Net investment income | 306,082 | 371,128 | 362,747 | 357,223 | 324,924 | ||||||||||||||
| Net Realized and Change in Unrealized (Losses) from Investments | (46,165 | ) | (267,990 | ) | (12,458 | ) | (38,203 | ) | (104,068 | ) | |||||||||
| Net realized (losses) gains on extinguishment of debt | (7,011 | ) | 224 | (3,950 | ) | — | — | ||||||||||||
| Net increase in net assets resulting from operations | 252,906 | 103,362 | 346,339 | 319,020 | 220,856 | ||||||||||||||
| Per Share Data | |||||||||||||||||||
| Net investment income(1) | $ | 0.85 | $ | 1.04 | $ | 1.03 | $ | 1.19 | $ | 1.57 | |||||||||
| Net increase in net assets resulting from operations(1) | 0.70 | 0.29 | 0.98 | 1.06 | 1.07 | ||||||||||||||
| Dividends to shareholders | (1.00 | ) | (1.00 | ) | (1.19 | ) | (1.32 | ) | (1.28 | ) | |||||||||
| Net asset value at end of year | 9.32 | 9.62 | 10.31 | 10.56 | 10.72 | ||||||||||||||
| Balance Sheet Data | |||||||||||||||||||
| Total assets(4) | $ | 6,172,789 | $ | 6,236,181 | $ | 6,753,914 | $ | 6,420,259 | $ | 4,410,610 | |||||||||
| Total debt outstanding(4) | 2,642,195 | 2,666,939 | 2,939,596 | 2,716,041 | 1,645,395 | ||||||||||||||
| Net assets | 3,354,952 | 3,435,917 | 3,703,049 | 3,618,182 | 2,656,494 | ||||||||||||||
| Other Data | |||||||||||||||||||
| Investment purchases for the year | $ | 1,489,470 | $ | 979,102 | $ | 1,867,477 | $ | 2,933,365 | $ | 3,103,217 | |||||||||
| Investment sales and repayments for the year | $ | 1,413,882 | $ | 1,338,875 | $ | 1,411,562 | $ | 767,978 | $ | 931,534 | |||||||||
| Number of portfolio companies at year end | 121 | 125 | 131 | 142 | 124 | ||||||||||||||
| Total return based on market value(2) | 16.8 | % | 21.8 | % | (20.8 | %) | 10.9 | % | 6.2 | % | |||||||||
| Total return based on net asset value(2) | 9.0 | % | 7.2 | % | 11.5 | % | 11.0 | % | 10.9 | % | |||||||||
| Weighted average yield on debt portfolio at year end(3) | 12.2 | % | 13.2 | % | 12.7 | % | 12.1 | % | 13.6 | % | |||||||||
Item 7. 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.)
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking information that involves risks and uncertainties. Our actual results may differ significantly from any results expressed or implied by these forward-looking statements due to the factors discussed in Part I, “Item 1A. Risk Factors” and “Forward-Looking Statements” appearing elsewhere herein.
Overview
The terms “Prospect,” “the Company,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise.
Prospect is a financial services company that primarily lends to and invests in middle marketmiddle-market privately-held companies. 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 “Code”). We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004.
On May 15, 2007, we formed a wholly-ownedwholly 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 revolving credit facility at PCF. Our wholly-ownedwholly owned subsidiary Prospect Small Business Lending, LLC (“PSBL”) was formed on January 27, 2014, and purchasespurchased small business whole loans on a recurring basis from online small business loan originators, including On Deck Capital, Inc. (“OnDeck”). On September 30, 2014, we formed a wholly-owned subsidiary Prospect Yield Corporation, LLC (“PYC”) and effective October 23, 2014, PYC holds a portion of our investments in collateralized loan obligations (“CLOs”), which we also refer to as subordinated structured notes (“SSNs”). Each of these subsidiaries have been consolidated since operations commenced.
We consolidate certain of our wholly-ownedwholly owned and substantially wholly-ownedwholly owned holding companies formed by us in order to facilitate our investment strategy. The following companies are included in our consolidated financial statements: AMU Holdings Inc.; APH Property Holdings, LLC (“APH”); Arctic Oilfield Equipment USA, Inc.; CCPI Holdings Inc.;statements and are collectively referred to as the “Consolidated Holding Companies”: CP Holdings of Delaware LLC (“CP Holdings”); Credit Central Holdings of Delaware, LLC;LLC (“Credit Central Delaware”); Energy Solutions Holdings Inc.; First Tower Holdings of Delaware LLC (“First Tower Delaware”); Harbortouch Holdings of Delaware Inc.; MITY Holdings of Delaware Inc. (“MITY Delaware”); Nationwide Acceptance Holdings LLC; NMMB Holdings, Inc. (“NMMB Holdings”); NPH Property Holdings, LLC (“NPH”); STI Holding, Inc.; UPH Property Holdings, LLC (“UPH”); Valley ElectricProspect Opportunity Holdings I, Inc. (“POHI”); Valley Electric Holdings II, Inc.; and Wolf Energy Holdings Inc. (“Wolf Energy Holdings”). On October 10, 2014, concurrent with the sale of the operating company, our ownership increased to 100% of the outstanding equity of ARRM Services, Inc. which was renamed SB Forging Company, Inc. (“SB Forging”). As such, we began consolidating SB Forging on October 11, 2014. Effective May 23, 2016, in connection with the merger of American Property REIT Corp.; STI Holding, Inc.; UTP Holdings Group Inc. (“APRC”UTP Holdings”); Valley Electric Holdings I, Inc.(“Valley Holdings I”); and United Property REIT Corp.Valley Electric Holdings II, Inc. (“UPRC”Valley Holdings II”) with and into National Property REIT Corp. (“NPRC”), APH and UPH merged with and into NPH, and were dissolved. We collectively refer to these entities as the “Consolidated Holding Companies.”.
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect Administration LLC (“Prospect Administration”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. 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 ninefour primary strategies that guide our origination of investment opportunities: (1) lending to companies, including companies controlled by private equity sponsors (2) lending to companiesand not controlled by private equity sponsors, (3)and including both directly-originated loans and syndicated loans, (2) lending to companies and purchasing controlling equity positions and lending toin such companies, including both operating companies (4) purchasing controlling equity positions and lending to financial services companies, (5)(3) purchasing controlling equity positions and lending to real estate companies, (6) purchasing controlling equity positions and lending to aircraft leasing companies (7)(4) investing in structured credit (8) investing in syndicated debt and (9) investing in online loans.credit. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy.
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Lending to Companies Controlled by Private Equity Sponsors - We make directly-originated agented loans to companies, including companies which are controlled by private equity sponsors.sponsors and companies that are not controlled by private equity sponsors (such as companies that are controlled by the management team, the founder, a family or public shareholders). This debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. We may also purchase selected equity co-investments in such companies. In addition to directly-originated, agented loans, we also invest in senior and secured loans, syndicated loans and high yield bonds that have been sold to a club or syndicate of buyers, both in the primary and secondary markets. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to the transaction by providing anchoring orders. Historically, this strategy has comprisedcompromised approximately 40%-60% of our portfolio.
Lending to Companies not Controlled by Private Equity Sponsors - We make loans to companies which are not controlled by private equity sponsors, such as companies that are controlled by the management team, the founder, a family or public shareholders. This origination strategy may have less competition to provide debt financing than the private-equity-sponsor origination strategy because such company financing needs are not easily addressed by banks and often require more diligence preparation. This origination strategy can result in investments with higher returns or lower leverage than the private-equity-sponsor origination strategy. Historically, this strategy has comprised up to approximately 15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Operatingin Such Companies - This strategy involves purchasing senior and secured yield-producing debt and controlling equity positions in non-financial-services operating companies.companies across various industries. We believe that we can providethis strategy provides enhanced certainty of closure and liquidity to sellers and we lookthe opportunity for management to continue on in their current roles. This strategy has comprised approximately 5%-15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate investment trusts (“REIT” or “REITs”). NPRC’s, an operating company and the surviving entity of the May 23, 2016 merger with APRC and UPRC,The real estate investments of National Property REIT Corp. (“NPRC”) are in various classes of developed and occupied real estate properties that generate current yields, including multi-family properties, and student housing, and self-storage.housing. NPRC seeks to identify properties that have historically significant occupancy rates and recurring cash flow generation. NPRC generally co-invests with established and experienced property management teams that manage such properties after acquisition. Additionally, NPRC makes investments in rated secured structured notes (primarily debt of structured credit). NPRC also purchases loans originated by certain consumer loan facilitators. It generally purchases each loan in its entirety (i.e., a “whole loan”). The borrowers are consumers, and the loans are typically serviced by the facilitators of the loans. ThisHistorically, this overall investment strategy has comprised approximately 5%-10%10%-20% of our business.
Investing in Structured Credit - We make investments in CLOs,structured credit, often taking a significant position in the subordinated interestsstructured notes (equity) of the CLOs.and rated secured structured notes (debt). The underlying portfolio of each CLOstructured credit investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real estate, mortgages, or consumer-based credit assets. The CLOsstructured credit portfolios in which we invest are managed by established collateral management teams with many years of experience in the industry. ThisHistorically, this overall strategy has comprised approximately 10%-20% of our portfolio.
We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured loans generally are senior debt instruments that rank ahead of unsecured 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. Our investments in CLOsstructured credit are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of CLOsstructured credit 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 CLOstructured credit investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B.
We hold many of our control investments in a two-tier structure consisting of a holding company and one or more related operating companies for tax purposes. These holding companies serve various business purposes including concentration of management teams, optimization of third party borrowing costs, improvement of supplier, customer, and insurance terms, and enhancement of co-investments by the management teams. In these cases, our investment, which is generally equity in the holding company, the holding company’s equity investment in the operating company and any debt from us directly to the operating company structure represents our total exposure for the investment. As of June 30, 2017,2021, as shown in our Consolidated Schedule of Investments, the cost basis and fair value of our investments in controlled companies was $1,840,731$2,482,431 and $1,911,775,$2,919,717, respectively. This structure gives rise to several of the risks described in our public documents and highlighted elsewhere in this Annual Report. We consolidate all wholly-owned and substantially wholly-owned holding companies formed by us for the purpose of holding our controlled investments in operating companies. There is no significant effect of consolidating these holding companies as they hold minimal assets other than their investments in the controlled operating companies. Investment company accounting prohibits the consolidation of any operating companies.
On June 11, 2021, at a special meeting of stockholders, our stockholders authorized us to sell shares of our common stock (during the next 12 months) at a price or prices below our net asset value per share at the time of sale in one or more offerings subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of its outstanding common stock immediately prior to such sale).
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Fourth Quarter Highlights
Investment Transactions
We seek to be a long-term investor with our portfolio companies. During the three months ended June 30, 2017,2021, we acquired $201,206$163,168 of new investments, completed follow-on investments in existing portfolio companies totaling approximately $12,550,$126,420, funded $5,938$316 of revolver advances, and recorded paid in kind (“PIK”)PIK interest of $3,482,$16,771, resulting in gross investment originations of $223,176.$306,675. During the three months ended June 30, 2017,2021, we received full repayments on five investments sold three investments andtotaling $105,537, received several$50,727 in partial prepayments, and amortization payments totaling $352,043.revolver paydowns of $8, resulting in net repayments of $156,272.
Debt Issuances and Redemptions
During the three months ended June 30, 2017, we redeemed $49,497 aggregate principal amount of our Prospect Capital InterNotes® at par with a weighted average interest rate of 4.87%, and issued $29,661 aggregate principal amount of Prospect Capital InterNotes® with a stated and weighted average interest rate of 4.82%, to extend our borrowing base. The newly issued notes mature between April 15, 2022 and June 15, 2022 and generated net proceeds of $29,290.
On March 16, 2021, we repurchased $78,766commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.00, plus accrued and unpaid interest (“2022 Notes March 2021 Tender Offer”). On April 13, 2021, $50 aggregate principal amount of the 20172022 Notes, at a pricerepresenting 0.05% of 102.0% of face value, including commissions. As a result of these transactions, we recordedthe previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes March 2021 Tender Offer resulted in our recognizing a loss of $1.
On April 28, 2021, we amended the 2019 Facility and closed an expanded five year revolving credit facility (the “2021 Facility” and collectively with the 2014 Facility, the 2018 Facility and the 2019 Facility, the “Revolving Credit Facility”). The lenders had extended commitments of $1,107,500 as of June 30, 2021. The Revolving Credit Facility includes an accordion feature which allows commitments to be increased up to $1,500,000 in the amountaggregate. The Revolving Credit Facility matures on April 27, 2026. It includes a revolving period that extends through April 27, 2025, followed by an additional one-year amortization period, with distributions allowed to Prospect after the completion of the difference betweenrevolving period. During such one-year amortization period, all principal payments on the reacquisition price andpledged assets will be applied to reduce the net carrying amountbalance. At the end of the 2017 Notes, net ofone-year amortization period, the proportionate amount of unamortized debt issuance costs. The net loss on extinguishment of debtremaining balance will become due, if required by the lenders.
On April 7, 2021, we recorded in the three months ending June 30, 2017 was $1,786.
April 2021 Tender Offer”). On April 11, 2017, we issued $225,000May 4, 2021, $226 aggregate principal amount of convertiblethe 6.375% 2024 notes, representing 0.28% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes April 2021 Tender Offer resulted in our recognizing a loss of $18 during the three months ended June 30, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.15, plus accrued and unpaid interest (“2023 Notes April 2021 Tender Offer”). On May 4, 2021, $836 aggregate principal amount of the 2023 Notes were tendered, representing 0.29% of the previously outstanding 2023 Notes. The 2023 Notes April 2021 Tender Offer resulted in our recognizing a loss of $43 during the three months ended June 30, 2021.
On May 27, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on JulyNovember 15, 20222026 (the “2022“3.364% 2026 Notes”), unless previously converted or repurchased in accordance with their terms.. The 20223.364% 2026 Notes bear interest at a rate of 4.95%3.364% per year, payable semi-annually on JanuaryNovember 15, and JulyMay 15 of each year, beginning Julyon November 15, 2017.2021. Total proceeds from the issuance of the 20223.364% 2026 Notes, net of underwriting discounts and offering costs, were $218,010.$293,283. As of June 30, 2021, the outstanding aggregate principal amount of the 3.364% 2026 Notes is $300,000.
On June 15, 2021, we redeemed $70,761 of the aggregate principal amount of the 2028 Notes. The transaction resulted in our recognizing a loss of $1,934 during the three months ended June 30, 2021. Following the redemption, none of the 2028 Notes remained outstanding.
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Equity Issuances
On April 22, 2021, May 20, 2017, May 18, 2017,2021, and June 22, 2017,17, 2021, we issued 53,517, 65,054,357,521, 344,487, and 72,659317,011 shares of our common stock in connection with the dividend reinvestment plan, respectively.
During the three months ended June 30, 2021, we issued 2,508,672 shares of our Series A1 Preferred Stock for net proceeds of $57,182, 187,000 shares of our Series A2 Preferred Stock for net proceeds of $4,208, and 108,897 shares of our Series M1 Preferred Stock for net proceeds of $2,662, each excluding offering costs and preferred stock dividend reinvestments.
During the three months ended June 30, 2021, we issued 1,000 shares of our Series A1 Preferred Stock and 9 shares of our Series M1 Preferred Stock in connection with the preferred stock dividend reinvestment plan.
Investment Holdings
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, 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 25% or more of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” 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. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As of June 30, 2017,2021, we own controlling interests in the following portfolio companies: Arctic Energy Services, LLC (“Arctic Energy”); CCPI Inc. (“CCPI”); CP Energy Services Inc. (“CP Energy”); Credit Central Loan Company, LLC (“Credit Central”); Echelon AviationTransportation, LLC (“Echelon”); Edmentum Ultimate Holdings, LLC; First Tower Finance Company LLC (“First Tower Finance”); Freedom Marine Solutions, LLC (“Freedom Marine”); InterDent, Inc. (“InterDent”); Kickapoo Ranch Pet Resort (“Kickapoo”); MITY, Inc. (“MITY”); NPRC; Nationwide Loan Company LLC (f/k/a Nationwide Acceptance LLC) (“Nationwide”); NMMB, Inc. (“NMMB”); Pacific World Corporation (“Pacific World”); R-V Industries, Inc. (“R-V”); SB Forging Company II, Inc. (f/k/a Gulf Coast Machine & Supply Company)Universal Turbine Parts, LLC (“Gulfco”UTP”); USES Corp. (“(“United States Environmental Services” or “USES”); and Valley Electric Company, Inc. (“Valley Electric”);. In June 2019, CP Energy purchased controlling interest of the common equity of Spartan Energy Holdings, Inc. (“Spartan Holdings”), which owns 100% of Spartan Energy Services, LLC (“Spartan”), a portfolio company of Prospect with $15,656 in senior secured term loans (the “Spartan Term Loan A”) due to us as of June 30, 2021. As a result of CP Energy’s purchase, and Wolfgiven Prospect’s controlling interest in CP Energy, LLC. Wewe report our investments in Spartan as control investment. Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loan A.
As of June 30, 2021, we also own affiliated interests in Nixon, Inc. (“Nixon”), PGX Holdings, Inc. (“PGX”), RGIS Services, LLC (“RGIS”), and Targus International, LLCCayman HoldCo Limited (“Targus”).
The following shows the composition of our investment portfolio by level of control as of June 30, 20172021 and June 30, 2016:2020:
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||
| Level of Control | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||||||||||
| Control Investments | $ | 2,482,431 | 41.0 | % | $ | 2,919,717 | 47.1 | % | $ | 2,286,725 | 39.5 | % | $ | 2,259,292 | 43.2 | % | |||||||||||||
| Affiliate Investments | 202,943 | 3.3 | % | 356,734 | 5.8 | % | 163,484 | 2.8 | % | 187,537 | 3.6 | % | |||||||||||||||||
| Non-Control/Non-Affiliate Investments | 3,372,750 | 55.7 | % | 2,925,327 | 47.1 | % | 3,332,509 | 57.7 | % | 2,785,499 | 53.2 | % | |||||||||||||||||
| Total Investments | $ | 6,058,124 | 100.0 | % | $ | 6,201,778 | 100.0 | % | $ | 5,782,718 | 100.0 | % | $ | 5,232,328 | 100.0 | % | |||||||||||||
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| June 30, 2017 | June 30, 2016 | ||||||||||||||||||||
| Level of Control | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||
| Control Investments | $ | 1,840,731 | 30.8 | % | $ | 1,911,775 | 32.7 | % | $ | 1,768,220 | 29.0 | % | $ | 1,752,449 | 29.7 | % | |||||
| Affiliate Investments | 22,957 | 0.4 | % | 11,429 | 0.2 | % | 10,758 | 0.2 | % | 11,320 | 0.2 | % | |||||||||
| Non-Control/Non-Affiliate Investments | 4,117,868 | 68.8 | % | 3,915,101 | 67.1 | % | 4,312,122 | 70.8 | % | 4,133,939 | 70.1 | % | |||||||||
| Total Investments | $ | 5,981,556 | 100.0 | % | $ | 5,838,305 | 100.0 | % | $ | 6,091,100 | 100.0 | % | $ | 5,897,708 | 100.0 | % | |||||
The following shows the composition of our investment portfolio by type of investment as of June 30, 20172021 and June 30, 2016:2020:
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||
| Type of Investment | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||||||||||
| Revolving Line of Credit | $ | 27,522 | 0.5 | % | $ | 27,503 | 0.4 | % | $ | 38,469 | 0.7 | % | $ | 36,944 | 0.7 | % | |||||||||||||
| Senior Secured Debt | 3,166,861 | 52.2 | % | 3,128,845 | 50.5 | % | 2,586,769 | 44.8 | % | 2,422,523 | 46.3 | % | |||||||||||||||||
| Subordinated Secured Debt | 1,069,767 | 17.7 | % | 981,425 | 15.8 | % | 1,424,633 | 24.6 | % | 1,269,398 | 24.3 | % | |||||||||||||||||
| Subordinated Unsecured Debt | 7,200 | 0.1 | % | 3,715 | 0.1 | % | 43,935 | 0.8 | % | 51,079 | 1.0 | % | |||||||||||||||||
| Subordinated Structured Notes | 1,090,175 | 18.0 | % | 756,109 | 12.2 | % | 1,089,079 | 18.8 | % | 708,961 | 13.5 | % | |||||||||||||||||
| Preferred Stock | 308,713 | 5.1 | % | 23,056 | 0.4 | % | 250,020 | 4.3 | % | 14,430 | 0.3 | % | |||||||||||||||||
| Common Stock | 207,661 | 3.4 | % | 894,819 | 14.4 | % | 140,986 | 2.4 | % | 394,832 | 7.5 | % | |||||||||||||||||
| Membership Interest | 180,225 | 3.0 | % | 349,942 | 5.6 | % | 208,827 | 3.6 | % | 310,252 | 5.9 | % | |||||||||||||||||
| Participating Interest(1) | — | — | % | 36,364 | 0.6 | % | — | — | % | 23,909 | 0.5 | % | |||||||||||||||||
| Total Investments | $ | 6,058,124 | 100.0 | % | $ | 6,201,778 | 100.0 | % | $ | 5,782,718 | 100.0 | % | $ | 5,232,328 | 100.0 | % | |||||||||||||
| June 30, 2017 | June 30, 2016 | ||||||||||||||||||||
| Type of Investment | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||
| Revolving Line of Credit | $ | 27,409 | 0.5 | % | $ | 27,409 | 0.5 | % | $ | 13,274 | 0.2 | % | $ | 13,274 | 0.2 | % | |||||
| Senior Secured Debt | 2,940,163 | 49.2 | % | 2,798,796 | 47.9 | % | 3,072,839 | 50.5 | % | 2,941,722 | 49.9 | % | |||||||||
| Subordinated Secured Debt | 1,160,019 | 19.4 | % | 1,107,040 | 19.0 | % | 1,228,598 | 20.2 | % | 1,209,604 | 20.5 | % | |||||||||
| Subordinated Unsecured Debt | 37,934 | 0.6 | % | 44,434 | 0.8 | % | 75,878 | 1.2 | % | 68,358 | 1.2 | % | |||||||||
| Small Business Loans | 8,434 | 0.1 | % | 7,964 | 0.1 | % | 14,603 | 0.2 | % | 14,215 | 0.2 | % | |||||||||
| CLO Residual Interest | 1,150,006 | 19.2 | % | 1,079,712 | 18.5 | % | 1,083,540 | 17.8 | % | 1,009,696 | 17.1 | % | |||||||||
| Preferred Stock | 112,394 | 1.9 | % | 83,209 | 1.4 | % | 140,902 | 2.3 | % | 81,470 | 1.4 | % | |||||||||
| Common Stock | 295,200 | 4.9 | % | 391,374 | 6.7 | % | 229,389 | 3.8 | % | 258,498 | 4.4 | % | |||||||||
| Membership Interest | 249,997 | 4.2 | % | 206,012 | 3.5 | % | 226,479 | 3.7 | % | 221,949 | 3.8 | % | |||||||||
| Participating Interest(1) | — | — | % | 91,491 | 1.6 | % | — | — | % | 70,590 | 1.2 | % | |||||||||
| Escrow Receivable | — | — | % | 864 | — | % | 3,916 | 0.1 | % | 6,116 | 0.1 | % | |||||||||
| Warrants | — | — | % | — | — | 1,682 | — | % | 2,216 | — | % | ||||||||||
| Total Investments | $ | 5,981,556 | 100.0 | % | $ | 5,838,305 | 100.0 | % | $ | 6,091,100 | 100.0 | % | $ | 5,897,708 | 100.0 | % | |||||
The following shows our investments in interest bearing securities by type of investment as of June 30, 20172021 and June 30, 2016:2020:
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||
| Type of Investment | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||||||||||
| First Lien | $ | 3,194,383 | 59.7 | % | $ | 3,156,348 | 64.4 | % | $ | 2,615,252 | 50.5 | % | $ | 2,450,928 | 54.7 | % | |||||||||||||
| 1.5 Lien | 18,164 | 0.3 | % | 18,164 | 0.4 | % | 1,981 | — | % | 1,981 | — | % | |||||||||||||||||
| Second Lien | 1,047,653 | 19.5 | % | 959,311 | 19.6 | % | 1,428,648 | 27.6 | % | 1,271,966 | 28.3 | % | |||||||||||||||||
| Third Lien | 3,950 | 0.1 | % | 3,950 | 0.1 | % | 3,990 | 0.1 | % | 3,990 | 0.1 | % | |||||||||||||||||
| Unsecured | 7,200 | 0.1 | % | 3,715 | 0.1 | % | 43,935 | 0.8 | % | 51,079 | 1.1 | % | |||||||||||||||||
| Subordinated Structured Notes | 1,090,175 | 20.3 | % | 756,109 | 15.4 | % | 1,089,079 | 21.0 | % | 708,961 | 15.8 | % | |||||||||||||||||
| Total Interest Bearing Investments | $ | 5,361,525 | 100.0 | % | $ | 4,897,597 | 100.0 | % | $ | 5,182,885 | 100.0 | % | $ | 4,488,905 | 100.0 | % | |||||||||||||
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| June 30, 2017 | June 30, 2016 | ||||||||||||||||||||
| Type of Investment | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||
| First Lien | $ | 2,959,738 | 55.6 | % | $ | 2,818,371 | 55.6 | % | $ | 3,079,689 | 56.1 | % | $ | 2,948,572 | 56.1 | % | |||||
| Second Lien | 1,167,853 | 21.9 | % | 1,114,874 | 22.0 | % | 1,235,022 | 22.5 | % | 1,216,028 | 23.1 | % | |||||||||
| Unsecured | 37,934 | 0.7 | % | 44,434 | 0.9 | % | 75,878 | 1.4 | % | 68,358 | 1.3 | % | |||||||||
| Small Business Loans | 8,434 | 0.2 | % | 7,964 | 0.2 | % | 14,603 | 0.3 | % | 14,215 | 0.3 | % | |||||||||
| CLO Residual Interest | 1,150,006 | 21.6 | % | 1,079,712 | 21.3 | % | 1,083,540 | 19.7 | % | 1,009,696 | 19.2 | % | |||||||||
| Total Debt Investments | $ | 5,323,965 | 100.0 | % | $ | 5,065,355 | 100.0 | % | $ | 5,488,732 | 100.0 | % | $ | 5,256,869 | 100.0 | % | |||||
| June 30, 2017 | June 30, 2016 | ||||||||||||||||||||
| Geographic Location | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||
| Canada | $ | 9,831 | 0.2 | % | $ | 10,000 | 0.2 | % | $ | 15,000 | 0.2 | % | $ | 8,081 | 0.1 | % | |||||
| Cayman Islands | 1,150,006 | 19.2 | % | 1,079,712 | 18.5 | % | 1,083,540 | 17.8 | % | 1,009,696 | 17.1 | % | |||||||||
| France | 9,755 | 0.2 | % | 8,794 | 0.2 | % | 9,756 | 0.2 | % | 9,015 | 0.2 | % | |||||||||
| Midwest US | 605,417 | 10.1 | % | 678,766 | 11.6 | % | 804,515 | 13.2 | % | 849,029 | 14.4 | % | |||||||||
| Northeast US | 786,552 | 13.1 | % | 823,616 | 14.1 | % | 838,331 | 13.8 | % | 824,408 | 13.9 | % | |||||||||
| Northwest US | 281,336 | 4.7 | % | 207,962 | 3.6 | % | 242,540 | 4.0 | % | 189,464 | 3.2 | % | |||||||||
| Puerto Rico | 83,410 | 1.4 | % | 83,410 | 1.4 | % | 40,516 | 0.7 | % | 40,516 | 0.7 | % | |||||||||
| Southeast US | 1,367,606 | 22.9 | % | 1,412,351 | 24.2 | % | 1,498,976 | 24.6 | % | 1,531,943 | 26.0 | % | |||||||||
| Southwest US | 616,008 | 10.3 | % | 558,368 | 9.5 | % | 770,441 | 12.6 | % | 675,745 | 11.5 | % | |||||||||
| Western US | 1,071,635 | 17.9 | % | 975,326 | 16.7 | % | 787,485 | 12.9 | % | 759,811 | 12.9 | % | |||||||||
| Total Investments | $ | 5,981,556 | 100.0 | % | $ | 5,838,305 | 100.0 | % | $ | 6,091,100 | 100.0 | % | $ | 5,897,708 | 100.0 | % | |||||
The following shows the composition of our investment portfolio by industry as of June 30, 20172021 and June 30, 2016:2020:
| June 30, 2021 | June 30, 2020 | ||||||||||||||||||||||||||||
| Industry | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||||||||||
| Aerospace & Defense | $ | 98,144 | 1.6 | % | $ | 84,240 | 1.4 | % | $ | 88,208 | 1.5 | % | $ | 85,627 | 1.6 | % | |||||||||||||
| Air Freight & Logistics | 12,500 | 0.2 | % | 12,500 | 0.2 | % | 12,500 | 0.2 | % | 10,755 | 0.2 | % | |||||||||||||||||
| Auto Components | 75,323 | 1.2 | % | 76,520 | 1.2 | % | 26,776 | 0.5 | % | 24,867 | 0.5 | % | |||||||||||||||||
| Chemicals | 28,745 | 0.5 | % | 28,863 | 0.5 | % | 31,837 | 0.6 | % | 31,891 | 0.6 | % | |||||||||||||||||
| Commercial Services & Supplies | 257,617 | 4.3 | % | 196,117 | 3.3 | % | 368,577 | 6.4 | % | 294,277 | 5.6 | % | |||||||||||||||||
| Communications Equipment | 59,709 | 1.0 | % | 58,881 | 0.9 | % | 59,638 | 1.0 | % | 50,837 | 1.0 | % | |||||||||||||||||
| Construction & Engineering | 69,935 | 1.2 | % | 149,695 | 2.4 | % | 68,874 | 1.2 | % | 129,296 | 2.5 | % | |||||||||||||||||
| Consumer Finance | 531,844 | 8.8 | % | 771,601 | 12.4 | % | 506,771 | 8.8 | % | 645,726 | 12.3 | % | |||||||||||||||||
| Distributors | 272,672 | 4.5 | % | 175,768 | 2.8 | % | 278,331 | 4.8 | % | 175,931 | 3.4 | % | |||||||||||||||||
| Diversified Consumer Services | 211,193 | 3.5 | % | 339,633 | 5.5 | % | 163,057 | 2.8 | % | 169,615 | 3.2 | % | |||||||||||||||||
| Diversified Financial Services | 30,165 | 0.5 | % | 30,165 | 0.5 | % | 30,165 | 0.5 | % | 30,165 | 0.6 | % | |||||||||||||||||
| Diversified Telecommunication Services | 66,333 | 1.1 | % | 67,448 | 1.1 | % | 57,098 | 1.0 | % | 55,311 | 1.1 | % | |||||||||||||||||
| Energy Equipment & Services | 277,227 | 4.6 | % | 83,204 | 1.3 | % | 266,618 | 4.6 | % | 82,236 | 1.6 | % | |||||||||||||||||
| Entertainment | 40,585 | 0.7 | % | 40,928 | 0.7 | % | 50,601 | 0.9 | % | 49,017 | 0.9 | % | |||||||||||||||||
| Equity Real Estate Investment Trusts (REITs) | 656,911 | 10.8 | % | 1,092,955 | 17.7 | % | 486,268 | 8.4 | % | 753,583 | 14.4 | % | |||||||||||||||||
| Food Products | 61,409 | 1.0 | % | 61,948 | 1.0 | % | 24,853 | 0.4 | % | 25,000 | 0.5 | % | |||||||||||||||||
| Health Care Equipment & Supplies | 7,478 | 0.1 | % | 6,721 | 0.1 | % | 7,474 | 0.1 | % | 5,606 | 0.1 | % | |||||||||||||||||
| Health Care Providers & Services | 583,369 | 9.6 | % | 714,107 | 11.5 | % | 533,188 | 9.2 | % | 495,402 | 9.5 | % | |||||||||||||||||
| Hotels, Restaurants & Leisure | 24,502 | 0.4 | % | 23,624 | 0.4 | % | 23,501 | 0.4 | % | 21,008 | 0.4 | % | |||||||||||||||||
| Household Durables | 12,913 | 0.2 | % | 15,403 | 0.2 | % | 24,437 | 0.4 | % | 24,362 | 0.5 | % | |||||||||||||||||
| Household Products | 21,186 | 0.3 | % | 21,186 | 0.3 | % | 15,915 | 0.3 | % | 16,066 | 0.3 | % | |||||||||||||||||
| Insurance | 21,911 | 0.4 | % | 22,280 | 0.4 | % | 12,796 | 0.2 | % | 12,744 | 0.2 | % | |||||||||||||||||
| Interactive Media & Services | 180,127 | 3.0 | % | 180,127 | 2.9 | % | 200,728 | 3.5 | % | 200,728 | 3.8 | % | |||||||||||||||||
| Internet & Direct Marketing Retail | 54,677 | 0.9 | % | 56,114 | 0.9 | % | 15,706 | 0.3 | % | 16,440 | 0.3 | % | |||||||||||||||||
| IT Services | 260,899 | 4.3 | % | 261,718 | 4.3 | % | 203,285 | 3.5 | % | 204,061 | 3.9 | % | |||||||||||||||||
| Leisure Products | 20,242 | 0.3 | % | 20,287 | 0.3 | % | 24,519 | 0.4 | % | 24,319 | 0.5 | % | |||||||||||||||||
| Machinery | 97,853 | 1.6 | % | 111,682 | 1.8 | % | 84,234 | 1.5 | % | 87,220 | 1.7 | % | |||||||||||||||||
| Media | 105,958 | 1.7 | % | 107,819 | 1.7 | % | 117,524 | 2.0 | % | 100,592 | 1.9 | % | |||||||||||||||||
| Online Lending | 6,600 | 0.1 | % | 6,600 | 0.1 | % | 45,950 | 0.8 | % | 45,950 | 0.9 | % | |||||||||||||||||
| Paper & Forest Products | 15,847 | 0.3 | % | 15,815 | 0.3 | % | 15,788 | 0.3 | % | 15,788 | 0.3 | % | |||||||||||||||||
| Personal Products | 249,245 | 4.1 | % | 71,097 | 1.1 | % | 246,702 | 4.3 | % | 59,907 | 1.1 | % | |||||||||||||||||
| Professional Services | 132,015 | 2.2 | % | 132,058 | 2.1 | % | 104,164 | 1.8 | % | 106,542 | 2.0 | % | |||||||||||||||||
| Real Estate Management & Development | — | — | % | — | — | % | 31,747 | 0.5 | % | 31,747 | 0.6 | % | |||||||||||||||||
| Software | 22,240 | 0.4 | % | 22,500 | 0.4 | % | 75,208 | 1.3 | % | 73,745 | 1.4 | % | |||||||||||||||||
| Technology Hardware, Storage & Peripherals | 12,431 | 0.2 | % | 12,500 | 0.2 | % | 12,415 | 0.2 | % | 12,318 | 0.2 | % | |||||||||||||||||
| Textiles, Apparel & Luxury Goods | 202,312 | 3.3 | % | 225,359 | 3.6 | % | 205,874 | 3.6 | % | 221,227 | 4.2 | % | |||||||||||||||||
| Trading Companies & Distributors | 65,248 | 1.1 | % | 27,106 | 0.4 | % | 65,450 | 1.1 | % | 26,599 | 0.5 | % | |||||||||||||||||
| Transportation Infrastructure | 30,384 | 0.5 | % | 30,900 | 0.5 | % | 27,662 | 0.5 | % | 27,662 | 0.5 | % | |||||||||||||||||
| Subtotal | $ | 4,877,749 | 80.5 | % | $ | 5,355,469 | 86.4 | % | $ | 4,614,439 | 79.8 | % | $ | 4,444,167 | 84.8 | % | |||||||||||||
| Structured Finance (1) | $ | 1,180,375 | 19.5 | % | $ | 846,309 | 13.6 | % | $ | 1,168,279 | 20.2 | % | $ | 788,161 | 15.2 | % | |||||||||||||
| Total Investments | $ | 6,058,124 | 100.0 | % | $ | 6,201,778 | 100.0 | % | $ | 5,782,718 | 100.0 | % | $ | 5,232,328 | 100.0 | % | |||||||||||||
(1)Our SSN investments do not have industry concentrations and as such have been separated in the tables above. As of June 30, 2021 and June 30, 2020, Structured Finance includes $90,200 and $79,200, respectively, of senior secured debt investments held through our investment in NPRC and its wholly-owned subsidiary.
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| June 30, 2017 | June 30, 2016 | ||||||||||||||||||||
| Industry | Cost | % of Portfolio | Fair Value | % of Portfolio | Cost | % of Portfolio | Fair Value | % of Portfolio | |||||||||||||
| Aerospace & Defense | $ | 69,837 | 1.2 | % | $ | 71,318 | 1.2 | % | $ | 57,762 | 0.9 | % | $ | 60,821 | 1.0 | % | |||||
| Air Freight & Logistics | 51,952 | 0.9 | % | 51,952 | 0.9 | % | 55,784 | 0.9 | % | 51,824 | 0.9 | % | |||||||||
| Auto Components | 30,222 | 0.5 | % | 30,460 | 0.5 | % | 20,328 | 0.3 | % | 20,328 | 0.3 | % | |||||||||
| Capital Markets | 14,796 | 0.2 | % | 15,000 | 0.3 | % | — | — | % | — | — | % | |||||||||
| Chemicals | 17,489 | 0.3 | % | 16,699 | 0.3 | % | 22,453 | 0.4 | % | 20,563 | 0.3 | % | |||||||||
| Commercial Services & Supplies | 354,185 | 5.9 | % | 312,634 | 5.3 | % | 479,034 | 7.9 | % | 461,089 | 7.9 | % | |||||||||
| Construction & Engineering | 62,258 | 1.0 | % | 32,509 | 0.6 | % | 60,436 | 1.0 | % | 31,091 | 0.5 | % | |||||||||
| Consumer Finance | 469,869 | 7.9 | % | 502,941 | 8.6 | % | 449,203 | 7.4 | % | 474,652 | 8.0 | % | |||||||||
| Distributors | 140,847 | 2.4 | % | 83,225 | 1.4 | % | 190,835 | 3.1 | % | 186,606 | 3.2 | % | |||||||||
| Diversified Consumer Services | 188,912 | 3.2 | % | 190,662 | 3.3 | % | 176,678 | 2.9 | % | 179,346 | 3.0 | % | |||||||||
| Diversified Telecommunication Services | 4,395 | 0.1 | % | 4,410 | 0.1 | % | 4,392 | 0.1 | % | 4,392 | 0.1 | % | |||||||||
| Electronic Equipment, Instruments & Components | 37,696 | 0.6 | % | 51,846 | 0.9 | % | 63,024 | 1.0 | % | 73,071 | 1.2 | % | |||||||||
| Energy Equipment & Services | 251,019 | 4.2 | % | 131,660 | 2.3 | % | 346,480 | 5.7 | % | 173,081 | 2.9 | % | |||||||||
| Equity Real Estate Investment Trusts (REITs) | 374,380 | 6.3 | % | 624,337 | 10.7 | % | 335,048 | 5.5 | % | 480,763 | 8.2 | % | |||||||||
| Food & Staples Retailing | — | — | % | — | — | % | 17,876 | 0.3 | % | 18,000 | 0.3 | % | |||||||||
| Food Products | — | — | % | — | — | % | 150,000 | 2.5 | % | 145,546 | 2.5 | % | |||||||||
| Health Care Providers & Services | 422,919 | 7.2 | % | 421,389 | 7.1 | % | 304,908 | 5.0 | % | 305,503 | 5.2 | % | |||||||||
| Health Care Technology | — | — | % | — | — | % | 2,228 | — | % | 2,842 | — | % | |||||||||
| Hotels, Restaurants & Leisure | 127,638 | 2.1 | % | 103,897 | 1.8 | % | 142,813 | 2.3 | % | 142,954 | 2.4 | % | |||||||||
| Household Durables | 146,031 | 2.4 | % | 146,183 | 2.5 | % | 106,831 | 1.8 | % | 107,394 | 1.8 | % | |||||||||
| Internet Software & Services | 219,348 | 3.7 | % | 219,348 | 3.8 | % | 46,253 | 0.8 | % | 45,058 | 0.8 | % | |||||||||
| IT Services | 19,531 | 0.3 | % | 20,000 | 0.3 | % | 128,197 | 2.1 | % | 128,396 | 2.2 | % | |||||||||
| Leisure Products | 44,085 | 0.7 | % | 44,204 | 0.8 | % | 144,065 | 2.4 | % | 143,043 | 2.4 | % | |||||||||
| Machinery | 35,488 | 0.6 | % | 32,678 | 0.6 | % | 35,391 | 0.6 | % | 36,877 | 0.6 | % | |||||||||
| Marine (1) | 8,919 | 0.1 | % | 8,800 | 0.2 | % | 8,886 | 0.1 | % | 8,886 | 0.2 | % | |||||||||
| Media | 469,108 | 7.8 | % | 466,500 | 8.0 | % | 432,444 | 7.1 | % | 418,918 | 7.1 | % | |||||||||
| Metals & Mining | 9,953 | 0.2 | % | 10,000 | 0.2 | % | 9,934 | 0.2 | % | 9,309 | 0.2 | % | |||||||||
| Online Lending | 424,350 | 7.0 | % | 370,931 | 6.3 | % | 406,931 | 6.7 | % | 377,385 | 6.4 | % | |||||||||
| Paper & Forest Products | 11,295 | 0.2 | % | 11,500 | 0.2 | % | — | — | % | — | — | % | |||||||||
| Personal Products | 222,698 | 3.7 | % | 192,748 | 3.3 | % | 213,585 | 3.5 | % | 193,054 | 3.3 | % | |||||||||
| Pharmaceuticals | 117,989 | 2.0 | % | 117,989 | 2.0 | % | 70,739 | 1.2 | % | 70,739 | 1.2 | % | |||||||||
| Professional Services | 64,242 | 1.1 | % | 64,473 | 1.1 | % | 170,865 | 2.7 | % | 166,741 | 2.9 | % | |||||||||
| Real Estate Management & Development | — | — | % | — | — | % | 3,916 | 0.1 | % | 3,900 | 0.1 | % | |||||||||
| Software | 56,041 | 0.9 | % | 55,150 | 0.9 | % | 26,772 | 0.4 | % | 25,425 | 0.4 | % | |||||||||
| Textiles, Apparel & Luxury Goods | 285,180 | 4.8 | % | 274,206 | 4.7 | % | 323,139 | 5.3 | % | 319,904 | 5.4 | % | |||||||||
| Tobacco | 14,365 | 0.2 | % | 14,431 | 0.2 | % | — | — | % | — | — | % | |||||||||
| Trading Companies & Distributors | 64,513 | 1.1 | % | 64,513 | 1.1 | % | 330 | — | % | 511 | — | % | |||||||||
| Subtotal | $ | 4,831,550 | 80.8 | % | $ | 4,758,593 | 81.5 | % | $ | 5,007,560 | 82.2 | % | $ | 4,888,012 | 82.9 | % | |||||
| Structured Finance (2) | $ | 1,150,006 | 19.2 | % | $ | 1,079,712 | 18.5 | % | $ | 1,083,540 | 17.8 | % | $ | 1,009,696 | 17.1 | % | |||||
| Total Investments | $ | 5,981,556 | 100.0 | % | $ | 5,838,305 | 100.0 | % | $ | 6,091,100 | 100.0 | % | $ | 5,897,708 | 100.0 | % | |||||
Portfolio Investment Activity
Our gross investment activity for the years ended June 30, 2021 and June 30, 2020 are presented below.
| Year Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Investments made in new portfolio companies | $ | 622,445 | $ | 577,301 | |||||||
| Follow-on investments made in existing portfolio companies (1) | 385,531 | 235,013 | |||||||||
| Revolver advances | 4,316 | 12,444 | |||||||||
| PIK interest | 75,521 | 55,657 | |||||||||
| Total acquisitions | $ | 1,087,813 | $ | 880,415 | |||||||
| Acquisitions by portfolio composition | |||||||||||
| 1st Lien Term Loan | $ | 717,572 | $ | 667,282 | |||||||
| Subordinated Secured Debt | 335,429 | 161,527 | |||||||||
| Rated Secured Structured Notes | — | 5,534 | |||||||||
| Subordinated Structured Notes | 5,399 | 1,913 | |||||||||
| Subordinated Unsecured Debt | 2,620 | 3,160 | |||||||||
| Equity | 26,793 | 40,999 | |||||||||
| Total acquisitions by portfolio composition | $ | 1,087,813 | $ | 880,415 | |||||||
| Investments sold | $ | — | $ | 40,994 | |||||||
| Partial repayments (2) | 199,678 | 419,230 | |||||||||
| Full repayments | 619,173 | 544,834 | |||||||||
| Revolver paydowns | 3,299 | 8,719 | |||||||||
| Total dispositions | $ | 822,150 | $ | 1,013,777 | |||||||
| Dispositions by portfolio composition | |||||||||||
| 1st Lien Term Loan | $ | 442,383 | $ | 774,844 | |||||||
| Subordinated Secured Debt | 327,393 | 184,622 | |||||||||
| Rated Secured Structured Notes | — | 50,237 | |||||||||
| Subordinated Structured Notes | — | — | |||||||||
| Subordinated Unsecured Debt | 53,738 | 565 | |||||||||
| Equity | (1,364) | 3,509 | |||||||||
| Total dispositions by portfolio composition | $ | 822,150 | $ | 1,013,777 | |||||||
| Weighted average interest rates for new investments by portfolio composition(3) | |||||||||||
| 1st Lien Term Loan | 9.27 | % | 8.75 | % | |||||||
| Subordinated Secured Debt | 8.66 | % | 9.89 | % | |||||||
(1)Includes follow-on investments in existing portfolio companies totaling approximately $599,333, funded $21,559and refinancings, if any.
(2)Includes partial prepayments of revolver advances,principal, scheduled amortization payments, and recorded PIKrefinancings, if any.
(3)Weighted average interest of $17,808, resulting in gross investment originations of $1,489,470. The more significant of these transactions are briefly described below.
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| Quarter Ended | Acquisitions(1) | Dispositions(2) | ||||
| September 30, 2014 | 714,255 | 690,194 | ||||
| December 31, 2014 | 522,705 | 224,076 | ||||
| March 31, 2015 | 219,111 | 108,124 | ||||
| June 30, 2015 | 411,406 | 389,168 | ||||
| September 30, 2015 | 345,743 | 436,919 | ||||
| December 31, 2015 | 316,145 | 354,855 | ||||
| March 31, 2016 | 23,176 | 163,641 | ||||
| June 30, 2016 | 294,038 | 383,460 | ||||
| September 30, 2016 | 347,150 | 114,331 | ||||
| December 31, 2016 | 469,537 | 644,995 | ||||
| March 31, 2017 | 449,607 | 302,513 | ||||
| June 30, 2017 | 223,176 | 352,043 | ||||
Investment Valuation
Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, management and the independent valuation firm look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. In determining the range of values for debt instruments where market quotations are not available, except CLOs and debt investments in controlling portfolio companies, management and the independent valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted cash flow technique was then preparedapplied using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of values for debt investments of controlled companies and equity investments, the enterprise value was determined by applying a market approach such as using earnings before interest, income tax,taxes, depreciation and amortization (“EBITDA”) multiples, the discounted cash flow technique, net income and/or book value multiples for similar guideline public companies and/or similar recent investment transactions.transactions and/or an income approach, such as the discounted cash flow technique. The enterprise value technique may also be used to value debt investments which are credit impaired. For stressed debt and equity investments, a liquidationasset recovery analysis was prepared.used.
In determining the range of values for our investments in CLOs, management and the independent valuation firm use primarilyuses a discounted multi-path cash flow model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations,which is a simulationare simulations used to model the probability of different outcomes,to generate probability-weighted (i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market and certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the corresponding multi-path cash flow model.
With respect to our online consumer and SME lending initiative, we invest primarily in marketplace loans through marketplace lending facilitators.platforms. We do not conduct loan origination activities ourselves. Therefore, our ability to purchase consumer and SME loans, and our ability to grow our portfolio of consumer and SME loans, are directly influenced by the business performance and competitiveness of the marketplace loan origination business of the marketplace lending facilitatorsplatforms from which we purchase consumer and SME loans. In addition, our ability to analyze the risk-return profile of consumer and SME loans is significantly dependent on the marketplace facilitators’platforms’ ability to effectively evaluate a borrower'sborrower’s credit profile and likelihood of default. If we are unable to effectively evaluate borrowers'borrowers’ credit profiles or the credit decisioning and scoring models implemented by each facilitator,platform, we may incur unanticipated losses which could adversely impact our operating results.
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 various valuation techniques, applied to each investment, was a total valuation of $5,838,305.$6,201,778.
Our portfolio companies are generally lower middle marketmiddle-market companies, outside of the financial sector, with less than $100,000 of annual EBITDA. We believe our investment portfolio has experienced less volatility than others because we believe there are more buy and hold investors who own these less liquid investments.
Impact of the novel coronavirus (the “COVID-19”) pandemic
As of June 30, 2021, there remains to be global uncertainty surrounding the COVID-19 pandemic, which has caused severe disruptions in the global economy and has negatively impacted the fair value and performance of certain investments since the pandemic began. For the year ended June 30, 2021, the aggregate increases in fair value and net unrealized appreciation on investments were driven by the expansion of comparable company trading multiples and/or tightened credit spreads as the level of market volatility generated by the COVID-19 pandemic declined over the twelve month period. However, for certain investments in our portfolio, the valuations continue to reflect factors such as specific industry concerns, uncertainty about the duration of business shutdowns and near-term liquidity needs. For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see Part I, Item 1A. Risk Factors, “Risk Factors - The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our portfolio companies and our business and operations.”
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Control Company 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. Equity positions in our portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results and market multiples. Several of ourOur controlled companies discussed below experienced such changes and we recorded corresponding fluctuations in valuations during the year ended June 30, 2017.2021.
Prospect owns 100% of the equity of Arctic Oilfield Equipment USA, Inc. (“Arctic Equipment”),Echelon, a Consolidated Holding Company. Arctic Equipmentconsolidated holding company. Echelon owns 70%60.7% of the equity of Arctic Energy, with Ailport Holdings, LLC (100% owned and controlled by Arctic Energy management) owning the remaining 30% of the equity of Arctic Energy. Arctic Energy provides oilfield service personnel, well testing flowback equipment, frac support systems and other services to exploration and development companies in the Rocky Mountains.AerLift. Echelon is an aircraft leasing company.
The Board of Directors decreased the fair value of our investment in Arctic EnergyEchelon decreased to $17,370$84,240 as of June 30, 2017,2021, which is a discount of $43,506 to$13,904 from its amortized cost, compared to thea fair value of $85,627 as of June 30, 2020, representing a discount of $22,536$2,581 to its amortized cost basis. The increase in discount to amortized cost resulted from lower aircraft residual values, as of June 30, 2016. The decreasewell as an increase in fair value was driven primarily by the impact of current energy market conditions resulting in a continued decline in operating performance.Echelon’s cost basis.
First Tower Finance Company LLC
Prospect owns 100% of the equity of CP Holdings,First Tower Delaware, a Consolidated Holding Company. CP Holdingsconsolidated holding company. First Tower Delaware owns 82.3%80.1% of the equityFirst Tower Finance. First Tower Finance owns 100% of CP Energy, and the remaining 17.7% of the equity is owned by CP Energy management. CP Energy provides oilfield flowback services and fluid hauling and disposal services through its subsidiariesFirst Tower, LLC (“First Tower”), a multiline specialty finance company.
The fair value of our investment in CP EnergyFirst Tower increased to $72,216$592,356 as of June 30, 2017,2021, representing a discountpremium of $41,284 from its amortized cost, compared to the discount of $37,498$236,502 to its amortized cost basis compared to a fair value of $508,465 as of June 30, 2016.2020, a premium of $150,250 to its amortized cost. The increase in premium to amortized cost was driven by strong financial performance.
During the year ended June 30, 2018, Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of InterDent and to appoint a new Board of Directors of InterDent, all the members of which are our Investment Adviser’s professionals. As a result, Prospect’s investment in InterDent is classified as a control investment.
The fair value of our investment in InterDent increased to $412,339 as of June 30, 2021, a premium of $129,650 to its amortized cost basis compared to a fair value of $230,757 as of June 30, 2020, a discount of $36,296 to its amortized cost. The increase in premium to amortized cost was driven by strong financial performance and expansion of comparable company trading multiples.
MITY, Inc.
Prospect owns 100% of the equity of Energy Solutions,MITY Delaware, a Consolidated Holding Company. Energy Solutions ownsconsolidated holding company. MITY Delaware previously held 95.58% of the equity of MITY. Effective March 13, 2019, MITY Delaware’s equity ownership of MITY increased to 100% of Freedom Marine. Freedom Marine. MITY owns 100% of each of Vessel Company, LLC, Vessel Company II, LLC,MITY-Lite, Inc. (“Mity-Lite”); Broda Enterprises USA, Inc.; and Vessel Company III, LLC. Freedom Marine owns, manages, and operates offshore supply vessels to provide transportation and support services for the oil and gas exploration and production industries in the Gulf of Mexico.Broda Enterprises ULC (“Broda Canada”).
The Board of Directors decreased the fair value of our investment in Freedom MarineMity decreased to $23,994$49,680 as of June 30, 2017,2021, a discount of $18,616$30,834 to its amortized cost basis compared to a discountfair value of $14,192 to its amortized cost$51,905 as of June 30, 2016.2020, a discount of $20,552 to its amortized cost. The increase in discount to amortized cost resulted from a decline in fair value was driven byfinancial performance, primarily associated with the continuing challenging environment fordemand imbalance stemming from the oil and gas industry, which has decreased the utilization of their vessels. COVID-19 pandemic.
National Property REIT Corp.
NPRC is a Maryland corporation and a qualified REIT for federal income tax purposes. NPRC is held for purposes of investing, operating, financing, leasing, managing and selling a portfolio of real estate assets and engages in any and all other activities that may be necessary, incidental, or convenient to perform the foregoing. NPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-family properties, and student housing properties. NPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity. Additionally, through its wholly-ownedwholly owned subsidiaries, NPRC invests in online consumer loans. Effective May 23, 2016, APRCloans and UPRC merged with and into NPRC, to consolidate all of our real estate holdings, with NPRC as the surviving entity.RSSNs. As of June 30, 2017,2021, we own 100% of the fully-diluted common equity of NPRC.
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During the year ended June 30, 2017,2021, we received partial repayments of $83,450 of our loans previously outstanding with NPRC, and provided $75,591$225,742 of debt and $25,200 of equity financing to NPRC for the acquisition of real estate properties, and $13,553 of equity financing to NPRC to fund capital expenditures for existing properties. In addition, during the year ended June 30, 2017, we received partial repaymentsreal estate properties, to provide working capital, and to fund purchases of $32,954 of our loans previously outstanding and $42,059 as a return of capital on our equity investment.
The online consumer loan investments held by certain of NPRC’s wholly-owned subsidiaries are unsecured obligations of individual borrowers that are issued in amounts ranging from $1 to $50, with fixed terms ranging from 2436 to 84 months. As of June 30, 2017,2021, the outstanding investment in online consumer loans by certain of NPRC’s wholly-owned subsidiaries was comprised of 102,6021,586 individual loans and one securitization equity residual interest in four securitizations, and had an aggregate fair value of $648,277.$9,815. The average outstanding individual loan balance is approximately $6$4 and the loans mature on dates ranging from July 1, 20172021 to June 28, 2024April 19, 2025 with a weighted-average outstanding term of 3118 months as of June 30, 2017.2021. Fixed interest rates range from 4.0%6.0% to 36.0% with a weighted-average current interest rate of 23.9%20.5%. As of June 30, 2017,2021, our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair value of $362,967.$10,668.
As of June 30, 2017,2021, based on outstanding principal balance, 6.3%17.4% of the portfolio was invested in super prime loans (borrowers with a Fair Isaac Corporation (“FICO”) score, of 720 or greater), 18.0%40.2% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 75.7%42.4% of the portfolio in near prime loans (borrowers with a FICO score of 580 to 659)659, a portion of which are considered sub-prime).
| Loan Type | Outstanding Principal Balance | Fair Value | Weighted Average Interest Rate* | Loan Type | Outstanding Principal Balance | Fair Value | Interest Rate Range | Weighted Average Interest Rate* | ||||||||||||||||||||||||||||
| Super Prime | $ | 41,293 | $ | 40,264 | 11.8% | Super Prime | $ | 1,321 | $ | 1,307 | 7.0% - 20.5% | 12.4% | ||||||||||||||||||||||||
| Prime | 117,505 | 112,159 | 15.8% | Prime | 2,731 | 2,662 | 6.0% - 32.0% | 18.1% | ||||||||||||||||||||||||||||
| Near Prime | 495,467 | 465,293 | 26.9% | Near Prime | 2,744 | 2,742 | 6.0% - 36.0% | 26.8% | ||||||||||||||||||||||||||||
*Weighted by outstanding principal balance of the online consumer loans.
The rated secured structured note investments held by certain of NPRC’s wholly owned subsidiaries are subordinated debt interests in broadly syndicated loans managed by established collateral management teams with many years of experience in the industry. As of June 30, 2021, the outstanding investment in rated secured structured notes by certain of NPRC’s wholly owned subsidiaries was comprised of 37 investments with a fair value of $209,540 and face value of $220,942. The average outstanding note is approximately $5,971 with an expected maturity date ranging from April 2026 to April 2029 and weighted-average expected maturity of 7 years as of June 30, 2021. Coupons range from three-month LIBOR (“3ML”) plus 5.45% to 9.45% with a weighted-average coupon of 3ML + 7.15%. As of June 30, 2021, our investment in NPRC and its wholly-owned subsidiaries relating to rated secured structured notes had a fair value of $108,457.
As of June 30, 2017,2021, based on outstanding notional balance, 24% of the portfolio was invested in Single - B rated tranches and 76% of the portfolio in BB rated tranches.
As of June 30, 2021, our investment in NPRC and its wholly-owned subsidiaries had an amortized cost of $790,296$753,711 and a fair value of $987,304,$1,189,755, including our investment in online consumer lending and rated secured structured notes as discussed above. The fair value of $624,337$1,070,780 related to NPRC’s real estate portfolio was comprised of thirty-seven multi-familiesfifty-one multi-family properties, twelve self-storage units, eight student housing properties and three commercial properties. The following table shows the location, acquisition date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as of June 30, 2017.2021.
| No. | Property Name | City | Acquisition Date | Purchase Price | Mortgage Outstanding | |||||||||||||||||||||||||||
| 1 | Filet of Chicken | Forest Park, GA | 10/24/2012 | $ | 7,400 | $ | — | |||||||||||||||||||||||||
| 2 | Arlington Park Marietta, LLC | Marietta, GA | 5/8/2013 | 14,850 | 13,495 | |||||||||||||||||||||||||||
| 3 | Cordova Regency, LLC | Pensacola, FL | 11/15/2013 | 13,750 | 10,925 | |||||||||||||||||||||||||||
| 4 | Crestview at Oakleigh, LLC | Pensacola, FL | 11/15/2013 | 17,500 | 13,297 | |||||||||||||||||||||||||||
| 5 | Inverness Lakes, LLC | Mobile, AL | 11/15/2013 | 29,600 | 23,722 | |||||||||||||||||||||||||||
| 6 | Kings Mill Pensacola, LLC | Pensacola, FL | 11/15/2013 | 20,750 | 16,855 | |||||||||||||||||||||||||||
| 7 | Plantations at Pine Lake, LLC | Tallahassee, FL | 11/15/2013 | 18,000 | 13,534 | |||||||||||||||||||||||||||
| 8 | Verandas at Rocky Ridge, LLC | Birmingham, AL | 11/15/2013 | 15,600 | 18,410 | |||||||||||||||||||||||||||
| 9 | Crestview at Cordova, LLC | Pensacola, FL | 1/17/2014 | 8,500 | 12,952 | |||||||||||||||||||||||||||
| 10 | Taco Bell, OK | Yukon, OK | 6/4/2014 | 1,719 | — | |||||||||||||||||||||||||||
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| No. | Property Name | City | Acquisition Date | Purchase Price | Mortgage Outstanding | No. | Property Name | City | Acquisition Date | Purchase Price | Mortgage Outstanding | |||||||||||||||||||||||||||||||||||
| 1 | Filet of Chicken | Forest Park, GA | 10/24/2012 | $ | 7,400 | $ | — | |||||||||||||||||||||||||||||||||||||||
| 2 | 5100 Live Oaks Blvd, LLC | Tampa, FL | 1/17/2013 | 63,400 | 46,700 | |||||||||||||||||||||||||||||||||||||||||
| 3 | Lofton Place, LLC | Tampa, FL | 4/30/2013 | 26,000 | 20,350 | |||||||||||||||||||||||||||||||||||||||||
| 4 | Arlington Park Marietta, LLC | Marietta, GA | 5/8/2013 | 14,850 | 9,650 | |||||||||||||||||||||||||||||||||||||||||
| 5 | NPRC Carroll Resort, LLC | Pembroke Pines, FL | 6/24/2013 | 225,000 | 178,970 | |||||||||||||||||||||||||||||||||||||||||
| 6 | Cordova Regency, LLC | Pensacola, FL | 11/15/2013 | 13,750 | 11,375 | |||||||||||||||||||||||||||||||||||||||||
| 7 | Crestview at Oakleigh, LLC | Pensacola, FL | 11/15/2013 | 17,500 | 13,845 | |||||||||||||||||||||||||||||||||||||||||
| 8 | Inverness Lakes, LLC | Mobile, AL | 11/15/2013 | 29,600 | 24,700 | |||||||||||||||||||||||||||||||||||||||||
| 9 | Kings Mill Pensacola, LLC | Pensacola, FL | 11/15/2013 | 20,750 | 17,550 | |||||||||||||||||||||||||||||||||||||||||
| 10 | Plantations at Pine Lake, LLC | Tallahassee, FL | 11/15/2013 | 18,000 | 14,092 | |||||||||||||||||||||||||||||||||||||||||
| 11 | Verandas at Rocky Ridge, LLC | Birmingham, AL | 11/15/2013 | 15,600 | 10,205 | 11 | Taco Bell, MO | Marshall, MO | 6/4/2014 | 1,405 | — | |||||||||||||||||||||||||||||||||||
| 12 | Matthews Reserve II, LLC | Matthews, NC | 11/19/2013 | 22,063 | 19,934 | 12 | Canterbury Green Apartments Holdings LLC | Fort Wayne, IN | 9/29/2014 | 85,500 | 84,048 | |||||||||||||||||||||||||||||||||||
| 13 | City West Apartments II, LLC | Orlando, FL | 11/19/2013 | 23,562 | 23,293 | 13 | Abbie Lakes OH Partners, LLC | Canal Winchester, OH | 9/30/2014 | 12,600 | 15,339 | |||||||||||||||||||||||||||||||||||
| 14 | Vinings Corner II, LLC | Smyrna, GA | 11/19/2013 | 35,691 | 32,943 | 14 | Kengary Way OH Partners, LLC | Reynoldsburg, OH | 9/30/2014 | 11,500 | 15,505 | |||||||||||||||||||||||||||||||||||
| 15 | Uptown Park Apartments II, LLC | Altamonte Springs, FL | 11/19/2013 | 36,590 | 29,809 | 15 | Lakeview Trail OH Partners, LLC | Canal Winchester, OH | 9/30/2014 | 26,500 | 29,581 | |||||||||||||||||||||||||||||||||||
| 16 | St. Marin Apartments II, LLC | Coppell, TX | 11/19/2013 | 73,078 | 62,441 | 16 | Lakepoint OH Partners, LLC | Pickerington, OH | 9/30/2014 | 11,000 | 16,831 | |||||||||||||||||||||||||||||||||||
| 17 | Atlanta Eastwood Village LLC | Stockbridge, GA | 12/12/2013 | 25,957 | 22,906 | 17 | Sunbury OH Partners, LLC | Columbus, OH | 9/30/2014 | 13,000 | 17,066 | |||||||||||||||||||||||||||||||||||
| 18 | Atlanta Monterey Village LLC | Jonesboro, GA | 12/12/2013 | 11,501 | 11,145 | 18 | Heatherbridge OH Partners, LLC | Blacklick, OH | 9/30/2014 | 18,416 | 24,411 | |||||||||||||||||||||||||||||||||||
| 19 | Atlanta Hidden Creek LLC | Morrow, GA | 12/12/2013 | 5,098 | 4,771 | 19 | Jefferson Chase OH Partners, LLC | Blacklick, OH | 9/30/2014 | 13,551 | 18,984 | |||||||||||||||||||||||||||||||||||
| 20 | Atlanta Meadow Springs LLC | College Park, GA | 12/12/2013 | 13,116 | 13,121 | 20 | Goldenstrand OH Partners, LLC | Hilliard, OH | 10/29/2014 | 7,810 | 11,577 | |||||||||||||||||||||||||||||||||||
| 21 | Atlanta Meadow View LLC | College Park, GA | 12/12/2013 | 14,354 | 13,176 | 21 | SSIL I, LLC | Aurora, IL | 11/5/2015 | 34,500 | 25,821 | |||||||||||||||||||||||||||||||||||
| 22 | Atlanta Peachtree Landing LLC | Fairburn, GA | 12/12/2013 | 17,224 | 15,606 | 22 | Vesper Tuscaloosa, LLC | Tuscaloosa, AL | 9/28/2016 | 54,500 | 43,052 | |||||||||||||||||||||||||||||||||||
| 23 | APH Carroll Bartram Park, LLC | Jacksonville, FL | 12/31/2013 | 38,000 | 27,639 | 23 | Vesper Iowa City, LLC | Iowa City, IA | 9/28/2016 | 32,750 | 24,825 | |||||||||||||||||||||||||||||||||||
| 24 | Plantations at Hillcrest, LLC | Mobile, AL | 1/17/2014 | 6,930 | 4,786 | 24 | Vesper Corpus Christi, LLC | Corpus Christi, TX | 9/28/2016 | 14,250 | 10,800 | |||||||||||||||||||||||||||||||||||
| 25 | Crestview at Cordova, LLC | Pensacola, FL | 1/17/2014 | 8,500 | 7,959 | 25 | Vesper Campus Quarters, LLC | Corpus Christi, TX | 9/28/2016 | 18,350 | 14,175 | |||||||||||||||||||||||||||||||||||
| 26 | APH Carroll Atlantic Beach, LLC | Atlantic Beach, FL | 1/31/2014 | 13,025 | 8,608 | 26 | Vesper College Station, LLC | College Station, TX | 9/28/2016 | 41,500 | 32,058 | |||||||||||||||||||||||||||||||||||
| 27 | Taco Bell, OK | Yukon, OK | 6/4/2014 | 1,719 | — | 27 | Vesper Kennesaw, LLC | Kennesaw, GA | 9/28/2016 | 57,900 | 51,087 | |||||||||||||||||||||||||||||||||||
| 28 | Taco Bell, MO | Marshall, MO | 6/4/2014 | 1,405 | — | 28 | Vesper Statesboro, LLC | Statesboro, GA | 9/28/2016 | 7,500 | 7,480 | |||||||||||||||||||||||||||||||||||
| 29 | 23 Mile Road Self Storage, LLC | Chesterfield, MI | 8/19/2014 | 5,804 | 4,350 | 29 | Vesper Manhattan KS, LLC | Manhattan, KS | 9/28/2016 | 23,250 | 14,679 | |||||||||||||||||||||||||||||||||||
| 30 | 36th Street Self Storage, LLC | Wyoming, MI | 8/19/2014 | 4,800 | 3,600 | 30 | 9220 Old Lantern Way, LLC | Laurel, MD | 1/30/2017 | 187,250 | 153,580 | |||||||||||||||||||||||||||||||||||
| 31 | Ball Avenue Self Storage, LLC | Grand Rapids, MI | 8/19/2014 | 7,281 | 5,460 | 31 | 7915 Baymeadows Circle Owner, LLC | Jacksonville, FL | 10/31/2017 | 95,700 | 76,560 | |||||||||||||||||||||||||||||||||||
| 32 | Ford Road Self Storage, LLC | Westland, MI | 8/29/2014 | 4,642 | 3,480 | 32 | 8025 Baymeadows Circle Owner, LLC | Jacksonville, FL | 10/31/2017 | 15,300 | 12,240 | |||||||||||||||||||||||||||||||||||
| 33 | Ann Arbor Kalamazoo Self Storage, LLC | Ann Arbor, MI | 8/29/2014 | 4,458 | 3,345 | 33 | 23275 Riverside Drive Owner, LLC | Southfield, MI | 11/8/2017 | 52,000 | 54,722 | |||||||||||||||||||||||||||||||||||
| 34 | Ann Arbor Kalamazoo Self Storage, LLC | Ann Arbor, MI | 8/29/2014 | 8,927 | 6,695 | 34 | 23741 Pond Road Owner, LLC | Southfield, MI | 11/8/2017 | 16,500 | 18,993 | |||||||||||||||||||||||||||||||||||
| 35 | Ann Arbor Kalamazoo Self Storage, LLC | Kalamazoo, MI | 8/29/2014 | 2,363 | 1,775 | 35 | 150 Steeplechase Way Owner, LLC | Largo, MD | 1/10/2018 | 44,500 | 36,668 | |||||||||||||||||||||||||||||||||||
| 36 | Canterbury Green Apartments Holdings LLC | Fort Wayne, IN | 9/29/2014 | 85,500 | 74,169 | 36 | Laurel Pointe Holdings, LLC | Forest Park, GA | 5/9/2018 | 33,005 | 26,400 | |||||||||||||||||||||||||||||||||||
| 37 | Abbie Lakes OH Partners, LLC | Canal Winchester, OH | 9/30/2014 | 12,600 | 13,055 | 37 | Bradford Ridge Holdings, LLC | Forest Park, GA | 5/9/2018 | 12,500 | 10,000 | |||||||||||||||||||||||||||||||||||
| 38 | Kengary Way OH Partners, LLC | Reynoldsburg, OH | 9/30/2014 | 11,500 | 13,502 | 38 | Olentangy Commons Owner LLC | Columbus, OH | 6/1/2018 | 113,000 | 92,876 | |||||||||||||||||||||||||||||||||||
| 39 | Lakeview Trail OH Partners, LLC | Canal Winchester, OH | 9/30/2014 | 26,500 | 23,256 | 39 | Villages of Wildwood Holdings LLC | Fairfield, OH | 7/20/2018 | 46,500 | 39,525 | |||||||||||||||||||||||||||||||||||
| 40 | 40 | Falling Creek Holdings LLC | Richmond, VA | 8/8/2018 | 25,000 | 19,335 | ||||||||||||||||||||||||||||||||||||||||
| 41 | 41 | Crown Pointe Passthrough LLC | Danbury, CT | 8/30/2018 | 108,500 | 89,400 | ||||||||||||||||||||||||||||||||||||||||
| 42 | 42 | Ashwood Ridge Holdings LLC | Jonesboro, GA | 9/21/2018 | 9,600 | 7,300 | ||||||||||||||||||||||||||||||||||||||||
| 43 | 43 | Lorring Owner LLC | Forestville, MD | 10/30/2018 | 58,521 | 47,680 | ||||||||||||||||||||||||||||||||||||||||
| 44 | 44 | Hamptons Apartments Owner, LLC | Beachwood, OH | 1/9/2019 | 96,500 | 79,520 | ||||||||||||||||||||||||||||||||||||||||
| 45 | 45 | 5224 Long Road Holdings, LLC | Orlando, FL | 6/28/2019 | 26,500 | 21,200 | ||||||||||||||||||||||||||||||||||||||||
| 46 | 46 | Druid Hills Holdings LLC | Atlanta, GA | 7/30/2019 | 96,000 | 79,104 | ||||||||||||||||||||||||||||||||||||||||
| 47 | 47 | Bel Canto NPRC Parcstone LLC | Fayetteville, NC | 10/15/2019 | 45,000 | 30,127 | ||||||||||||||||||||||||||||||||||||||||
| 48 | 48 | Bel Canto NPRC Stone Ridge LLC | Fayetteville, NC | 10/15/2019 | 21,900 | 14,662 | ||||||||||||||||||||||||||||||||||||||||
| 49 | 49 | Sterling Place Holdings LLC | Columbus, OH | 10/28/2019 | 41,500 | 34,196 | ||||||||||||||||||||||||||||||||||||||||
| 50 | 50 | SPCP Hampton LLC | Dallas, TX | 11/2/2020 | 36,000 | 27,590 | ||||||||||||||||||||||||||||||||||||||||
| 51 | 51 | Palmetto Creek Holdings LLC | North Charleston, SC | 11/10/2020 | 33,182 | 25,865 | ||||||||||||||||||||||||||||||||||||||||
| 52 | 52 | Valora at Homewood Holdings LLC | Homewood, AL | 11/19/2020 | 81,250 | 63,844 | ||||||||||||||||||||||||||||||||||||||||
| 53 | 53 | NPRC Fairburn LLC | Fairburn, GA | 12/14/2020 | 52,140 | 39,105 | ||||||||||||||||||||||||||||||||||||||||
| 54 | 54 | NPRC Grayson LLC | Grayson, GA | 12/14/2020 | 47,860 | 35,895 | ||||||||||||||||||||||||||||||||||||||||
| 55 | 55 | NPRC Taylors LLC | Taylors, SC | 1/27/2021 | 18,762 | 14,075 | ||||||||||||||||||||||||||||||||||||||||
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| No. | Property Name | City | Acquisition Date | Purchase Price | Mortgage Outstanding | |||||||||
| 40 | Lakepoint OH Partners, LLC | Pickerington, OH | 9/30/2014 | 11,000 | 14,480 | |||||||||
| 41 | Sunbury OH Partners, LLC | Columbus, OH | 9/30/2014 | 13,000 | 14,115 | |||||||||
| 42 | Heatherbridge OH Partners, LLC | Blacklick, OH | 9/30/2014 | 18,416 | 18,328 | |||||||||
| 43 | Jefferson Chase OH Partners, LLC | Blacklick, OH | 9/30/2014 | 13,551 | 17,200 | |||||||||
| 44 | Goldenstrand OH Partners, LLC | Hilliard, OH | 10/29/2014 | 7,810 | 9,600 | |||||||||
| 45 | Jolly Road Self Storage, LLC | Okemos, MI | 1/16/2015 | 7,492 | 5,620 | |||||||||
| 46 | Eaton Rapids Road Self Storage, LLC | Lansing West, MI | 1/16/2015 | 1,741 | 1,305 | |||||||||
| 47 | Haggerty Road Self Storage, LLC | Novi, MI | 1/16/2015 | 6,700 | 5,025 | |||||||||
| 48 | Waldon Road Self Storage, LLC | Lake Orion, MI | 1/16/2015 | 6,965 | 5,225 | |||||||||
| 49 | Tyler Road Self Storage, LLC | Ypsilanti, MI | 1/16/2015 | 3,507 | 2,630 | |||||||||
| 50 | SSIL I, LLC | Aurora, IL | 11/5/2015 | 34,500 | 26,450 | |||||||||
| 51 | Vesper Tuscaloosa, LLC | Tuscaloosa, AL | 9/28/2016 | 54,500 | 41,250 | |||||||||
| 52 | Vesper Iowa City, LLC | Iowa City, IA | 9/28/2016 | 32,750 | 24,825 | |||||||||
| 53 | Vesper Corpus Christi, LLC | Corpus Christi, TX | 9/28/2016 | 14,250 | 10,800 | |||||||||
| 54 | Vesper Campus Quarters, LLC | Corpus Christi, TX | 9/28/2016 | 18,350 | 14,175 | |||||||||
| 55 | Vesper College Station, LLC | College Station, TX | 9/28/2016 | 41,500 | 32,058 | |||||||||
| 56 | Vesper Kennesaw, LLC | Kennesaw, GA | 9/28/2016 | 57,900 | 44,727 | |||||||||
| 57 | Vesper Statesboro, LLC | Statesboro, GA | 9/28/2016 | 7,500 | 5,292 | |||||||||
| 58 | Vesper Manhattan KS, LLC | Manhattan, KS | 9/28/2016 | 23,250 | 15,921 | |||||||||
| 59 | JSIP Union Place, LLC | Franklin, MA | 12/7/2016 | 64,750 | 51,800 | |||||||||
| 60 | 9220 Old Lantern Way, LLC | Laurel, MD | 1/30/2017 | 187,250 | 153,580 | |||||||||
| $ | 1,600,720 | $ | 1,312,667 | |||||||||||
| No. | Property Name | City | Acquisition Date | Purchase Price | Mortgage Outstanding | |||||||||||||||||||||||||||
| 56 | Parkside at Laurel West Owner LLC | Spartanburg, SC | 2/26/2021 | 57,005 | 42,025 | |||||||||||||||||||||||||||
| 57 | Willows at North End Owner LLC | Spartanburg, SC | 2/26/2021 | 23,255 | 19,000 | |||||||||||||||||||||||||||
| 58 | SPCP Edge CL Owner LLC | Webster, TX | 3/12/2021 | 34,000 | 25,496 | |||||||||||||||||||||||||||
| 59 | Jackson Pear Orchard LLC | Ridgeland, MS | 6/28/2021 | 50,900 | 38,175 | |||||||||||||||||||||||||||
| 60 | Jackson Lakeshore Landing LLC | Ridgeland, MS | 6/28/2021 | 22,600 | 16,950 | |||||||||||||||||||||||||||
| 61 | Jackson Reflection Pointe LLC | Flowood, MS | 6/28/2021 | 45,100 | 31,050 | |||||||||||||||||||||||||||
| 62 | Jackson Crosswinds LLC | Pearl, MS | 6/28/2021 | 41,400 | 33,825 | |||||||||||||||||||||||||||
| $ | 2,322,181 | $ | 1,937,492 | |||||||||||||||||||||||||||||
The Board of Directors increased the fair value of our investment in NPRC increased to $987,304 $1,189,755 as of June 30, 2017,2021, a premium of $197,008$436,044 from its amortized cost basis compared to a fair value of $878,733 as of June 30, 2020, representing a premium of $267,315. The increase in premium is primarily driven by compression of capitalization rates and, to a lesser extent, growth in net operating income in our real estate portfolio.
Nationwide Loan Company LLC
Prospect owns 100% of the membership interests of Nationwide Acceptance Holdings LLC (“Nationwide Holdings”), a Consolidated Holding Company. Nationwide Holdings owns 94.48% of the equity of Nationwide Loan Company LLC (“Nationwide”), with members of Nationwide management owning the remaining 5.52% of the equity. Nationwide was founded in 1954 and provides installment loans to sub-prime consumers who use the funds to purchase used automobiles.
The fair value of our investment in Nationwide increased to $47,993 as of June 30, 2021, a premium of $6,887 to its amortized cost, compared to the $116,557 unrealized appreciation, inclusivea fair value of APRC and UPRC, recorded at$37,238 as of June 30, 2016. This increase is primarily due2020, a discount of $3,311 to improved operating performance at the property level, partially offset by a decline in our online lending portfolio value resulting from anits amortized cost. The increase in delinquent loans.fair value was driven by strong financial performance.
NMMB, Inc.Inc.
Prospect owns 100% of the equity of NMMB Holdings, Inc. (“NMMB Holdings”), a Consolidated Holding Company. NMMB Holdings owns 96.33%94.82% and 93.00% of the fully-diluted equity of NMMB, Inc. (f/k/a NMMB Acquisition, Inc.), (“NMMB”) as of June 30, 2021 and June 30, 2020, respectively, with NMMB management owning the remaining 3.67% of the equity. NMMB owns 100% of Refuel Agency, Inc. (“Refuel Agency”). Refuel Agency owns 100% of Armed Forces Communications, Inc. (“Armed Forces”). NMMB is an advertising media buying business.
The fair value of our investment in NMMB increased to $20,825$46,888 as of June 30, 2017,2021, representing a discountpremium of $2,658$29,145 to its amortized cost basis, compared to the discounta fair value of $13,576$33,668 as of June 30, 2020, representing a premium of $15,774 to its amortized cost at June 30, 2016.basis. The increase to the premium was driven by strong financial performance and expansion of comparable company trading multiples.
Prospect owns 88.27% of USESthe fully-diluted equity of R-V Industries, Inc. (“R-V”), with R-V management owning the remaining 11.73% of the equity. On December 15, 2020 we restructured our $28,622 Senior Subordinated Note with R-V into a $28,622 Senior Secured Note. No realized gain or loss was recorded as a result of the transaction. R-V is a provider of engineering and manufacturing services to chemical, paper, pharmaceutical, and power industries.
The fair value of our investment in R-V increased to $49,693 as of June 30, 2017.2021, representing a premium of $14,205 to its amortized cost basis, compared to a fair value of $38,565 as of June 30, 2020, representing a premium of $3,076 to its amortized cost basis. The increase to the premium was driven by strong financial performance and expansion of comparable company trading multiples.
USES Corp.
Prospect owns 99.96% of the equity of USES Corp. as of June 30, 2021 and June 30, 2020. USES provides industrial, environmental, and environmentalmaritime services in the Gulf States region. USES offers industrial services, such as tank and chemical cleaning, hydro blasting, waste management, vacuum, safety training, turnaround management, and oilfield response/remediation services.
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Valley Electric Company, Inc.
Prospect owns 100% of the common stock of Valley Holdings I, a Consolidated Holding Company. Valley Holdings I owns 100% of Valley Holdings II, a Consolidated Holding Company. Valley Holdings II owns 94.99% of Valley Electric, aswith Valley Electric management owning the remaining 5.01% of June 30, 2017.the equity. Valley Electric owns 100% of the equity of VE Company, Inc., which owns 100% of the equity of Valley Electric Co. of Mt. Vernon, Inc. (“Valley”). Valley is, a leading provider of specialty electrical services in the state of Washington and is among the top 50 electrical contractors in the U.S. The company, with its headquarters in Everett, Washington, offers a comprehensive array of contracting services, primarily for commercial, industrial, and transportation infrastructure applications, including new installation, engineering and design, design-build, traffic lighting and signalization, low to medium voltage power distribution, construction management, energy management and control systems, 24-hour electrical maintenance and testing, as well as special projects and tenant improvement services. Valley was founded in 1982 by the Ward family, who held the company until the end of 2012.United States.
Our controlled investments, other thanincluding those discussed above, have seen steady or improved operating performance and are valued at $61,504$437,286 above cost. Overall, combined with those portfolio companies impacted by the energy marketstheir amortized cost as of June 30, 2021.
Affiliate and discussed above, our controlledNon-Control Company Investments
We hold three affiliate investments at June 30, 2017 are2021 with a total fair value of $356,734, a premium of $153,791 from their combined amortized cost compared to a fair value of $187,537 as of June 30, 2020, representing a $24,053 premium to its amortized cost. The increase in premium is primarily driven by our investment in PGX Holdings, Inc. (“Progrexion”), which is valued at $71,044 above theira premium of $126,933 at June 30, 2021 compared to a premium of $180 as of June 30, 2020. The increase in Progrexion’s premium to amortized cost.cost was driven by strong financial performance.
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 debtdebt investments, the fair value is generally limited on the high side to each loan’s par value, plus any prepayment premium 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 and are generally performing as expected or better. However, as of June 30, 2017, four2021, Engine Group, Inc. (“Engine”) and USC, two of our non-control/non-affiliate investments Pacific World Corporation, PrimeSport, Inc., Spartan Energy Services, Inc. and United Sporting Companies, Inc. (“USC”) are valued at discounts to amortized cost of $30,216, $23,741, $16,769$27,258 and $57,622,$96,794, respectively. As of June 30, 2017,2021, our CLO investment portfolio is valued at a $70,294$334,066 discount to amortized cost. Excluding these investments,Engine, USC, and the CLO investment portfolio, the fair value of our non-control/non-affiliate investments at June 30, 20172021 increased and are valued $4,125 belowat $10,695 above their amortized cost.cost, compared to a discount of $35,674 recorded at June 30, 2020. This increase is driven largely by tightening credit spreads as market participants expected a lower yield on similar investments as the level of volatility generated by the COVID-19 pandemic declined over the twelve month period.
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 as of June 30, 20172021 consists of: a Revolving Credit Facility availing us of the ability to borrow debt subject to borrowing base determinations; Convertible Notes which we issued in April 2012, August 2012, December 2012, April 20142017 (with a follow-on issuance in May 2018) and April 2017;March 2019; Public Notes which we issued in March 2013, April 2014,October 2018, December 2015, and2018 (and from time to time through our 20242029 Notes Follow-on Program;Program), January 2021, and May 2021; and Prospect Capital InterNotes® which we issue from time to time. OurAs of June 30, 2021, our equity capital is comprised entirely of common and preferred equity.
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The following table shows our outstanding debt as of June 30, 2017.2021.
| Principal Outstanding | Unamortized Discount & Debt Issuance Costs | Net Carrying Value | Fair Value (1) | Effective Interest Rate | ||||||||||||||||||||||||||||
Revolving Credit Facility(2) | $ | 356,937 | $ | 11,141 | $ | 356,937 | (3) | $ | 356,937 | 1ML+2.05% | (6) | |||||||||||||||||||||
| 2022 Notes | 111,055 | 825 | 110,230 | 113,799 | (4) | 5.69 | % | (7) | ||||||||||||||||||||||||
| 2025 Notes | 156,168 | 3,298 | 152,870 | 171,590 | (4) | 6.63 | % | (7) | ||||||||||||||||||||||||
| Convertible Notes | 267,223 | 263,100 | 285,389 | |||||||||||||||||||||||||||||
| 6.375% 2024 Notes | 81,389 | 467 | 80,922 | 88,996 | (4) | 6.57 | % | (7) | ||||||||||||||||||||||||
| 2023 Notes | 284,219 | 1,397 | 282,822 | 302,616 | (4) | 6.07 | % | (7) | ||||||||||||||||||||||||
| 2026 Notes | 400,000 | 8,768 | 391,232 | 413,032 | (4) | 3.94 | % | (7) | ||||||||||||||||||||||||
| 3.364% 2026 Notes | 300,000 | 7,279 | 292,721 | 300,693 | (4) | 3.57 | % | (7) | ||||||||||||||||||||||||
| 2029 Notes | 69,170 | 2,150 | 67,020 | 71,336 | (4) | 7.38 | % | (7) | ||||||||||||||||||||||||
| Public Notes | 1,134,778 | 1,114,717 | 1,176,673 | |||||||||||||||||||||||||||||
Prospect Capital InterNotes® | 508,711 | 10,496 | 498,215 | 591,013 | (5) | 6.17 | % | (8) | ||||||||||||||||||||||||
| Total | $ | 2,267,649 | $ | 2,232,969 | $ | 2,410,012 | ||||||||||||||||||||||||||
| Principal Outstanding | Unamortized Discount & Debt Issuance Costs | Net Carrying Value | Fair Value (1) | Effective Interest Rate | ||||||||||||||||||
Revolving Credit Facility(2) | $ | — | $ | 4,779 | $ | — | (3 | ) | $ | — | 1ML+2.25% | (6 | ) | |||||||||
| 2017 Notes | 50,734 | 77 | 50,657 | 51,184 | (4 | ) | 5.91 | % | (7 | ) | ||||||||||||
| 2018 Notes | 85,419 | 394 | 85,025 | 87,660 | (4 | ) | 6.42 | % | (7 | ) | ||||||||||||
| 2019 Notes | 200,000 | 1,846 | 198,154 | 206,614 | (4 | ) | 6.51 | % | (7 | ) | ||||||||||||
| 2020 Notes | 392,000 | 6,458 | 385,542 | 394,689 | (4 | ) | 5.38 | % | (7 | ) | ||||||||||||
| 2022 Notes | 225,000 | 6,737 | 218,263 | 223,875 | (4 | ) | 5.63 | % | (7 | ) | ||||||||||||
| Convertible Notes | 953,153 | 937,641 | 964,022 | |||||||||||||||||||
| 5.00% 2019 Notes | 300,000 | 1,705 | 298,295 | 308,439 | (4 | ) | 5.29 | % | (7 | ) | ||||||||||||
| 2023 Notes | 250,000 | 4,087 | 245,913 | 258,045 | (4 | ) | 6.22 | % | (7 | ) | ||||||||||||
| 2024 Notes | 199,281 | 5,189 | 194,092 | 207,834 | (4 | ) | 6.72 | % | (7 | ) | ||||||||||||
| Public Notes | 749,281 | 738,300 | 774,318 | |||||||||||||||||||
Prospect Capital InterNotes® | 980,494 | 14,240 | 966,254 | 1,003,852 | (5 | ) | 5.55 | % | (8 | ) | ||||||||||||
| Total | $ | 2,682,928 | $ | 2,642,195 | $ | 2,742,192 | ||||||||||||||||
| (1)As permitted by ASC 825-10-25, we have not elected to value |
| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | After 5 Years | |||||||||||||||
| Revolving Credit Facility | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
| Convertible Notes | 953,153 | 136,153 | 592,000 | — | 225,000 | ||||||||||||||
| Public Notes | 749,281 | — | 300,000 | — | 449,281 | ||||||||||||||
| Prospect Capital InterNotes® | 980,494 | 39,038 | 325,661 | 399,490 | 216,305 | ||||||||||||||
| Total Contractual Obligations | $ | 2,682,928 | $ | 175,191 | $ | 1,217,661 | $ | 399,490 | $ | 890,586 | |||||||||
(3)Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Critical Accounting Policies and Estimates for accounting policy details.
(4)We use available market quotes to estimate the fair value of the Convertible Notes due July 15, 2022 which bearand Public Notes.
(5)The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread based on observable market inputs.
(6)Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7)The effective interest atrate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs. For the 2029 Notes, the rate presented is a combined effective interest rate of 4.95% per year,their respective original Note issuances and repurchasing $78,766 aggregateNote Follow-on Programs.
(8)For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are amortized on a straight-line method over the stated life of the obligation which approximates level yield, are weighted against the average year-to-date principal amount of 2017 Notes which bear interest at a rate of 5.375% and $114,581 aggregate principal amount of 2018 Notes which bear interest at a rate of 5.75%.balance.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of June 30, 2016.2021.
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | After 5 Years | |||||||||||||||||||||||||
| Revolving Credit Facility | $ | 356,937 | $ | — | $ | — | $ | 356,937 | $ | — | |||||||||||||||||||
| Convertible Notes | 267,223 | — | 111,055 | 156,168 | — | ||||||||||||||||||||||||
| Public Notes | 1,134,778 | — | 365,608 | 400,000 | 369,170 | ||||||||||||||||||||||||
| Prospect Capital InterNotes® | 508,711 | — | 11,744 | 51,822 | 445,145 | ||||||||||||||||||||||||
| Total Contractual Obligations | $ | 2,267,649 | $ | — | $ | 488,407 | $ | 964,927 | $ | 814,315 | |||||||||||||||||||
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| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | After 5 Years | |||||||||||||||
| Revolving Credit Facility | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
| Convertible Notes | 1,089,000 | 167,500 | 529,500 | 392,000 | — | ||||||||||||||
| Public Notes | 711,380 | — | — | 300,000 | 411,380 | ||||||||||||||
| Prospect Capital InterNotes® | 908,808 | 8,819 | 257,198 | 360,599 | 282,192 | ||||||||||||||
| Total Contractual Obligations | $ | 2,709,188 | $ | 176,319 | $ | 786,698 | $ | 1,052,599 | $ | 693,572 | |||||||||
| Payments Due by Period | |||||||||||||||||||||||||||||
| Total | Less than 1 Year | 1 – 3 Years | 3 – 5 Years | After 5 Years | |||||||||||||||||||||||||
| Revolving Credit Facility | $ | 237,536 | $ | — | $ | — | $ | 237,536 | $ | — | |||||||||||||||||||
| Convertible Notes | 459,490 | — | 258,240 | 201,250 | — | ||||||||||||||||||||||||
| Public Notes | 793,719 | — | 320,000 | 333,788 | 139,931 | ||||||||||||||||||||||||
Prospect Capital InterNotes® | 680,229 | — | — | 243,062 | 437,167 | ||||||||||||||||||||||||
| Total Contractual Obligations | $ | 2,170,974 | $ | — | $ | 578,240 | $ | 1,015,636 | $ | 577,098 | |||||||||||||||||||
We may from time to time seek to cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. The amounts involved may be material. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including secured debt, unsecured debt and/or debt securities convertible into common stock. Any such purchases or exchanges of outstanding debt would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.
Historically, we have funded 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 $5,000,000 less issuances to date. As of June 30, 2017, we can issue up to $4,691,212 of additional debt and equity securities in the public market under this shelf registration.an indeterminate amount. 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.
Each of our Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Unsecured Notes”) are our general, unsecured obligations and rank equal in right of payment with all of our existing and future unsecured indebtedness and will be senior in right of payment to any of our subordinated indebtedness that may be issued in the future. The Unsecured Notes are effectively subordinated to our existing secured indebtedness, such as our credit facility, and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to any existing and future liabilities and other indebtedness of any of our subsidiaries.
Revolving Credit Facility
On August 29, 2014, we renegotiated our previous credit facility and closed an expanded five and a half year revolving credit facility (the “2014 Facility” or the “Revolving Credit Facility”). The lenders havehad extended commitments of $885,000 under the 2014 Facility as of June 30, 2017.2018. The 2014 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate. Interest on borrowings under the 2014 Facility was one-month LIBOR plus 225 basis points. Additionally, the lenders charged a fee on the unused portion of the 2014 Facility equal to either 50 basis points if at least 35% of the credit facility was drawn or 100 basis points otherwise.
On August 1, 2018, we renegotiated the 2014 Facility and closed an expanded five and a half year revolving credit facility (the “2018 Facility”). The lenders have extended commitments of $1,132,500 as of June 30, 2019. The 2018 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On September 9, 2019, we amended the 2018 Facility and closed an expanded revolving credit facility (the “2019 Facility”). The lenders had extended commitments of $1,077,500 as of March 31, 2021. The 2019 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On April 28, 2021, we amended the 2019 Facility and closed an expanded five year revolving credit facility (the “2021 Facility” and collectively with the 2014 Facility, the 2018 Facility and the 2019 Facility, the “Revolving Credit Facility”). The lenders had extended commitments of $1,107,500 as of June 30, 2021. The Revolving Credit Facility includes an accordion feature which allows commitments to be increased up to $1,500,000 in the aggregate. The Revolving Credit Facility matures on April 27, 2026. It includes a revolving period of the 2014 Facilitythat extends through March 2019, withApril 27, 2025, followed by an additional one yearone-year amortization period, (withwith distributions allowed)allowed to Prospect after the completion of the revolving period. During such one yearone-year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one yearone-year amortization period, the remaining balance will become due, if required by the lenders.
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The 2014Revolving Credit 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 2014Revolving Credit 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 2014Revolving Credit Facility. The 2014Revolving Credit Facility also requires the maintenance of a minimum liquidity requirement. As of June 30, 2017,2021, we were in compliance with the applicable covenants.
Interest on borrowings under the 20142021 Facility is one-month LIBOR plus 225205 basis points. Additionally, the lenders charge a fee on the unused portion of the 2014 Facilitycredit facility equal to either 5040 basis points if at least 35%more than 60% of the credit facility is drawn, or 10070 basis points otherwise.if more than 35% and an amount less than or equal to 60% of the credit facility is drawn, or 150 basis points if an amount less than or equal to 35% of the credit facility is drawn. The 20142021 Facility requires us to pledge assets as collateral in order to borrow under the credit facility.
For the years ended June 30, 2021, June 30, 2020, and June 30, 2019, the average stated interest rate (i.e., rate in effect plus the spread) and average outstanding borrowings for the Revolving Credit Facility were as follows:
| Year Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||
| Average stated interest rate | 2.31 | % | 3.31 | % | 4.55 | % | |||||||||||||||||
| Average outstanding balance | $386,848 | $222,758 | $225,310 | ||||||||||||||||||||
As of June 30, 20172021 and June 30, 2016,2020, we had $665,409$640,853 and $538,456,$545,496, respectively, available to us for borrowing under the Revolving Credit Facility, net of $356,937 and $237,536 outstanding borrowings as of the respective balance sheet dates. As of June 30, 2021, the investments, including cash and cash equivalents, used as collateral for the Revolving Credit Facility had an aggregate fair value of $1,807,442, which nothing was outstanding at either date.represents 28.8% of our total investments, including cash and cash equivalents. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and, as such, these investments are not available to our general creditors. As additional eligible investments are transferred to PCF and pledged under the Revolving Credit Facility, PCF will generate additional availability up to the current commitment amount of $885,000. As of June 30, 2017, the investments, including cash and money market funds, used as collateral for the Revolving Credit Facility had an aggregate fair value of $1,618,986, which represents 26.3% of our total investments, including cash and money market funds. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and as such, these investments are not available to our general creditors.$1,107,500. The release of any assets from PCF requires the approval of the facility agent.
In connection with the origination and amendments of the Revolving Credit Facility, we incurred $12,405$15,299 of new fees and $3,539$7,509 were carried over for continuing participants from the previous facility,facilities, all of which are being amortized over the term of the facility in accordance with ASC 470-50. As of June 30, 2017, $4,7792021, $11,141 remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities.Liabilities.
During the years ended June 30, 2017, 20162021, 2020 and 2015,2019, we recorded $12,173, $13,213$18,208, $21,850 and $14,424,$23,097, respectively, of interest costs, unused fees and amortization of financing costs on the Revolving Credit Facility as interest expense.
Convertible Notes
On April 11, 2014, we issued $400,000 aggregate principal amount of convertible notes that mature on April 15, 2020 (the “2020 Notes”), unless previously converted or repurchased in accordance with their terms. The 2020 Notes bear interest at a rate of 4.75% per year, payable semi-annually on April 15 and October 15 each year, beginning October 15, 2014. Total proceeds from the issuance of the 2020 Notes, net of underwriting discounts and offering costs, were $387,500. On January 30, 2015, we repurchased $8,000 aggregate principal amount of the 2020 Notes at a price of 93.0, including commissions. As a result of this
transaction, we recorded a gain of $332, in the amount of the difference between the reacquisition price and the net carrying amount of the notes,2020 Notes, net of the proportionate amount of unamortized debt issuance cost. During the three months ended December 31, 2018, we repurchased an additional $13,500 aggregate principal amount of the 2020 Notes at a price of 99.5, including commissions. As a result of this transaction, we recorded a loss of $41, in the amount of the difference between the reacquisition price and the net carrying amount of the 2020 Notes, net of the proportionate amount of unamortized debt issuance costs. During the three months ended March 31, 2019, we repurchased an additional $129,798 aggregate principal amount of the 2020 Notes at a weighted average price of 101.4, including commission. As a result of these transactions, we recorded a net loss of $2,787 during the three months ended March 31, 2019, in the amount of the difference between the reacquisition price and the net carrying amounts of the 2020 Notes, net of the proportionate amount of unamortized debt issuance costs. During the three months ended June 30, 2019, we repurchased an additional $24,588 aggregate principal amount of the 2020 Notes at a weighted average price of $101.10, including commissions. As a result of these transactions, we recorded a net loss of $414 during the three months ended June 30, 2019, in the amount of the difference of the reacquisition price and the net carrying amounts of the 2020 Notes, net of the proportionate amount of unamortized debt issuance costs.
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On June 28, 2019, we commenced a tender offer to purchase for cash any and all of the $224,114 then outstanding aggregate principal amount of the 2020 Notes (“June Tender Offer”). On July 27, 2019, $32,948 aggregate principal amount of the 2020 Notes, representing 14.7% of the previously outstanding 2020 Notes, were validly tendered and accepted. On August 12, 2019, we commenced a tender offer to purchase for cash up to $60,000 aggregate principal amount of the 2020 Notes (“August Tender Offer”). On September 10, 2019, $13,597 aggregate principal amount of the 2020 Notes, representing 7.1% of the previously outstanding 2020 Notes, were validly tendered and accepted. The June Tender Offer and August Tender Offer, resulted in our recognizing a loss of $668 during the three months ended September 30, 2019.
On September 24, 2019, we commenced a tender offer to purchase for cash up to $40,000 outstanding aggregate principal amount of the 2020 Notes (“2020 Notes September Tender Offer”). On October 23, 2019, $2,140 aggregate principal amount of the 2020 Notes, representing 1.2% of the previously outstanding 2020 Notes, were validly tendered and accepted. On November 7, 2019, we commenced a tender offer to purchase for cash up to $10,000 aggregate principal amount of the 2020 Notes (“2020 Notes November Tender Offer”). On December 7, 2019, $392 aggregate principal amount of the 2020 Notes, representing 0.2% of the previously outstanding 2020 Notes, were validly tendered and accepted. The 2020 Notes September Tender Offer and 2020 Notes November Tender Offer resulted in our recognizing a loss of $31 during the three months ended December 31, 2019.
On December 23, 2019, we commenced a tender offer to purchase for cash up to $10,000 aggregate principal amount of the 2020 Notes (“2020 Notes December Tender Offer”). On January 22, 2020, $2,215 aggregate principal amount of the 2020 Notes, representing 1.3% of the previously outstanding 2020 Notes, were validly tendered and accepted. The 2020 Notes December Tender Offer resulted in our recognizing a loss of $14 during the three months ended March 31, 2020. During the three months ended March 31, 2020, we repurchased an additional $45,111 aggregate principal amount of the 2020 Notes at a weighted average price of 100.5 including commissions. As a result of this transaction, we recorded a loss of $220, in the amount of the difference between the reacquisition price and the net carrying amount of the 2020 Notes, net of the proportionate amount of unamortized debt issuance costs.
On April 15, 2020, we repaid the outstanding principal amount of $127,711 of the 2020 Notes, plus interest. No gain or loss was realized on the transaction.
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “2022“Original 2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Original 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2017. Total proceeds from the issuance of the Original 2022 Notes, net of underwriting discounts and offering costs, were $218,010. On May 18, 2018, we issued an additional $103,500 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “Additional 2022 Notes,” and together with the Original 2022 Notes, the “2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Additional 2022 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2022 Notes and bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2018. Total proceeds from the issuance of the Additional 2022 Notes, net of underwriting discounts and offering costs, were $100,749.
On October 18, 2019, we repurchased $22,941 aggregate principal amount of the 2022 Notes at a price of 102.8 including commissions. As a result of this transaction, we recorded a loss of $1,072 in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs. On November 7, 2019, we commenced a tender offer to purchase for cash up to $50,000 aggregate principal amount of the 2022 Notes (“2022 Notes November Tender Offer”). On December 7, 2019, $13,432 aggregate principal amount of the 2022 Notes, representing 4.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes November Tender Offer resulted in our recognizing a loss of $599, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
On December 23, 2019, we commenced a tender offer to purchase for cash up to $25,000 aggregate principal amount of the 2022 Notes (“2022 Notes December Tender Offer”). On January 22, 2020, $1,302 aggregate principal amount of the 2022 Notes, representing 0.5% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December Tender Offer resulted in our recognizing a loss of $51 during the three months ended March 31, 2020. During the three months ended March 31, 2020, we repurchased an additional $32,585 aggregate principal amount of the 2022 Notes at a weighted average price of 89.1 including commissions. As a result of this transaction, we recorded a gain of $3,045, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
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On July 23, 2020, we commenced a tender offer to purchase for cash up to $100,000 aggregate principal amount of the 2022 Notes (“2022 Notes July Tender Offer”). On August 19, 2020, $29,420 aggregate principal amount of the 2022 Notes, representing 11.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes July Tender Offer resulted in our recognizing a loss of $396 during the three months ended September 30, 2020.
On September 3, 2020, we commenced a tender offer to purchase for cash up to $228,820 aggregate principal amount of the 2022 Notes at the purchase price of $101.00, plus accrued and unpaid interest (“2022 Notes September Tender Offer”). On October 1, 2020, $6,035 aggregate principal amount of the 2022 Notes, representing 2.64% of the previously outstanding 2022 Notes, were validly tendered and accepted. On October 19, 2020, we commenced a tender offer to purchase for cash any and all of the $222,785 aggregate principal amount outstanding of the 2022 Notes at the purchase price of $102.625, plus accrued and unpaid interest (“2022 Notes October Tender Offer”). On November 16, 2020, $59,863 aggregate principal amount of the 2022 Notes, representing 26.87% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes September Tender Offer and the 2022 Notes October Tender Offer resulted in our recognizing a loss of $2,433 during the three months ended December 31, 2020.
On December 16, 2020, we commenced a tender offer to purchase for cash any and all of the $162,922 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.50, plus accrued and unpaid interest (“2022 Notes December 2020 Tender Offer”). On January 15, 2021, $26,694 aggregate principal amount of the 2022 Notes, representing 16.38% of the previously outstanding 2022 Notes, were validly tendered and accepted. On February 1, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.00, plus accrued and unpaid interest (“2022 Notes February 2021 Tender Offer”). On March 2, 2021, $25,123 aggregate principal amount of the 2022 Notes, representing 18.44% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December 2020 Tender Offer and the 2022 Notes February 2021 Tender Offer resulted in our recognizing a loss of $2,225 during the three months ended March 31, 2021.
On March 16, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.00, plus accrued and unpaid interest (“2022 Notes March 2021 Tender Offer”). On April 13, 2021, $50 aggregate principal amount of the 2022 Notes, representing 0.05% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes March 2021 Tender Offer resulted in our recognizing a loss of $1. As of June 30, 2021, the outstanding aggregate principal amount of the 2022 Notes is $111,055.
On March 1, 2019, we issued $175,000 aggregate principal amount of senior convertible notes that mature on March 1, 2025 (the “2025 Notes”), unless previously converted or repurchased in accordance with their terms. We granted the underwriters a 13-day over-allotment option to purchase up to an additional $26,250 aggregate principal amount of the 2025 Notes. The underwriters fully exercised the over-allotment option on March 11, 2019 and we issued $26,250 aggregate principal amount of 2025 Notes at settlement on March 13, 2019. The 2025 Notes bear interest at a rate of 6.375% per year, payable semi-annually on March 1 and September 1 each year, beginning September 1, 2019. Total proceeds from the issuance of the 2025 Notes, net of underwriting discounts and offering costs, were $198,674.
On December 28, 2020, we commenced a tender offer to purchase for cash up to $20,000 aggregate principal amount of the 2025 Notes at the purchase price of $111.00, plus accrued and unpaid interest (“2025 Notes December 2020 Tender Offer”). On January 27, 2021, $20,000 aggregate principal amount of the 2025 Notes, representing 9.94% of the previously outstanding 2025 Notes, were validly tendered and accepted. The 2025 Notes December 2020 Tender Offer resulted in our recognizing a loss of $2,676 during the three months ended March 31, 2021. On February 16, 2021, we repurchased an additional $25,082 aggregate principal amount of the 2025 Notes, representing 13.84% of the previously outstanding 2025 Notes, at a price of $107.50, including commissions. As a result of this transaction, we recorded a loss of $2,466, in the amount of the difference between the reacquisition price and the net carrying amount of the 2025 Notes, net of the proportionate amount of unamortized debt issuance costs. As of June 30, 2021, the outstanding aggregate principal amount of the 2025 Notes is $156,168.
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Certain key terms related to the convertible features for the 2017 Notes, the 2018 Notes, the 2019 Notes, the 20202022 Notes and the 20222025 Notes (collectively, the “Convertible Notes”) are listed below.
| 2022 Notes | 2025 Notes | |||||||||||||
| Initial conversion rate(1) | 100.2305 | 110.7420 | ||||||||||||
| Initial conversion price | $ | 9.98 | $ | 9.03 | ||||||||||
| Conversion rate at June 30, 2021(1)(2) | 100.2305 | 110.7420 | ||||||||||||
| Conversion price at June 30, 2021(2)(3) | $ | 9.98 | $ | 9.03 | ||||||||||
| Last conversion price calculation date | 4/11/2021 | 3/1/2021 | ||||||||||||
| Dividend threshold amount (per share)(4) | $ | 0.083330 | $ | 0.060000 | ||||||||||
(1)Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
(2)Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
| 2017 Notes | 2018 Notes | 2019 Notes | 2020 Notes | 2022 Notes | |||||||||||||||
| Initial conversion rate(1) | 85.8442 | 82.3451 | 79.7766 | 80.6647 | 100.2305 | ||||||||||||||
| Initial conversion price | $ | 11.65 | $ | 12.14 | $ | 12.54 | $ | 12.40 | $ | 9.98 | |||||||||
| Conversion rate at June 30, 2017(1)(2) | 87.7516 | 84.1497 | 79.8360 | 80.6670 | 100.2305 | ||||||||||||||
Conversion price at June 30, 2017(2)(3) | $ | 11.40 | $ | 11.88 | $ | 12.53 | $ | 12.40 | $ | 9.98 | |||||||||
| Last conversion price calculation date | 4/16/2017 | 8/14/2016 | 12/21/2016 | 4/11/2017 | 4/11/2017 | ||||||||||||||
| Dividend threshold amount (per share)(4) | $ | 0.101500 | $ | 0.101600 | $ | 0.110025 | $ | 0.110525 | $ | 0.083330 | |||||||||
(4)The conversion rate is increased if monthly cash dividends paid to common shares exceed the monthly dividend threshold amount, subject to adjustment. Current dividend rates are at or below the minimum dividend threshold amount for further conversion rate adjustments for all bonds.
Interest accrues from the date of the original issuance of the Convertible Notes or from the most recent date to which interest has been paid or duly provided. 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 Convertible Notes. If a holder converts the Convertible Notes after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive shares of our common stock based on the conversion formula described above, a cash payment representing accrued and unpaid interest through the record date in the normal course and a separate cash payment representing accrued and unpaid interest from the record date to the conversion date.
No holder of 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 Convertible 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 Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible 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 Convertible Notes through and including the maturity date.
In connection with the issuance of the Convertible Notes, we incurred $31,884recorded a discount of fees$3,369 and debt issuance costs of $9,355 which are being amortized over the terms of the notes,Convertible Notes. As of which $15,512 remainsJune 30, 2021, $2,034 of the original issue discount and $2,089 of the debt issuance costs remain to be amortized and is included as a reduction within Convertible Notes on the Consolidated Statement of Assets and Liabilities as of June 30, 2017..
During the years ended June 30, 2017, 20162021, 2020 and 2015,2019, we recorded $55,217, $68,966$22,148, $37,661 and $74,365,$44,492, respectively, of interest costs and amortization of financing costs on the Convertible Notes as interest expense.
Public Notes
On March 15, 2013, we issued $250,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “2023“Original 2023 Notes”). The Original 2023 Notes bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each
year, beginning September 15, 2013. Total proceeds from the issuance of the Original 2023 Notes, net of underwriting discounts and offering costs, were $243,641. On June 20, 2018, we issued an additional $70,000 aggregate
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principal amount of unsecured notes that mature on March 15, 2023 (the “Additional 2023 Notes”, and together with the Original 2023 Notes, the “2023 Notes”). The Additional 2023 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2023 Notes and bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the Additional 2023 Notes, net of underwriting discounts, were $69,403.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $105.00, plus accrued and unpaid interest (“2023 Notes November Tender Offer”). On December 15, 2020, $36,644 aggregate principal amount of the 2023 Notes were tendered, of which, $30,000 aggregate principal amount, representing 9.38% of the previously outstanding 2023 Notes, were validly accepted pursuant to the applicable 2023 Notes November Tender Offer (applying a proration factor of approximately 82.27%). The 2023 Notes November Tender Offer resulted in our recognizing a loss of $1,694 during the three months ended December 31, 2020.
On March 9, 2021, we commenced a tender offer to purchase for cash any and all of the $290,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.25, plus accrued and unpaid interest (“2023 Notes March 9, 2021 Tender Offer”). On March 15, 2021, $4,219 aggregate principal amount of the 2023 Notes were tendered, representing 1.45% of the previously outstanding 2023 Notes. On March 23, 2021, we commenced a tender offer to purchase for cash any and all of the $285,781 aggregate principal amount of the 2023 Notes at the purchase price of $104.20, plus accrued and unpaid interest (“2023 Notes March 23, 2021 Tender Offer”). On March 29, 2021, $726 aggregate principal amount of the 2023 Notes were tendered, representing 0.25% of the previously outstanding 2023 Notes. The 2023 Notes March 9, 2021 Tender Offer and the 2023 Notes March 23, 2021 Tender Offer resulted in our recognizing a loss of $234 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.15, plus accrued and unpaid interest (“2023 Notes April 2021 Tender Offer”). On May 4, 2021, $836 aggregate principal amount of the 2023 Notes were tendered, representing 0.29% of the previously outstanding 2023 Notes. The 2023 Notes April 2021 Tender Offer resulted in our recognizing a loss of $43 during the three months ended June 30, 2021. As of June 30, 2021, the outstanding aggregate principal amount of the 2023 Notes is $284,219.
On April 7, 2014, we issued $300,000 aggregate principal amount of unsecured notes that mature on July 15, 2019 (the “5.00% 2019 Notes”). Included in the issuance is $45,000 of Prospect Capital InterNotes® that were exchanged for the 5.00% 2019 Notes. The 5.00% 2019 Notes bear interest at a rate of 5.00% per year, payable semi-annually on January 15 and July 15 of each year, beginning July 15, 2014. Total proceeds from the issuance of the 5.00% 2019 Notes, net of underwriting discounts and offering costs, were $295,998. On June 7, 2018, we commenced a tender offer to purchase for cash any and all of the $300,000 aggregate principal amount outstanding of the 5.00% 2019 Notes. On June 20, 2018, $146,464 aggregate principal amount of the 5.00% 2019 Notes, representing 48.8% of the previously outstanding 5.00% 2019 Notes, were validly tendered and accepted. The transaction resulted in our recognizing a $3,705 loss during the three months ended June 30, 2018. On September 26, 2018, we repurchased the remaining $153,536 aggregate principal amount of the 5.00% 2019 Notes at a price of 101.645, including commissions. The transaction resulted in our recognizing a loss of $2,874 during the year ended June 30, 2019.
On December 10, 2015, we issued $160,000 aggregate principal amount of unsecured notes that mature on June 15, 2024 (the “2024 Notes”). The 2024 Notes bearbore interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning March 15, 2016. Total proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were $155,043. On June 16, 2016, we entered into an at-the-market (“ATM”) program with FBR Capital Markets & Co. through which we could sell, by means of at-the-marketATM offerings, from time to time, up to $100,000 in aggregate principal amount of our existing 2024 Notes. As of June 30, 2017, we issued $199,281 inNotes (“Initial 2024 Notes ATM”). Following the Initial 2024 Notes ATM, the aggregate principal amount of ourthe 2024 Notes issued was $199,281 for net proceeds of $193,253, after commissions and offering costs. On July 2, 2018, we entered into a second ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of the 2024 Notes (“Second 2024 Notes ATM”). Prior to the February 2021 full redemption discussed below, the 2024 Notes were listed on the New York Stock Exchange (“NYSE”) and traded thereon under the ticker “PBB”.
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During the year ended June 30, 2019, we issued an additional $35,162 aggregate principal amount under the Second 2024 Notes ATM, for net proceeds of $34,855, after commissions and offering costs. On March 20, 2020, we commenced a tender offer to purchase for cash any and all of the $234,443 aggregate principal amount of the 2024 Notes (“2024 Notes March Tender Offer”). On March 31, 2020, $655 aggregate principal amount of the 2024 Notes, representing 0.3% of the previously outstanding 2024 Notes, were validly tendered and accepted. The 2024 Notes March Tender Offer, resulted in our recognizing a gain of $203 during the three months ended March 31, 2020.
On February 16, 2021, we redeemed $233,788 of the aggregate principal amount of the 2024 Notes. The transaction resulted in our recognizing a loss of $3,391 during the three months ended March 31, 2021. Following the redemption, none of the 2024 Notes remained outstanding.
On June 7, 2018, we issued $55,000 aggregate principal amount of unsecured notes that mature on June 15, 2028 (the “2028 Notes”). The 2028 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the 2028 Notes, net of underwriting discounts and offering costs were $53,119. On July 2, 2018, we entered into an ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2028 Notes (“2028 Notes ATM” or “2028 Notes Follow-on Program”). The 2028 Notes are listed on the NYSE and trade thereon under the ticker “PBY.” During the year ended June 30, 2019, we issued an additional $15,761 aggregate principal amount under the 2028 Notes ATM, for net proceeds of $15,530, after commissions and offering costs.
On June 15, 2021, we redeemed $70,761 of the aggregate principal amount of the 2028 Notes. The transaction resulted in our recognizing a loss of $1,934 during the three months ended June 30, 2021. Following the redemption, none of the 2028 Notes remained outstanding.
On October 1, 2018, we issued $100,000 aggregate principal amount of unsecured notes that mature on January 15, 2024 (the “6.375% 2024 Notes”). The 6.375% 2024 Notes bear interest at a rate of 6.375% per year, payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2019. Total proceeds from the issuance of the 6.375% 2024 Notes, net of underwriting discounts and offering costs, were $98,985.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $10,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.00, plus accrued and unpaid interest (“6.375% 2024 Notes November Tender Offer”). On December 15, 2020, $11,848 aggregate principal amount of the 6.375% 2024 Notes were tendered, of which, $10,000 aggregate principal amount, representing 10% of the previously outstanding 6.375% 2024 Notes, were validly accepted pursuant to the applicable 6.375% 2024 Notes Tender Offer (applying a proration factor of approximately 84.56%). The 6.375% 2024 Notes November Tender Offer resulted in our recognizing a loss of $866 during the three months ended December 31, 2020.
On March 2, 2021, we commenced a tender offer to purchase for cash any and all of the $90,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $109.00, plus accrued and unpaid interest (“6.375% 2024 Notes March 2, 2021 Tender Offer”). On March 8, 2021, $7,738 aggregate principal amount of the 6.375% 2024 Notes, representing 8.60% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. On March 16, 2021, we commenced a tender offer to purchase for cash any and all of the $82,262 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.75, plus accrued and unpaid interest (“6.375% 2024 Notes March 16, 2021 Tender Offer”). On March 22, 2021, $647 aggregate principal amount of the 6.375% 2024 Notes, representing 0.79% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes March 2, 2021 Tender Offer and the 6.375% 2024 Notes March 16, 2021 Tender Offer resulted in our recognizing a loss of $806 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $107.50, plus accrued and unpaid interest (“6.375% 2024 Notes April 2021 Tender Offer”). On May 4, 2021, $226 aggregate principal amount of the 6.375% 2024 notes, representing 0.28% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes April 2021 Tender Offer resulted in our recognizing a loss of $18 during the three months ended June 30, 2021. As of June 30, 2021, the outstanding aggregate principal amount of the 6.375% 2024 Notes is $81,389.
On December 5, 2018, we issued $50,000 aggregate principal amount of unsecured notes that mature on June 15, 2029 (the “2029 Notes”). The 2029 Notes bear interest at a rate of 6.875% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning March 15, 2019. Total proceeds from the issuance of the 2029 Notes, net of underwriting discounts and offering costs, were $48,057. On February 9, 2019, we entered into an ATM program with B. Riley
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FBR, Inc., BB&T Capital Markets, and Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2029 Notes (“2029 Notes ATM” or “2029 Notes Follow-on Program”). The 2029 Notes are listed on the NYSE and trade thereon under the ticker “PBC.” During the year ended June 30, 2019, we issued an additional $19,170 aggregate principal amount under the 2029 Notes ATM, for net proceeds of $18,523, after commissions and offering costs. As of June 30, 2021, the outstanding aggregate principal amount of the 2029 Notes is $69,170.
On January 22, 2021, we issued $325,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Original 2026 Notes”). The Original 2026 Notes bear interest at a rate of 3.706% per year, payable semi-annually on July 22, and January 22 of each year, beginning on July 22, 2021. Total proceeds from the issuance of the Original 2026 Notes, net of underwriting discounts and offering costs, were $317,720. On February 19, 2021, we issued an additional $75,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Additional 2026 Notes”, and together with the Original 2026 Notes, the “2026 Notes”). The Additional 2026 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2026 Notes and bear interest at a rate of 3.706% per year, payable semi-annually on July 22 and January 22 of each year, beginning July 22, 2021. Total proceeds from the issuance of the Additional 2026 Notes, net of underwriting discounts and offering costs, were $74,061. As of June 30, 2021, the outstanding aggregate principal amount of the 2026 Notes is $400,000.
On May 27, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on November 15, 2026 (the “3.364% 2026 Notes”). The 3.364% 2026 Notes bear interest at a rate of 3.364% per year, payable semi-annually on November 15, and May 15 of each year, beginning on November 15, 2021. Total proceeds from the issuance of the 3.364% 2026 Notes, net of underwriting discounts and offering costs, were $293,283. As of June 30, 2021, the outstanding aggregate principal amount of the 3.364% 2026 Notes is $300,000.
The 2023 Notes, the 5.00% 20196.375% 2024 Notes, the 2029 Notes, the 2026 Notes, and the 20243.364% 2026 Notes (collectively, the “Public Notes”) are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding.
In connection with the issuance of the 2023 Notes, the 5.00% 2019 Notes, and the 2024Public Notes we incurred $13,613recorded a discount of fees$11,116 and debt issuance costs of $15,860, which are being amortized over the term of the notes,notes. As of which $9,091 remainsJune 30, 2021, $8,729 of the original issue discount and $11,332 of the debt issuance costs remain to be amortized and isare included as a reduction within Public Notes on the Consolidated Statement of Assets and Liabilities as of June 30, 2017.Liabilities.
During the years ended June 30, 2017, 20162021, 2020 and 2015,2019, we recorded $43,898$51,410, $36,85951,294 and $37,063,47,931, respectively, of interest costs and amortization of financing costs on the Public Notes as interest expense.
Prospect Capital InterNotes®
On February 16, 2012, we entered into a selling agent agreement (the “Selling“Original Selling Agent Agreement”) with IncapitalInspereX LLC (formerly known as “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 increased to $1,500,000 in May 2014. On May 10, 2019, the Original Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “May 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes®.
On September 16, 2019, the May 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “September 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®. We sold approximately $1,700,000 in aggregate principal amount of Prospect Capital InterNotes® under the Original Selling Agent Agreement, May 2019 Selling Agent Agreement, and September 2019 Selling Agent Agreement (collectively the “Previous Selling Agent Agreements”).
On February 13, 2020, the September 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes® (collectively with the previously authorized selling agent agreements, the “InterNotes® Offerings”). Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement. We have, from time to time, repurchased certain notes issued through the InterNotes® Offerings and, therefore, as of June 30, 2021, $508,711 aggregate principal amount of Prospect Capital InterNotes® were outstanding.
These notes are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time 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.
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During the year ended June 30, 2017,2021, we issued $138,882$188,390 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $137,150.$185,189. These notes were issued with stated interest rates ranging from 1.50% to 6.00% with a weighted average interest rate of 4.20%. These notes will mature between January 15, 2024 and July 15, 2033. The following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2017.2021.
| Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | ||||||||||||||||||||||||||||
| 3 | 3 | $ | 662 | 1.50% | 1.50 | % | January 15, 2024 | ||||||||||||||||||||||||||||||
| 5 | $ | 138,882 | 4.75%–5.50% | 5.08 | % | July 15, 2021 – June 15, 2022 | 5 | 81,611 | 3.00% - 5.50% | 4.23 | % | July 15, 2025 – May 15, 2026 | |||||||||||||||||||||||||
| 6 | 6 | 15,107 | 3.00% | 3.00 | % | June 15, 2027 – July 15, 2027 | |||||||||||||||||||||||||||||||
| 7 | 7 | 21,820 | 3.25% - 5.75% | 4.54 | % | July 15, 2027 – May 15, 2028 | |||||||||||||||||||||||||||||||
| 8 | 8 | 3,511 | 3.40% - 3.50% | 3.45 | % | June 15, 2029 – July 15, 2029 | |||||||||||||||||||||||||||||||
| 10 | 10 | 53,035 | 3.50% - 6.00% | 4.49 | % | July 15, 2030 – July 15, 2031 | |||||||||||||||||||||||||||||||
| 12 | 12 | 12,644 | 4.00% | 4.00 | % | June 15, 2033 – July 15, 2033 | |||||||||||||||||||||||||||||||
| $ | 188,390 | ||||||||||||||||||||||||||||||||||||
During the year ended June 30, 2016,2020, we issued $88,435$233,988 aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $87,141. These notes were issued with stated interest rates ranging from 4.63% to 6.00% with a weighted average interest rate of 5.18%. These notes mature between July 15, 2020 and December 15, 2025.$230,117. The following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2016.2020.
| Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | ||||||||||||||||||||||||||||
| 5 | $ | 51,503 | 4.63%–6.00% | 5.12 | % | July 15, 2020 – June 15, 2021 | 5 | $ | 113,064 | 3.75% - 5.50% | 4.19 | % | July 15, 2024 - July 15, 2025 | ||||||||||||||||||||||||
| 6.5 | 35,155 | 5.10%–5.25% | 5.25 | % | January 15, 2022 – May 15, 2022 | ||||||||||||||||||||||||||||||||
| 7 | 990 | 5.63%–6.00% | 5.77 | % | November 15, 2022 – December 15, 2022 | 7 | 45,075 | 4.00% - 5.75% | 4.27 | % | July 15, 2026 - July 15, 2027 | ||||||||||||||||||||||||||
| 10 | 787 | 5.13%–6.00% | 5.33 | % | November 15, 2025 – December 15, 2025 | 10 | 75,849 | 3.75% - 6.00% | 4.60 | % | July 15, 2029 - July 15, 2030 | ||||||||||||||||||||||||||
| $ | 88,435 | $ | 233,988 | ||||||||||||||||||||||||||||||||||
During the year ended June 30, 2017,2021, we redeemed, $49,497prior to maturity, $354,069 aggregate principal amount of Prospect Capital InterNotes® at par
with a weighted average interest rate of 4.87%5.06% in order to replace shorter maturity debt with shorter maturity dates.longer-term debt. During the year ended June 30, 2017,2021, we repaid $8,880$5,839 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option as defined inof the InterNotes® Offering prospectus.. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the year ended June 30, 20172021 was $525.$2,997. The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2017.2021.
| Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | ||||||||||||||||||||||
| 3 | $ | 662 | 1.50% | 1.50 | % | January 15, 2024 | ||||||||||||||||||||
| 5 | 46,968 | 3.00% - 4.25% | 3.28 | % | August 15, 2024 – May 15, 2026 | |||||||||||||||||||||
| 6 | 15,107 | 3.00% | 3.00 | % | June 15, 2027 – July 15, 2027 | |||||||||||||||||||||
| 7 | 59,729 | 3.25% - 5.75% | 4.31 | % | July 15, 2024 – May 15, 2028 | |||||||||||||||||||||
| 8 | 3,511 | 3.40% - 3.50% | 3.45 | % | June 15, 2029 – July 15, 2029 | |||||||||||||||||||||
| 10 | 201,285 | 3.50% - 6.25% | 5.09 | % | January 15, 2024 – July 15, 2031 | |||||||||||||||||||||
| 12 | 14,432 | 4.00% - 6.00% | 4.25 | % | November 15, 2025 – July 15, 2033 | |||||||||||||||||||||
| 15 | 16,801 | 5.75% - 6.00% | 5.79 | % | May 15, 2028 – November 15, 2028 | |||||||||||||||||||||
| 18 | 18,487 | 4.50% - 6.25% | 5.59 | % | December 15, 2030 – August 15, 2031 | |||||||||||||||||||||
| 20 | 3,777 | 5.75% - 6.00% | 5.89 | % | November 15, 2032 – October 15, 2033 | |||||||||||||||||||||
| 25 | 30,344 | 6.25% - 6.50% | 6.39 | % | August 15, 2038 – May 15, 2039 | |||||||||||||||||||||
| 30 | 97,608 | 5.50% - 6.75% | 6.25 | % | November 15, 2042 – October 15, 2043 | |||||||||||||||||||||
| $ | 508,711 | |||||||||||||||||||||||||
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| Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | |||||||
| 4 | 39,038 | 3.75%–4.00% | 3.92 | % | November 15, 2017 – May 15, 2018 | ||||||
| 5 | 354,805 | 4.25%–5.50% | 5.00 | % | July 15, 2018 – June 15, 2022 | ||||||
| 5.2 | 4,440 | 4.63% | 4.63 | % | August 15, 2020 – September 15, 2020 | ||||||
| 5.3 | 2,686 | 4.63% | 4.63 | % | September 15, 2020 | ||||||
| 5.4 | 5,000 | 4.75% | 4.75 | % | August 15, 2019 | ||||||
| 5.5 | 109,068 | 4.25%–5.00% | 4.67 | % | February 15, 2019 – November 15, 2020 | ||||||
| 6 | 2,182 | 4.88% | 4.88 | % | April 15, 2021 – May 15, 2021 | ||||||
| 6.5 | 40,702 | 5.10%–5.50% | 5.24 | % | February 15, 2020 – May 15, 2022 | ||||||
| 7 | 191,356 | 4.00%–6.55% | 5.38 | % | June 15, 2019 – December 15, 2022 | ||||||
| 7.5 | 1,996 | 5.75% | 5.75 | % | February 15, 2021 | ||||||
| 10 | 37,509 | 4.27%–7.00% | 6.20 | % | March 15, 2022 – December 15, 2025 | ||||||
| 12 | 2,978 | 6.00% | 6.00 | % | November 15, 2025 – December 15, 2025 | ||||||
| 15 | 17,245 | 5.25%–6.00% | 5.36 | % | May 15, 2028 – November 15, 2028 | ||||||
| 18 | 21,532 | 4.13%–6.25% | 5.47 | % | December 15, 2030 – August 15, 2031 | ||||||
| 20 | 4,248 | 5.63%–6.00% | 5.84 | % | November 15, 2032 – October 15, 2033 | ||||||
| 25 | 34,218 | 6.25%–6.50% | 6.39 | % | August 15, 2038 – May 15, 2039 | ||||||
| 30 | 111,491 | 5.50%–6.75% | 6.22 | % | November 15, 2042 – October 15, 2043 | ||||||
| $ | 980,494 | ||||||||||
During the year ended June 30, 2016,2020, we redeemed, prior to maturity, $255,822 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 5.06% in order to replace shorter maturity debt with longer-term debt. During the year ended June 30, 2020, we repaid $7,069$5,636 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option as defined inof the InterNotes® Offering prospectus.. As a result of these transactions, we recorded a loss in the amount of the difference between the reacquisition price and the net carrying amount of the notes, net of the proportionate amount of unamortized debt issuance costs. The net gainloss on the extinguishment of Prospect Capital InterNotes® in the year ended June 30, 20162020 was $215.$2,470.
The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2016.2020.
| Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | Tenor at Origination (in years) | Principal Amount | Interest Rate Range | Weighted Average Interest Rate | Maturity Date Range | |||||||||||||||||||||||||||||
| 3 | $ | 5,710 | 4.00 | % | 4.00 | % | October 15, 2016 | |||||||||||||||||||||||||||||||
| 3.5 | 3,109 | 4.00 | % | 4.00 | % | April 15, 2017 | ||||||||||||||||||||||||||||||||
| 4 | 45,690 | 3.75%–4.00% | 3.92 | % | November 15, 2017 – May 15, 2018 | |||||||||||||||||||||||||||||||||
| 5 | 259,191 | 4.25%–5.75% | 4.95 | % | July 15, 2018 – June 15, 2021 | 5 | $ | 218,240 | 3.75% - 5.75% | 4.81 | % | September 15, 2023 – July 15, 2025 | ||||||||||||||||||||||||||
| 5.2 | 4,440 | 4.63 | % | 4.63 | % | August 15, 2020 – September 15, 2020 | ||||||||||||||||||||||||||||||||
| 5.3 | 2,686 | 4.63 | % | 4.63 | % | September 15, 2020 | ||||||||||||||||||||||||||||||||
| 5.4 | 5,000 | 4.75 | % | 4.75 | % | August 15, 2019 | ||||||||||||||||||||||||||||||||
| 5.5 | 109,808 | 4.25%–5.00% | 4.65 | % | February 15, 2019 – November 15, 2020 | |||||||||||||||||||||||||||||||||
| 6 | 2,197 | 3.38 | % | 3.38 | % | April 15, 2021 – May 15, 2021 | ||||||||||||||||||||||||||||||||
| 6.5 | 40,867 | 5.10%–5.50% | 5.24 | % | February 15, 2020 – May 15, 2022 | |||||||||||||||||||||||||||||||||
| 7 | 192,076 | 4.00%–6.55% | 5.13 | % | June 15, 2019 – December 15, 2022 | 7 | 104,529 | 4.00% - 6.00% | 5.11 | % | July 15, 2024 – July 15, 2027 | |||||||||||||||||||||||||||
| 7.5 | 1,996 | 5.75 | % | 5.75 | % | February 15, 2021 | ||||||||||||||||||||||||||||||||
| 8 | 8 | 24,325 | 4.50% - 5.75% | 4.67 | % | August 15, 2025 – July 15, 2026 | ||||||||||||||||||||||||||||||||
| 10 | 37,533 | 3.62%–7.00% | 6.11 | % | March 15, 2022 – December 15, 2025 | 10 | 159,802 | 3.75% - 6.25% | 5.32 | % | January 15, 2024 – July 15, 2030 | |||||||||||||||||||||||||||
| 12 | 2,978 | 6.00 | % | 6.00 | % | November 15, 2025 – December 15, 2025 | 12 | 2,978 | 6.00% | 6.00 | % | November 15, 2025 – December 15, 2025 | ||||||||||||||||||||||||||
| 15 | 17,325 | 5.25%–6.00% | 5.36 | % | May 15, 2028 – November 15, 2028 | 15 | 16,851 | 5.75% - 6.00% | 5.79 | % | May 15, 2028 – November 15, 2028 | |||||||||||||||||||||||||||
| 18 | 22,303 | 4.13%–6.25% | 5.53 | % | December 15, 2030 – August 15, 2031 | 18 | 18,741 | 4.50% - 6.25% | 5.58 | % | December 15, 2030 – August 15, 2031 | |||||||||||||||||||||||||||
| 20 | 4,462 | 5.63%–6.00% | 5.89 | % | November 15, 2032 – October 15, 2033 | 20 | 3,847 | 5.75% - 6.00% | 5.89 | % | November 15, 2032 – October 15, 2033 | |||||||||||||||||||||||||||
| 25 | 35,110 | 6.25%–6.50% | 6.39 | % | August 15, 2038 – May 15, 2039 | 25 | 30,710 | 6.25% - 6.50% | 6.39 | % | August 15, 2038 – May 15, 2039 | |||||||||||||||||||||||||||
| 30 | 116,327 | 5.50%–6.75% | 6.23 | % | November 15, 2042 – October 15, 2043 | 30 | 100,206 | 5.50% - 6.75% | 6.25 | % | November 15, 2042 – October 15, 2043 | |||||||||||||||||||||||||||
| $ | 908,808 | $ | 680,229 | |||||||||||||||||||||||||||||||||||
In connection with the issuance of Prospect Capital InterNotes®, we incurred $24,284$28,275 of fees which are being amortized over the term of the notes, of which $14,240$10,496 remains to be amortized and is included as a reduction within Prospect Capital InterNotes® on the Consolidated Statement of Assets and Liabilities as of June 30, 2017.2021.
During the years ended June 30, 2017, 20162021, 2020, and 2015,2019, we recorded $53,560, $48,681$38,852, $37,563 and $44,808,$41,711, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense.
Net Asset Value
During the year ended June 30, 2017,2021, our net asset value decreasedincreased by $80,965,$889,656. After reducing our net asset value by the stated value of our cumulative preferred stock issuances, our net asset value available to common stockholders increased by $752,616, or $0.30$1.63 per common share. This decrease isThe increase was primarily from dividends exceedingattributable to an increase in net realized and net change in unrealized gains of $678,070, or $1.77 per basic weighted average common share. During the year ended June 30, 2021, net investment income by $52,905,of $285,737, or $0.15$0.75 per basic weighted average common share, also exceeded distributions to common and frompreferred stockholders of $277,856 (including distributions classified as return of capital distributions to common stockholders), or $0.72 per basic weighted average common share, resulting in a net realized and change in unrealized lossesincrease of $53,176, or $0.15$0.03 per basic weighted average common share. Our net investment income decreasedThe increase was primarily from a decrease in interest income due to reduced returns from our structured credit investments as a result of lower future expected cash flows and a reduced interest earning asset base. Net investment income further decreased due to a decline in dividend income primarily from a non-recurring dividends received from APRC in the amount of $11,016 and a decrease in Echelon dividend in the amount of $7,050. These decreases were partially offset by lower management fees$0.11 of dilution per common share related to common stock issuances through our common stock dividend reinvestment program and other operating expenses.by $0.04 of dilution per common share related to preferred stock issuances for the year ended June 30, 2021. The following table shows the calculation of net asset value per common share as of June 30, 20172021 and June 30, 2016.2020.
| June 30, 2021 | June 30, 2020 | |||||||||||||
| Net assets | $ | 3,945,517 | $ | 3,055,861 | ||||||||||
| Preferred Stock | (137,040) | — | ||||||||||||
| Net assets available to common stockholders | $ | 3,808,477 | $ | 3,055,861 | ||||||||||
| Shares of common stock issued and outstanding | 388,419,573 | 373,538,499 | ||||||||||||
| Net asset value per common share | $ | 9.81 | $ | 8.18 | ||||||||||
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| June 30, 2017 | June 30, 2016 | |||||||
| Net assets | $ | 3,354,952 | $ | 3,435,917 | ||||
| Shares of common stock issued and outstanding | 360,076,933 | 357,107,231 | ||||||
| Net asset value per share | $ | 9.32 | $ | 9.62 | ||||
Results of Operations
Operating results for the years ended June 30, 20162021 and June 30, 2015. This $255,532, or $0.71 per per weighted average share, is primarily due to softening of the energy markets, non-credit related changes in the capital markets and increased default rates impacting the underlying collateral of our CLO residual interest investments. These factors resulted in an unfavorable increase in net change in unrealized and realized losses of $15,178 in our energy-related investments and $88,104 in our CLO investments for the year ended June 30, 2016. The remaining $152,250 increase in net realized and unrealized losses is primarily due to net unrealized losses for certain controlled investments, including Harbortouch, First Tower Finance and USES, partially offset by unrealized gains related to our real estate investments.2020 were as follows:
| Years ended June 30, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Investment Income | $ | 631,967 | $ | 623,530 | |||||||||||||
| Operating Expenses | 346,230 | 357,836 | |||||||||||||||
| Net Investment Income | 285,737 | 265,694 | |||||||||||||||
| Net Realized Gains (Losses) from Investments | 7,537 | (7,574) | |||||||||||||||
| Net Change in Unrealized Gains (Losses) from Investments | 694,044 | (271,642) | |||||||||||||||
| Net Realized Losses on Extinguishment of Debt | (23,511) | (2,702) | |||||||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | $ | 963,807 | $ | (16,224) | |||||||||||||
| Preferred Stock Dividend | (1,711) | — | |||||||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations attributable to Common Shareholders | $ | 965,518 | $ | (16,224) | |||||||||||||
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 typically do not issue securities rated investment grade, and have limited resources, limited operating history, and concentrated product lines or customers. These 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. These changes, along with those discussed in Investment Valuation above, can cause significant fluctuations in our net change in unrealized gains (losses) from investments, and therefore our net increase (decrease) in nets assets resulting from operations attributable to common stockholders, quarter over quarter.
Investment Income
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 $701,046, $791,973 and $791,084 for the years ended June 30, 2017, 2016 and 2015, respectively. Investment income decreased from June 30, 2016 compared to June 30, 2017 primarily due to reduced returns from our structured credit investments due to lower future expected cash flows and a reduced interest earning asset base. Investment income also declined due to dividend income related to our investments in APRC and Echelon. Investment income remained relatively stable for the year ended June 30, 2016 compared to the year ended June 30, 2015 primarily due to an increase in dividend income offset by a decrease in interest income.fees.
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The following table describes the various components of investment income and the related levels of debt investments:
| Year Ended June 30, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Interest income | $ | 554,263 | $ | 554,376 | |||||||||||||
| Dividend income | 5,101 | 11,444 | |||||||||||||||
| Other income | 72,603 | 57,710 | |||||||||||||||
| Total investment income | $ | 631,967 | $ | 623,530 | |||||||||||||
Average debt principal of performing interest bearing investments(1) | $ | 5,460,354 | $ | 5,254,455 | |||||||||||||
Weighted average interest rate earned on performing interest bearing investments(1) | 10.15 | % | 10.55 | % | |||||||||||||
Average debt principal of all interest bearing investments(2) | $ | 5,799,945 | $ | 5,879,597 | |||||||||||||
Weighted average interest rate earned on all interest bearing investments(2) | 9.56 | % | 9.43 | % | |||||||||||||
| Year Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Interest income | $ | 668,717 | $ | 731,618 | $ | 748,974 | |||||
| Dividend income | 5,679 | 26,501 | 7,663 | ||||||||
| Other income | 26,650 | 33,854 | 34,447 | ||||||||
| Total investment income | $ | 701,046 | $ | 791,973 | $ | 791,084 | |||||
| Average debt principal of performing investments | $ | 5,706,090 | $ | 6,013,754 | $ | 6,183,163 | |||||
| Weighted average interest rate earned on performing assets | 11.72 | % | 12.17 | % | 12.11 | % | |||||
The average interest earned on interest bearing performing assets decreased from 12.17%10.55% for the year ended June 30, 20162020 to 11.72%10.15% for the year ended June 30, 2017.2021. The decrease is primarily driven by a decrease in interest income due to reduced returnsa decline in LIBOR, as well as originations at lower rates than our average existing portfolio yield, offset by early repayments causing an increase in accelerated income. The average interest earned on all interest bearing assets increased from our structured credit investments due to lower future expected cash flows. Average interest income producing assets decreased from $6,183,1639.43% for the year ended June 30, 20152020 to $6,013,7549.56% for the year ended June 30, 2016.2021. The average interest earned on interest bearing performing assets increased from 12.11% for the year ended June 30, 2015 to 12.17% for the year ended June 30, 2016. This moderate increase is primarily due to repayments of lower yielding portfolio investments.decreases in non-accrual loans.
Investment income is also generated from dividends and other income which is less predictable than interest income. DividendThe following table describes dividend income decreased from $26,501earned for the yearyears ended June 30, 2016 to $5,679 for the year ended2021 and June 30, 2017. The $20,822 decrease in dividend income is primarily attributable to an $11,016 dividend received during the year ended June 30, 2016 from our investment in APRC resulting from the sale of APRC’s Vista Palma Sola property. No such dividend was received from NPRC during the year ended June 30, 2017. Additionally, a $7,250 dividend was received during the year ended June 30, 2016 from our investment in Echelon, whereas only $200 of dividend was received during the year ended June 30, 2017. Additionally, the level of dividends received from our investment in CCPI and MITY decreased by $3,073 and $242, respectively, during the year ended June 30, 2017 as compared to the same period in the prior year. The decrease was partially offset by an increase of $347 in dividends received from Nationwide for the year ended June 30, 2017.2020, respectively:
| Year Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Dividend income | |||||||||||
| Nationwide Loan Company LLC | $ | 2,381 | $ | — | |||||||
| Valley Electric Company, Inc. | 2,261 | 7,538 | |||||||||
| NMMB, Inc. | — | 2,797 | |||||||||
| Other, net | 459 | 1,109 | |||||||||
| Total dividend income | $ | 5,101 | $ | 11,444 | |||||||
Other income has come primarily fromis comprised of structuring fees, advisory fees, royalty interests, settlement of net profits interests and settlement of netresidual profits interests. Income fromThe following table describes other sources decreased from $33,854income earned for the yearyears ended June 30, 2016 to $26,650 for the year ended2021 and June 30, 2017. The decrease is primarily due to a $12,632 decrease in advisory fee income, which was generated from the Harbortouch transaction, as well as from follow-on investments in existing portfolio companies. This was offset by a $4,388 increase in structuring fees and by a $1,669 increase in amendment fee income, which are generated from new originations as well as from follow-on investments and amendments to existing portfolio companies. During the fiscal year ended June 30, 2015, we elected to suspend our equity raising activities. The curtailment of capital raising activities suppressed our levels of origination. Total originations decreased from $1,867,477 in the year ended June 30, 2015 to $979,102 in the year ended June 30, 2016. As a result, structuring fees fell from $28,562 in the year ended June 30, 2015 to $26,207 in the year ended June 30, 2016. Included within the $26,207 of structuring fees recognized during the year ended June 30, 2016 is a $12,909 advisory fee for the Harbortouch transaction, as well as from follow-on investments in existing portfolio companies and new originations, primarily from our investments in Crosman, PeopleConnect Intermediate, LLC (f/k/a Intelius, Inc.), Broder, Coverall North America, Inc., NPRC, Inpatient Care and System One.2020, respectively:
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| Year Ended June 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Structuring, advisory and amendment fees | |||||||||||
| First Tower Finance Company LLC | $ | 21,081 | $ | — | |||||||
| National Property REIT Corp. | 3,176 | 14,454 | |||||||||
| Ahead Data Blue, LLC | 1,725 | 1,400 | |||||||||
| Interventional Management Services, LLC | 1,510 | — | |||||||||
| Eze Castle Integration, Inc. | 1,250 | — | |||||||||
| Enseo Acquisition, Inc. | 1,200 | — | |||||||||
| OneTouchPoint Corp. | 810 | — | |||||||||
| Orva Buyer, LLC | 810 | — | |||||||||
| Thermal Product Solutions, Inc. | 689 | — | |||||||||
| H.I.G. KM2 Investor, LLC | 500 | — | |||||||||
| Atlantis Health Care Group (Puerto Rico), Inc. | 445 | — | |||||||||
| Nationwide Loan Company LLC | 405 | — | |||||||||
| PeopleConnect Intermediate, LLC | — | 5,170 | |||||||||
| Other, net | 1,074 | 4,562 | |||||||||
| Total structuring, advisory and amendment fees | $ | 34,675 | $ | 25,586 | |||||||
| Royalty and net revenue interests | |||||||||||
| National Property REIT Corp. | 36,748 | 30,891 | |||||||||
| Other, net | 669 | 710 | |||||||||
| Total royalty and net revenue interests | 37,417 | 31,601 | |||||||||
| Administrative agent fees | |||||||||||
| Other, net | 511 | 523 | |||||||||
| Total administrative agent fees | 511 | 523 | |||||||||
| Total other income | $ | 72,603 | $ | 57,710 | |||||||
Operating Expenses
Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees, overhead-related expenses 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 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. Operating expenses were $394,964, $420,845
The following table describes the various components of our operating expenses:
| Years ended June 30, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Base management fee | $ | 114,622 | $ | 108,910 | |||||||||||||
| Income incentive fee | 71,227 | 68,057 | |||||||||||||||
| Interest and credit facility expenses | 130,618 | 148,368 | |||||||||||||||
| Allocation of overhead from Prospect Administration | 14,262 | 18,247 | |||||||||||||||
| Audit, compliance and tax related fees | 3,861 | 4,028 | |||||||||||||||
| Directors’ fees | 450 | 453 | |||||||||||||||
| Other general and administrative expenses | 11,190 | 9,773 | |||||||||||||||
| Total Operating Expenses | $ | 346,230 | $ | 357,836 | |||||||||||||
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Total gross and $428,337net base management fee was $114,622 and $108,910 for the years ended June 30, 2017, 20162021 and 2015, respectively.
For the years ended June 30, 2017, 20162021 and 2015,2020, we incurred $76,520, $92,782$71,227 and $90,687$68,057 of income incentive fees, respectively ($0.21, $0.26 and $0.26 per weighted average share, respectively).respectively. This decreaseincrease was driven by a corresponding decreaseincrease in pre-incentive fee net investment income, to $356,964 from $463,910$333,751 for the yearyears ended June 30, 2016 to $382,602 for the year ended June 30, 2017, primarily from decreases in interest income due to repayments on investments2021, and increased default rates in the underlying collateral of our CLO investments, and dividend income.2020, respectively. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement. Income incentive fee for the years ended June 30, 2021 and June 30, 2020 includes a $264 and $1,306 adjustment for fees earned in prior periods that were neither expensed nor paid to the Investment Adviser.
During the years ended June 30, 2017, 20162021 and 2015,2020, we incurred $164,848, $167,719$130,618 and $170,660,$148,368, respectively, of interest and credit facility expenses related to our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Notes”). These expenses are related directly to the leveraging capacity put into place for each of those periods and the levels of indebtedness actually undertaken in those periods.
The table below describes the various expenses of our Notes and the related indicators of leveraging capacity and indebtedness during these years.
| Year Ended June 30, | |||||||||||||||||
| 2021 | 2020 | ||||||||||||||||
| Interest on borrowings | $ | 115,336 | $ | 126,501 | |||||||||||||
| Amortization of deferred financing costs | 7,251 | 8,580 | |||||||||||||||
| Accretion of discount on unsecured debt | 1,264 | 1,042 | |||||||||||||||
| Facility commitment fees | 6,767 | 12,245 | |||||||||||||||
| Total interest and credit facility expenses | $ | 130,618 | $ | 148,368 | |||||||||||||
| Average principal debt outstanding | $ | 2,336,208 | $ | 2,314,174 | |||||||||||||
Annualized weighted average stated interest rate on borrowings(1) | 4.94 | % | 5.47 | % | |||||||||||||
Annualized weighted average interest rate on borrowings(2) | 5.59 | % | 6.41 | % | |||||||||||||
| Year Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Interest on borrowings | $ | 142,819 | $ | 146,659 | $ | 149,312 | |||||
| Amortization of deferred financing costs | 13,013 | 13,561 | 14,266 | ||||||||
| Accretion of discount on Public Notes | 269 | 200 | 213 | ||||||||
| Facility commitment fees | 8,747 | 7,299 | 6,869 | ||||||||
| Total interest and credit facility expenses | $ | 164,848 | $ | 167,719 | $ | 170,660 | |||||
| Average principal debt outstanding | $ | 2,683,254 | $ | 2,807,125 | $ | 2,830,727 | |||||
| Weighted average stated interest rate on borrowings(1) | 5.32 | % | 5.22 | % | 5.27 | % | |||||
| Weighted average interest rate on borrowings(2) | 6.14 | % | 5.97 | % | 6.03 | % | |||||
(2)Includes the stated interest expense, amortization of deferred financing costs, accretion of discount on Public Notes and commitment fees on the undrawn portion of our Revolving Credit Facility.
Interest expense is relatively stable during the yearsdecreased from $148,368 year ended June 30, 2017 and2020 to $130,618 for the year ended June 30, 2016.2021. The weighted average stated interest rate on borrowings (excluding amortization, accretion and undrawn facility fees) increaseddecreased from 5.22%5.47% for the year ended June 30, 20162020 to 5.32%4.94% for the year ended June 30, 2017. This increase is2021 primarily due to issuances of the 2024 Notesrepurchases and Prospect Capital InterNotes® at higher rates, partially offset by the repayment and repurchasesearly retirements of our Convertible Notes.
Notes and the issuance of the 2026 Notes and 3.364% 2026 Notes at lower rates.
The allocation of grossnet overhead expense from Prospect Administration was $22,882, $20,313$14,262 and $21,991$18,247 for the years ended June 30, 2017, 20162021 and 2015,2020, respectively. Prospect Administration received estimated payments of $8,760, $7,445$1,572 and $7,014$1,530 directly from our portfolio companies and certain funds managed by the Investment Adviser for legal tax and portfolio level accounting services during the years ended June 30, 2017, 20162021 and 2015,2020, respectively. In addition, we were given a credit in the amount of $3,522 for legal expenses incurred on behalf of our portfolio companies that were remitted to Prospect Administration during the year ended June 30, 2021. We were given a credit for these payments as a reduction of the administrative services cost payable by us to Prospect Administration. Had Prospect Administration not received these payments, Prospect Administration’s charges for its administrative services would have increased by these amounts. During the year ended June 30, 2017, other operating expenses in the amount of $876 incurred by us, which were attributable to CCPI, have been reimbursed by CCPI and are reflected as an offset to our overhead allocation. No such reimbursements or expenses occurred during the years ended June 30, 2016 or June 30, 2015. During the year ended June 30, 2016, we renegotiated the managerial assistance agreement with First Tower LLC (“First Tower”) and reversed $1,200 of previously accrued managerial assistance at First Tower Delaware, $600 of which was expensed during the three months ended June 30, 2015, as the fee was paid by First Tower, which decreased our overhead expense. During the year ended June 30, 2016, we also incurred $379 of overhead expense related to our consolidated entity SB Forging. Net overhead during the years ended June 30, 2017, 2016 and 2015 totaled $13,246, $12,647 and $14,977, respectively.this amount.
Total operating expenses, excluding investment advisory fees, interest and credit facility expenses, and allocation of overhead from Prospect Administration (“Other Operating Expenses”), net of any expense reimbursements, were $17,476, $21,174$15,501 and $17,423$14,254 for the years ended June 30, 2017, 20162021 and 2015,2020, respectively. The decreaseincrease of $3,698$1,247 during the year ended June 30, 2017 is2021 was primarily due a reversal of excise tax previously accrued dueattributable to lower levels of taxable income,an increase in general and administrative expenses offset by a slight increasedecrease in audit, compliance and tax relatedlegal fees due to a reimbursement from litigation proceeds of previously expensed legal fees.
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Net Investment IncomeRealized Gains (Losses)
| Years Ended June 30, | |||||||||||
| Portfolio Company | 2021 | 2020 | |||||||||
| Edmentum Ultimate Holdings, LLC | $ | 4,469 | $ | — | |||||||
| Spartan Energy Services, LLC - Term Loan B | 2,832 | — | |||||||||
| CCPI, Inc. | — | 2,366 | |||||||||
| Rated Secured Structured Note Portfolio | — | 1,885 | |||||||||
| New Century Transportation, Inc. | — | 449 | |||||||||
| Voya CLO 2012-2, Ltd. | — | (450) | |||||||||
| PeopleConnect Holdings, LLC | — | (522) | |||||||||
| Madison Park Funding XI, Ltd. | — | (1,949) | |||||||||
| Easy Gardener | — | (9,719) | |||||||||
| Other, net | 236 | 366 | |||||||||
| Net realized gains (losses) | $ | 7,537 | $ | (7,574) | |||||||
Net Realized Losses from Extinguishment of Debt
During the years ended June 30, 2021 and June 30, 2020, we recorded a net realized loss from the extinguishment of debt of $23,511 and $2,702, respectively. Refer to Capitalization for additional discussion.
Change in Unrealized Gains (Losses)
The $65,046 decreasefollowing table details net change in unrealized gains (losses) for our portfolio for the for the years ended June 30, 2021 and June 30, 2020:
| Years ended June 30, | |||||||||||||||||
| 2021 | 2020(1) | ||||||||||||||||
| Control investments | $ | 464,719 | $ | (117,552) | |||||||||||||
| Affiliate investments | 129,738 | 67,077 | |||||||||||||||
| Non-control/non-affiliate investments | 99,587 | (221,167) | |||||||||||||||
| Net change in unrealized gains (losses) | $ | 694,044 | $ | (271,642) | |||||||||||||
(1) For the year ended June 30, 2020, the fair value of our investments was negatively impacted by the uncertainty surrounding the impact of the COVID-19 pandemic. For more information, see “Investment Valuation”.
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The following table reflects net change in unrealized gains (losses) on investments for the year ended June 30, 2017 compared to the year ended June 30, 2016 is primarily the result of a $62,901 decrease in interest income, driven primarily by a decline in interest income from reduced returns from our structured credit investments due to lower future expected cash flows, an additional $248,357 weighted average balance of loans on non-accrual status and a reduced interest earning asset base, and a $20,822 decrease in dividend income related to APRC, Echelon, CCPI and MITY discussed earlier. In addition to a decrease of $7,204 in other income due to a decrease of $12,632 of advisory fee income from the sale of Harbortouch offset by an increase of $4,888 in structuring fees and by a $1,669 increase in amendment fee income. These decreases were partially offset by a favorable $19,911 decrease in advisory fees and a decrease of $3,698 in Other Operating Expenses.2021:
| Net Change in Unrealized Gains (Losses) | ||||||||
| National Property REIT Corp. | $ | 168,730 | ||||||
| InterDent, Inc. | 165,945 | |||||||
| PGX Holdings, Inc. | 126,754 | |||||||
| First Tower Finance Company LLC | 86,252 | |||||||
| Subordinated Structured Notes | 46,052 | |||||||
| Other, net | 30,595 | |||||||
| Valley Electric Company, Inc. | 19,338 | |||||||
| USES Corp. | 14,490 | |||||||
| NMMB, Inc. | 13,372 | |||||||
| R-V Industries, Inc. | 11,128 | |||||||
| Nationwide Loan Company LLC | 10,198 | |||||||
| Pacific World Corporation | 8,648 | |||||||
| Securus Technologies Holdings, Inc. | 7,973 | |||||||
| Engine Group, Inc. | 5,448 | |||||||
| ACE Cash Express, Inc. | 5,080 | |||||||
| Targus Cayman HoldCo Limited | 4,997 | |||||||
| RGIS Services, LLC | 4,528 | |||||||
| Edmentum Ultimate Holdings, LLC | (5,471) | |||||||
| CP Energy Services Inc. | (8,408) | |||||||
| MITY, Inc. | (10,283) | |||||||
| Echelon Transportation, LLC | (11,322) | |||||||
| Net change in unrealized gains | $ | 694,044 | ||||||
The following table reflects net realized loss during the year ended June 30, 2016 was primarily due to the write-down of our investment in Targus of $14,194, the sale of our investments in American Gilsonite Company, ICON Health and Fitness, Inc., and Harbortouch for which we recognized total realized losses of $10,860 and the write-off of defaulted loans in our small business lending portfolio of $5,986. These losses were partially offset by net realized gains from the sale of two of our CLO investments for which we realized total gains of $3,911.
| Net Change in Unrealized Gains (Losses) | ||||||||
| National Property REIT Corp. | $ | 32,238 | ||||||
| First Tower Finance Company LLC | 14,769 | |||||||
| Edmentum Ultimate Holdings, LLC | 11,006 | |||||||
| United Sporting Companies, Inc. | 9,713 | |||||||
| NMMB, Inc. | 7,575 | |||||||
| Easy Gardener Products, Inc. | 7,488 | |||||||
| USES Corp. | 6,050 | |||||||
| Targus Cayman HoldCo Limited | 5,576 | |||||||
| Securus Technologies Holdings, Inc. | (7,058) | |||||||
| Credit Central Loan Company, LLC | (8,623) | |||||||
| InterDent, Inc. | (12,299) | |||||||
| Valley Electric Company, Inc. | (13,327) | |||||||
| Echelon Transportation, LLC | (14,704) | |||||||
| Other, net | (15,958) | |||||||
| Engine Group, Inc. | (27,873) | |||||||
| Pacific World Corporation | (61,254) | |||||||
| CP Energy Services Inc. | (77,900) | |||||||
| Subordinated Structured Notes | (127,061) | |||||||
| Net change in unrealized (losses) | $ | (271,642) | ||||||
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Financial Condition, Liquidity and Capital Resources
On July 27, 2017, the Financial Conduct Authority (“FCA”) announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board (“ARRC”) and the Federal Reserve Bank of New York. On August 24, 2017, the Federal Reserve Board requested public comment on a proposal by the Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, to produce three new reference rates intended to serve as alternatives to LIBOR. These alternative rates are based on overnight repurchase agreement transactions secured by U.S. Treasury Securities. On December 12, 2017, following consideration of public comments, the Federal Reserve Board concluded that the public would benefit if the Federal Reserve Bank of New York published the three proposed reference rates as alternatives to LIBOR (the “Federal Reserve Board Notice”). In April 2018, the Federal Reserve System, in conjunction with the ARRC, announced the replacement of LIBOR with a new index, calculated by short term repurchase agreements collateralized by U.S. Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). On June 12, 2019, the Staff from the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts that reference LIBOR and begin transitions to alternative rates. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 will have further effect on LIBOR transition plans. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
At this time, it is not possible to predict the effect of the FCA Announcement or other regulatory changes or announcements, any establishment of any alternative reference rates, including SOFR and its market acceptance, or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States or elsewhere. As such, the potential effect of any such event on our net investment income cannot yet be determined. The CLOs in which the Company is invested generally contemplate a scenario where LIBOR is no longer available by requiring the CLO administrator to calculate a replacement rate primarily through dealer polling on the applicable measurement date. However, there is uncertainty regarding the effectiveness of the dealer polling processes, including the willingness of banks to provide such quotations, which could adversely impact our net investment income. Recently, the CLOs we are invested in have included, or have been amended to include, language permitting the CLO investment manager to implement a market replacement rate (like SOFR) upon the occurrence of certain material disruption events. However, we cannot ensure that all CLOs in which we are invested will have such provisions, nor can we ensure the CLO investment managers will undertake the suggested amendments when able. In addition, the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear. To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans, the CLO would experience an interest rate mismatch between its assets and liabilities which could have an adverse impact on the Company’s net investment income and portfolio returns.
For the years ended June 30, 2017, 20162021 and 2015,2020, our operating activities provided $376,201, $861,869$31,019 and $45,464$429,438 of cash, respectively. There were no investing activities for the years ended June 30, 2017, 20162021 and 2015.2020. Financing activities used $375,916, $654,097$11,970 and $69,663$491,975 of cash during the years ended June 30, 2017, 20162021 and 2015,2020, respectively, which included dividend payments of $333,623, $336,637$195,574 and $414,833,$239,954, 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.stockholders.
Our primary sources of funds have historically been issuances of debt and equity. More recently, we have and may continue to fund a portion of our cash needs through repayments and opportunistic sales of our existing investment portfolio. We may also securitize a portion of our investments in unsecured 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 year ended June 30, 2017,2021, we borrowed $635,000$1,092,861 and we made repayments totaling $635,000$973,460 under the Revolving Credit Facility. As of June 30, 2017,2021, our outstanding balance on the Revolving Credit Facility was $356,937. As of June 30, 2021, we had, net of unamortized discount and debt issuance costs, $937,641$263,100 outstanding on the Convertible Notes, $738,300$1,114,717 outstanding on the Public Notes, and $966,254$498,215 outstanding on the Prospect Capital InterNotes®, and no outstanding balance on the Revolving Credit Facility. (See “Capitalization” above.)above).
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Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 4.00%5.00%. As of June 30, 20172021 and June 30, 2016,2020, we had $22,925$67,385 and $40,560,$41,487, respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as of June 30, 20172021 and June 30, 2016.2020.
We have guaranteed $2,737 in standby letters of credit issued through a financial intermediary and $2,775 of equipment lease obligations on behalf of InterDent, Inc. (“InterDent”) as of June 30, 2021. Under these arrangements, we would be required to make payments to the financial intermediary or equipment lease provider, respectively, if InterDent was to default on their related payment obligations. As of June 30, 2021, we have not recorded a liability on the statement of assets and liabilities for these guarantees as the likelihood of default on the standby letters of credit or equipment lease is deemed to be remote.
On February 13, 2020, we filed a registration statement on Form N-2 (File No. 333-236415) that was effective upon filing pursuant to Rule 462(e) under the Securities Act as permitted under the Small Business Credit Availability Act. The registration statement permits us to issue, through one or more transactions, an indeterminate amount of securities, consisting of common stock, preferred stock, debt securities, subscription rights to purchase our securities, warrants representing rights to purchase our securities or separately tradeable units combining two or more of our securities.
Preferred Stock
On August 3, 2020, we entered into a Dealer Manager Agreement with Preferred Capital Securities, LLC (“PCS”), pursuant to which PCS has agreed to serve as the Company’s agent, principal distributor and dealer manager for the Company’s offering of up to 40,000,000 shares, par value $0.001 per share, of preferred stock, with a liquidation preference of $25.00 per share. Such preferred stock will initially be issued in multiple series, including the Series A1 Preferred Stock, the Series M1 Preferred Stock, and the Series M2 Preferred Stock. In connection with such offering, on August 3, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, reclassifying and designating 120,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as “Convertible Preferred Stock.” On October 30, 2020, we entered into a Dealer Manager Agreement with InspereX LLC, pursuant to which InspereX LLC has agreed to serve as the Company’s agent and dealer manager for the Company’s offering of up to 10,000,000 shares, par value $0.001 per share, of 5.50% Series AA1 Preferred Stock, with a liquidation preference of $25.00 per share. In connection with such offering, on October 30, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, reclassifying and designating an additional 20,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock. On May 19, 2021, we entered into an Underwriting Agreement with UBS Securities LLC, relating to the offer and sale of 187,000 shares, par value $0.001 per share, of 5.50% Series A2 Preferred Stock, with a liquidation preference of $25.00 per share. The issuance of the Series A2 Preferred Stock settled on May 26, 2021. In connection with such offering, on May 19, 2021, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland, reclassifying and designating an additional 1,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock.
In connection with the offerings of the 5.50% Preferred Stock, we adopted and amended, respectively, a preferred stock dividend reinvestment plan (the “Preferred Stock Plan” or the “Preferred Stock DRIP”), pursuant to which holders of the 5.50% Preferred Stock will have dividends on their 5.50% Preferred Stock automatically reinvested in additional shares of such 5.50% Preferred Stock at a price per share of $25.00, if they elect.
Each series of 5.50% Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities.
At any time prior to the listing of the 5.50% Preferred Stock on a national securities exchange, shares of the 5.50% Preferred Stock are convertible, at the option of the holder of the 5.50% Preferred Stock (the “Holder Optional Conversion”). We will settle any Holder Optional Conversion by paying or delivering, as the case may be, (A) any portion of the Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the Settlement Amount, minus (b) any portion of the Settlement Amount that we elect to pay in cash, divided by (2) the arithmetic average of the daily volume weighted average price of shares of our common stock over each of the five consecutive trading days ending on the Holder Conversion Exercise Date (as defined in the applicable prospectus supplement)(such arithmetic average, the “5-day VWAP”). For the Series A1 Preferred Stock, the Series AA1 Preferred Stock, and the Series A2 Preferred Stock, “Settlement Amount” means (A) $25.00 per share (the “Stated Value”), plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the Holder Optional Conversion Fee (as described in the prospectus supplements relating to the Series A1 Preferred Stock, the Series AA1 Preferred Stock, or the Series A2 Preferred
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Stock, as applicable) applicable on the respective Holder Conversion Deadline (as defined in the applicable prospectus supplement). For the Series M Preferred Stock, “Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable Series M Clawback, if any (as described in the prospectus supplements relating to the Series M Preferred Stock. “Series M Clawback,” if applicable, means an amount equal to the aggregate amount of all dividends, whether paid or accrued, on such share of Series M Stock in the three full months prior to the Holder Conversion Exercise Date. Subject to certain limited exceptions, we will not pay any portion of the Settlement Amount in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction. The right of holders to convert a share of 5.50% Preferred Stock will terminate upon the listing of such share on a national securities exchange.
Subject to certain limited exceptions allowing earlier redemption, beginning on the earlier of the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued, or, for listed shares of 5.50% Preferred Stock, five years from the earliest date on which any series that has been listed was first issued (the earlier of such dates, the “Redemption Eligibility Date”), such share of 5.50% Preferred Stock may be redeemed at any time or from time to time at our option (the “Issuer Optional Redemption”), at a redemption price of 100% of the Stated Value of the shares of 5.50% Preferred Stock to be redeemed plus unpaid dividends accrued to, but not including, the date fixed for redemption.
Subject to certain limitations, each share of 5.50% Preferred Stock may be converted at our option (the “Issuer Optional Conversion”). We will settle any Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the 5-day VWAP, subject to our ability to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value if the 5-day VWAP represents a discount to our net asset value per share of common stock. For the 5.50% Preferred Stock, “IOC Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the date fixed for conversion. Subject to certain limited exceptions, we will not exercise an Issuer Optional Conversion with respect to a share of 5.50% Preferred Stock until after the date set forth in the applicable prospectus supplement with respect to the 5.50% Preferred Stock. In connection with an Issuer Optional Conversion, we will use commercially reasonable efforts to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value and the 5-day VWAP is at a discount to our net asset value per share of common stock, we will settle any conversions in connection with an Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the NAV per share of common stock at the close of business on the business day immediately preceding the date of conversion. We will not pay any portion of the IOC Settlement Amount from an Issuer Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the Redemption Eligibility Date. Beginning on the Redemption Eligibility Date, we may elect to settle any Issuer Optional Conversion in cash without limitation or restriction. In the event that we exercise an Issuer Optional Conversion with respect to any shares of 5.50% Preferred Stock, the holder of such 5.50% Preferred Stock may instead elect a Holder Optional Conversion with respect to such 5.50% Preferred Stock provided that the date of conversion for such Holder Optional Conversion would occur prior to the date of conversion for an Issuer Optional Conversion.
We determined the estimated value as of June 30, 2021 of our 5.50% Preferred Stock, with a $25.00 stated value per share. We engaged a third-party valuation service to assist in our determination based on the calculation resulting from the total equity on our Consolidated Statements of Assets and Liabilities in our Annual Report on Form 10-K for the quarter ended June 30, 2021 (the “Form 10-K”), which was prepared in accordance with U.S. generally accepted accounting principles in the United States of America, adjusted for the fair value of our investments (i.e. from our Consolidated Schedule of Investments) and total liabilities, divided by the number of shares of our 5.50% Preferred Stock outstanding. Based on this methodology and because the result from the calculation above is greater than the $25.00 per share stated value of our Preferred Stock, the estimated value of our Preferred Stock as of June 30, 2021 is $25.00 per share.
Common Stock
Our shareholders’common stockholders’ equity accounts as of June 30, 2017, June 30, 20162021 and June 30, 20152020 reflect cumulative shares issued, net of shares repurchased, 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, our dividend reinvestment plan and in connection with the acquisition of certain controlled portfolio companies. When our common stock is issued, the related
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offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
Off-Balance Sheet Arrangements
As of June 30, 2017,2021, 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 July 21, 2021, we funded total commitments of $202,931, comprised of a $49,000 first lien senior secured floating rate term loan and a $153,931 second lien senior secured floating rate term loan, to support the refinancing of PGX Holdings, Inc., a portfolio company of H.I.G. Capital, LLC and market leading provider of consumer credit repair services in the U.S. In connection with the refinancing, our $47,773 first lien senior secured term loan, $18,164 1.5 lien senior secured term loan and $122,271 second lien senior secured term loan outstanding with PGX Holdings, Inc. were fully repaid at par.
During the period of July 14, 2021 through August 13, 2021, we provided notice to call on July 11, 2017 with settlement on August 15, 2017, $41,441certain of our Prospect Capital InterNotes® at par maturing between February 15, 2018 and February 15, 2019, with a weighted average rate of 4.83%.the following terms:
| Notice Date | Settlement Date | Maturity Date Range | Interest Rate Range | Principal | ||||||||||
| 7/14/2021 | 7/21/2021 | 1/15/2026 - 5/15/2029 | 4.000% - 6.250% | $68,422 | ||||||||||
| 7/15/2021 | 8/15/2021 | 2/15/2024 | 5.750% - 6.000% | $4,880 | ||||||||||
| 8/4/2021 | 8/11/2021 | 12/15/2027 - 12/15/2030 | 4.500% - 6.000% | $54,831 | ||||||||||
| 8/13/2021 | 9/15/2021 | 3/15/2024 | 5.750% | $2,581 | ||||||||||
On August 7, 2017, Water Pik, Inc. repaid19, 2021, we increased total commitments to our Revolving Credit Facility by $50,000 to $1,157,500 in the $13,739 loan receivable to us.
During the period from July 1, 20172021 through August 28, 201724, 2021, we issued $18,392$61,137 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $18,126. In addition, we sold $3,047$59,648, with $9,170 of such aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $3,003 with expected closingscheduled to settle on August 31, 2017.26, 2021.
On August 28, 2017,24, 2021, we announced the declaration of monthly dividends in the following amounts and with the following dates:
| Monthly Cash 5.50% Preferred Shareholder Distribution | Record Date | Payment Date | Monthly Amount ($ per share), before pro ration for partial periods | ||||||||
| September 2021 | 9/15/2021 | 10/1/2021 | $0.114583 | ||||||||
| October 2021 | 10/20/2021 | 11/1/2021 | $0.114583 | ||||||||
| November 2021 | 11/17/2021 | 12/1/2021 | $0.114583 | ||||||||
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On August 24, 2021, we announced the declaration of October 19, 2017.
| Quarterly Cash 5.35% Preferred Shareholder Distribution | Record Date | Payment Date | Amount ($ per share) | ||||||||
| July - October 2021 | 10/20/2021 | 11/1/2021 | $0.382674 | ||||||||
On August 24, 2021, we announced the declaration of November 22, 2017.monthly dividends on our common stock as follows:
| Monthly Cash Common Shareholder Distribution | Record Date | Payment Date | Amount ($ per share) | ||||||||
| September 2021 | 9/28/2021 | 10/21/2021 | $0.06 | ||||||||
| October 2021 | 10/27/2021 | 11/18/2021 | $0.06 | ||||||||
Critical Accounting Policies and Estimates
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) pursuant to the requirements for reporting on Form 10-K, ASC 946, Financial Services—Investment Companies (“ASC 946”), and Articles 3, 6 and 12 of Regulation S-X. Under the 1940 Act, ASC 946, and the regulations pursuant to Article 6 of Regulation S-X, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services to benefit us. Our consolidated financial statements include the accounts of Prospect, PCF, PSBL, PYC, and the Consolidated Holding Companies. All intercompany balances and transactions have been eliminated in consolidation. The financial results of our non-substantially wholly-owned holding companies and operating portfolio company investments are not consolidated in the financial statements. Any operating companies owned by the Consolidated Holding Companies are not consolidated.
Reclassifications
Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of and for the year ended June 30, 2017.
2021.
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP 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, expenses, and gains and losses during the reported period. Changes in the economic environment, financial markets, creditworthiness of the issuers of our investment portfolio and any other parameters used in determining these estimates could cause actual results to differ, and these differences could be material.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, 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. Under the 1940 Act, “Affiliate Investments” 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. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As of June 30, 20172021 and June 30, 2016,2020, our qualifying assets as a percentage of total assets, stood at 71.75%76.31% and 74.58%74.44%, respectively.
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Investment Transactions
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. Specifically, we record all security transactions on a trade date basis. 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. In accordance with ASC 325-40, Beneficial Interest in Securitized Financial Assets, investments in CLOs are periodically assessed for other-than-temporary impairment (“OTTI”). When the Company determines that a CLO has OTTI, the amortized cost basis of the CLO is written down to its fair value as of the date of the determination based on events and information evaluated and that write-down is recognized as a realized loss. Amounts for investments traded but not yet settled are reported in Due to Broker or Due from Broker, in the Consolidated Statements of Assets and Liabilities.
Foreign Currency
Foreign currency amounts are translated into US Dollars (USD) on the following basis:
i.fair value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and ii. |
purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such investment transactions, income or expenses. |
We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held or disposed of during the period. Such fluctuations are included within the net realized and net change in unrealized gains or losses from investments in the Consolidated Statements of Operations.
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 our investment 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 us less likely to fully earn all of the expected income of that security and reinvesting in a lower yielding instrument.
Structured Credit Related Risk
CLO investments may be riskier and less transparent to us than direct investments in underlying companies. CLOs typically will have no significant assets other than their underlying senior secured loans. Therefore, payments on CLO investments are and will be payable solely from the cash flows from such senior secured loans.
Online Small-and-Medium-Sized Business Lending Risk
With respect to our online SMEsmall-and-medium-sized business (“SME”) lending initiative, we invest primarily in marketplace loans through marketplace lending facilitators.platforms (e.g. OnDeck). We do not conduct loan origination activities
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ourselves. Therefore, our ability to purchase SME loans, and our ability to grow our portfolio of SME loans, is directly influenced by the business performance and competitiveness of the
marketplace loan origination business of the marketplace lending facilitatorsplatforms from which we purchase SME loans. In addition, our ability to analyze the risk-return profile of SME loans is significantly dependent on the marketplace facilitators’platforms’ ability to effectively evaluate a borrower'sborrower’s credit profile and likelihood of default. If we are unable to effectively evaluate borrowers'borrowers’ credit profiles or the credit decisioning and scoring models implemented by each facilitator,platform, we may incur unanticipated losses which could adversely impact our operating results.
Foreign Currency
Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.
Investment Valuation
Consolidated Statement of Operations.To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for measuring fair value in conformity with accounting principles generally accepted in the United States of America (“GAAP”),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.
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 prepare independent valuations for each investment based on their own independent assessments and issue their report. 3.The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment. 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. 127 |
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, liquidationasset recovery technique, discounted cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market (multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction
metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidationasset recovery technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued primarily using a discounted multi-path cash flow model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows from the underlying assets and liabilities. These cash flows after payments to debt tranches senior to our equity positions, are discounted using appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third partythird-party CLO collateral managers. The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
Valuation of Other Financial Assets and Financial Liabilities
ASC 825, Financial Instruments, specifically ASC 825-10-25, permits an entity to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). We have not elected the Fair Value Option to report selected financial assets and financial liabilities. See Note 8 in the accompanying Consolidated Financial Statements for further discussionthe disclosure of the fair value of our financial liabilities that are measured using another measurement attribute.outstanding debt and the market observable inputs used in determining fair value.
Convertible Notes
We have recorded the Convertible Notes at their contractual amounts. We have determined that the embedded conversion options in the Convertible Unsecured Notes are not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. See Note 5 in the accompanying Consolidated Financial Statements for further discussion.
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. Loan origination fees, originalOriginal issue discount,discounts and market discounts are capitalized and accreted into interest income over the respective terms of the applicable loans using the effective interest method or straight-line, as applicable, and adjusted only for material amendments or prepayments. Upon a prepayment of a loan, prepayment premiums, original issue discount, or market discounts are recorded as interest income. Other income generally includes amendment fees, commitment fees, administrative agent fees and structuring fees which are recorded when earned.
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 orare either applied to the cost basis or interest income, depending upon management’s judgment of the collectibility of the loan receivable. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in
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management’s judgment, is likely to remain current.current and future principal and interest collections when due are probable. Interest received and applied against cost while a loan is on non-accrual, and PIK interest capitalized but not recognized while on non-accrual, is recognized prospectively on the effective yield basis through maturity of the loan when placed back on accrual status, to the extent deemed collectible by management. As of June 30, 2017,2021, approximately 2.5%0.6% of our total assets at fair value are in non-accrual status.
Some of our loans and other investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, we capitalize the accrued interest (reflecting such amounts in the basis as additional securities received). PIK generally becomes due at maturity of the investment or upon the investment being called by the issuer. At the point that we believe PIK is not fully expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends are reversed from the related receivable through interest or dividend income, respectively. We do not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if we believe that PIK is expected to be realized.
Interest income from investments in the “equity” class of security of CLO fundsSubordinated Structured Notes (typically preferred shares, income notes or subordinated notes)notes of CLO funds) and “equity” class of security of securitized trust is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial
Assets. We monitor the expected cash inflows from our CLO and securitized trust 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.
Federal and State Income Taxes
We have elected to be treated as a RIC and intend to continue to comply with the requirements of the Code applicable to regulated investment companies.RICs. 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 of June 30, 2017,2021, we do not expect to have any excise tax due for the 20172021 calendar year. Thus, we have not accrued any excise tax for this period.
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 income tax 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 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 shareholdersstockholders our accumulated earnings and profits attributable to non-RIC years. 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 five years.
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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. June 2017AsAs of June 30, 2017 and 2016,2021, we did not record any unrecognized tax benefits or liabilities. 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. Although we file both federal and state income tax returns, our major tax jurisdiction is federal. Our federal tax returns for the tax years ended August 31, 20142018 and thereafter remain subject to examination by the Internal Revenue Service.
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 future taxable earnings. Net realized capital gains, if any, are distributed at least annually.
Our distributions may exceed our earnings, and therefore, portions of the distributions that we make may be a return of the money originally invested and represent a return of capital distribution to shareholders for tax purposes.
Financing Costs
We record origination expenses related to our Revolving Credit Facility and the Unsecured Notes as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method over the stated life of the obligation for our Revolving Credit Facility. The same methodology is used to approximate the effective yield methodFacility and for our Prospect Capital InterNotes® and our 2024 Notes Follow-on Program.. The effective interest method is used to amortize deferred financing costs for our remaining
Unsecured Notes over the respective expected life or maturity. In the event that we modify or extinguish our debt before maturity, we follow the guidance in ASC 470-50, Modification and Extinguishments (“ASC 470-50”). For modifications to or exchanges of our Revolving Credit Facility, any unamortized deferred costs relating to lenders who are not part of the new lending group are expensed. For extinguishments of our Unsecured Notes, any unamortized deferred costs are deducted from the carrying amount of the debt in determining the gain or loss from the extinguishment.
We may record registration expenses related to shelf filings as prepaid expenses. These expenses consist principally of SEC registration fees, legal fees and accounting fees incurred. These prepaid expenses are charged to capital upon the receipt of proceeds from an equity offering or charged to expense if no offering is completed. As of June 30, 20172021 and June 30, 2016,2020, there are no prepaid expenses related to registration expenses and all amounts incurred have been expensed.
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
We compute earnings per common share in accordance with ASC 260, Earnings Per Share (“ASC 260”). Basic earnings per common share is calculated by dividing the net increase (decrease) in net assets resulting from operations attributable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per common share reflects the assumed conversion of dilutive securities.
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Recent Accounting Pronouncements
On July 1, 2020, the Company adopted ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes tothe Disclosure Requirements for Fair Value Measurement. The standard modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The adoption of ASU 2018-13 did not have a material effect on our consolidated financial statements and disclosures.
In May 2020, the SEC adopted rule amendments that will impact the requirement of investment companies, including BDCs, to disclose the financial statements of certain of their portfolio companies or certain acquired funds (the “Final Rules”). The Final Rules adopted a new definition of “significant subsidiary” set forth in Rule 1-02(w)(2) of Regulation S-X under the Securities Act. Rules 3-09 and 4-08(g) of Regulation S-X require investment companies to include separate financial statements or summary financial information, respectively, in such investment company’s periodic reports for any portfolio company that meets the definition of “significant subsidiary.” The Final Rules adopt a new definition of “significant subsidiary” applicable only to investment companies that (i) modifies the investment test and the income test, and (ii) eliminates the asset test currently in the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X. The new Rule 1-02(w)(2) of Regulation S-X is intended to more accurately capture these portfolio companies that are more likely to materially impact the financial condition of an investment company. The Final Rules became effective on January 1, 2021, but voluntary compliance was permitted in advance of the effective date. We evaluated the impact of adopting the Final Rules on our consolidated financial statements and because the new definition of “significant subsidiary” contained therein is specific to investment companies, we elected to early adopt the Final Rules beginning with our fiscal year ended June 30, 2020. Refer to Note 3. in the accompanying Consolidated Financial Statements for additional discussion of significant subsidiary results and disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective foras of March 12, 2020 through December 31, 2022. Management is currently evaluating the impact of the optional guidance on the Company’s consolidated financial statements and disclosures. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the year ended June 30, 2021.
In August 2020, FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, after adoption, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early2021, with early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.permitted. We are currently evaluating the impact, if any, of adopting this ASU on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates and equity price risk. Uncertainty with respect to the economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks, including those listed below. For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see Part I, Item 1A. Risk Factors, “Risks Relating to Our Operations as a Business Development Company - The COVID-19 pandemic has caused severe disruptions in the global economy, which has had, and may continue to have, a negative impact on our portfolio companies and our business and operations.”
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Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates impacting some of the loans in our portfolio which have floating interest rates. Additionally, because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. See “RiskPart I, Item 1A. Risk Factors, - Risks“Risks Relating to Our Business - Business—Changes in interest rates may affect our cost of capital and net investment income.”
Our debt investments may be based on floating rates or fixed rates. For our floating rate loans the rates are determined from the LIBOR, EURO Interbank Offer Rate, the Federal Funds Rate or the Prime Rate. The floating interest rate loans may be subject to a LIBOR floor. Our loans typically have durations of one, to three or six months after which they reset to current market interest rates. As of June 30, 2017, 90.4%2021, 86.1% of the interest earning investments in our portfolio, at fair value, bore interest at floating rates.
We also have a revolving credit facility and certain Prospect Capital InterNotes® issuances that areis based on floating LIBOR rates. Interest on borrowings under the revolving credit facility is one-month LIBOR plus 225205 basis points with no minimum LIBOR floor and there is no$356,937 outstanding balance as of June 30, 2017. Interest on five Prospect Capital InterNotes® is three-month LIBOR plus a range of 300 to 350 basis points with no minimum LIBOR floor.2021. The Convertible Notes, Public Notes and remaining Prospect Capital InterNotes® bear interest at fixed rates.
On March 5, 2021, the FCA announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); (ii) the overnight and 12-month US LIBOR settings would cease to exist after June 30, 2023; and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them.
The following table shows the approximate annual impact on net investment income of base rate changes in interest rates (considering interest rate flows for floating rate instruments, excluding our investments in CLO residual interests)Subordinated Structured Notes) to our loan portfolio and outstanding debt as of June 30, 2017,2021, assuming no changes in our investment and borrowing structure:
| (in thousands) Basis Point Change | Interest Income | Interest Expense | Net Investment Income | Net Investment Income (1) | |||||||||||||||||||||||||
| Up 300 basis points | $ | 56,649 | $ | 10,708 | $ | 45,941 | $ | 36,753 | |||||||||||||||||||||
| Up 200 basis points | 28,242 | 7,139 | 21,103 | 16,882 | |||||||||||||||||||||||||
| Up 100 basis points | 5,549 | 3,569 | 1,980 | 1,584 | |||||||||||||||||||||||||
| Down 100 basis points | (368) | (372) | 4 | 3 | |||||||||||||||||||||||||
(in thousands) Basis Point Change | Interest Income | Interest Expense | Net Investment Income | Net Investment Income (1) | ||||||||||||
| Up 300 basis points | $ | 99,317 | $ | 43 | $ | 99,274 | $ | 79,419 | ||||||||
| Up 200 basis points | 63,596 | 29 | 63,567 | 50,854 | ||||||||||||
| Up 100 basis points | 28,356 | 14 | 28,342 | 22,674 | ||||||||||||
| Down 100 basis points | (6,522 | ) | (19 | ) | (6,503 | ) | (5,202 | ) | ||||||||
As of June 30, 2017,2021, one, two, three, six and threetwelve month LIBOR waswere 1.23%0.10%, 0.13%, 0.15%,0.16% and 0.25% and 1.30%, respectively.
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 year ended June 30, 2017,2021, we did not engage in hedging activities.
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Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
Stockholders and Board of Directors and Stockholders
Prospect Capital Corporation
New York, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of assets and liabilities of Prospect Capital Corporation (the “Company”), including the consolidated schedules of investments, as of June 30, 20172021 and 2016,2020, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the three years in the period ended June 30, 2017,2021, and the related notes (collectively referred to as the “consolidated financial highlights for each of the five years in the period ended June 30, 2017. These consolidated financial statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial highlights based on our audits.
In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Prospect Capital Corporationthe Company at June 30, 20172021 and 2016,2020, and the results of its operations, the changes in its net assets, and its cash flows for each of the three years in the period ended June 30, 2017, and the financial highlights for each of the five years in the period ended June 30, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), Prospect Capital Corporation’sthe Company's internal control over financial reporting as of June 30, 2017,2021, based on criteria established in Internal Control—Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”) and our report dated August 28, 201724, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our procedures included confirmation of securities owned as of June 30, 2021 and 2020 by correspondence with the custodians, brokers and portfolio companies; when replies were not received, we performed other auditing procedures. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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Valuation of Level 3 Investments
As described in Notes 2 and 3 to the consolidated financial statements, the Company's consolidated investments at fair value were $6,202 million as of June 30, 2021. The Company’s investment portfolio is primarily comprised of privately held equity and debt instruments in portfolio companies, collateralized loan obligations (“CLO”) and real estate properties, substantially all of which have been classified as level 3 investments. The Company’s determination of fair value for these level 3 investments involves valuation techniques as outlined in Note 2 and requires management to make judgments on the utilization of inputs that are unobservable and significant to the entire fair value measurement. The fair value of investments in equity and debt instruments is determined on a quarterly basis by the Board of Directors based on input from third-party valuation firms, management and the Audit Committee. The third-party valuation firms prepare independent valuations with a range of values for each investment based on their independent assessments.
We identified the valuation of level 3 investments as a critical audit matter. The principal considerations for our determination are the use of complex models to value these investments and the use of significant unobservable inputs in the valuation models, which are inherently uncertain and subjective, including revenue and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples, discount rates and market yields for portfolio companies, discount rates for CLOs, and capitalization rates for real estate properties. Performing audit procedures to evaluate the reasonableness of management’s assumptions involved a high degree of auditor judgment and specialized skills and knowledge needed.
The primary procedures we performed to address this critical audit matter included:
Utilizing personnel with specialized knowledge and skill in valuation to assist in evaluating the reasonableness of management’s fair value estimates and performing the following procedures for a selection of investments:
•assessing the appropriateness of valuation models, such as the market or income approach for portfolio companies, including discounted cash flow models for portfolio companies and CLOs or net asset value (“NAV”) analysis for real estate properties;
•evaluating whether significant unobservable inputs used were reasonable including (a) historical or forecasted revenue or EBITDA multiples, discount rates, and market yields for portfolio companies, (b) discount rates for CLOs, and (c) capitalization rates for real estate properties;
•recalculating the fair value estimates for portfolio companies and real estate properties; and
•performing independent fair value calculations for CLOs from independently derived assumptions.
| /s/ BDO USA, LLP | ||
| BDO USA, LLP | ||
We have served as the Company’s auditor since 2005.
| New York, New York | ||
| August | ||
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
| June 30, 2017 | June 30, 2016 | June 30, 2021 | June 30, 2020 | |||||||||||||||
| Assets | Assets | |||||||||||||||||
| Investments at fair value: | Investments at fair value: | |||||||||||||||||
| Control investments (amortized cost of $1,840,731 and $1,768,220, respectively) | $ | 1,911,775 | $ | 1,752,449 | ||||||||||||||
| Affiliate investments (amortized cost of $22,957 and $10,758, respectively) | 11,429 | 11,320 | ||||||||||||||||
| Non-control/non-affiliate investments (amortized cost of $4,117,868 and $4,312,122, respectively) | 3,915,101 | 4,133,939 | ||||||||||||||||
| Total investments at fair value (amortized cost of $5,981,556 and $6,091,100, respectively) | 5,838,305 | 5,897,708 | ||||||||||||||||
| Control investments (amortized cost of $2,482,431 and $2,286,725, respectively) | Control investments (amortized cost of $2,482,431 and $2,286,725, respectively) | $ | 2,919,717 | $ | 2,259,292 | |||||||||||||
| Affiliate investments (amortized cost of $202,943 and $163,484, respectively) | Affiliate investments (amortized cost of $202,943 and $163,484, respectively) | 356,734 | 187,537 | |||||||||||||||
| Non-control/non-affiliate investments (amortized cost of $3,372,750 and $3,332,509, respectively) | Non-control/non-affiliate investments (amortized cost of $3,372,750 and $3,332,509, respectively) | 2,925,327 | 2,785,499 | |||||||||||||||
| Total investments at fair value (amortized cost of $6,058,124 and $5,782,718, respectively) | Total investments at fair value (amortized cost of $6,058,124 and $5,782,718, respectively) | 6,201,778 | 5,232,328 | |||||||||||||||
| Cash | 318,083 | 317,798 | Cash | 63,610 | 44,561 | |||||||||||||
| Receivables for: | Receivables for: | |||||||||||||||||
| Interest, net | 9,559 | 12,127 | Interest, net | 12,575 | 11,712 | |||||||||||||
| Other | 924 | 168 | Other | 365 | 106 | |||||||||||||
| Prepaid expenses | 1,125 | 855 | Prepaid expenses | 1,072 | 1,248 | |||||||||||||
| Due from Affiliate | 14 | — | ||||||||||||||||
| Due from broker | Due from broker | 12,551 | 1,063 | |||||||||||||||
| Deferred financing costs on Revolving Credit Facility (Note 4) | 4,779 | 7,525 | Deferred financing costs on Revolving Credit Facility (Note 4) | 11,141 | 9,145 | |||||||||||||
Total Assets | 6,172,789 | 6,236,181 | Total Assets | 6,303,092 | 5,300,163 | |||||||||||||
Liabilities | Liabilities | |||||||||||||||||
| Revolving Credit Facility (Notes 4 and 8) | — | — | Revolving Credit Facility (Notes 4 and 8) | 356,937 | 237,536 | |||||||||||||
| Prospect Capital InterNotes® (Notes 7 and 8) | 966,254 | 893,210 | ||||||||||||||||
| Convertible Notes (Notes 5 and 8) | 937,641 | 1,074,361 | ||||||||||||||||
| Public Notes (Notes 6 and 8) | 738,300 | 699,368 | ||||||||||||||||
| Convertible Notes (less unamortized discount and debt issuance costs of $4,123 and $8,892, respectively) (Notes 5 and 8) | Convertible Notes (less unamortized discount and debt issuance costs of $4,123 and $8,892, respectively) (Notes 5 and 8) | 263,100 | 450,598 | |||||||||||||||
| Public Notes (less unamortized discount and debt issuance costs of $20,061 and $11,613, respectively) (Notes 6 and 8) | Public Notes (less unamortized discount and debt issuance costs of $20,061 and $11,613, respectively) (Notes 6 and 8) | 1,114,717 | 782,106 | |||||||||||||||
| Prospect Capital InterNotes® (less unamortized debt issuance costs of $10,496 and $12,802, respectively) (Notes 7 and 8) | Prospect Capital InterNotes® (less unamortized debt issuance costs of $10,496 and $12,802, respectively) (Notes 7 and 8) | 498,215 | 667,427 | |||||||||||||||
| Due to Prospect Capital Management (Note 13) | 48,249 | 54,149 | Due to Prospect Capital Management (Note 13) | 48,612 | 42,481 | |||||||||||||
| Interest payable | 38,630 | 40,804 | Interest payable | 27,359 | 29,066 | |||||||||||||
| Dividends payable | 30,005 | 29,758 | Dividends payable | 23,313 | 22,412 | |||||||||||||
| Due to broker | Due to broker | 14,854 | 1 | |||||||||||||||
| Accrued expenses | Accrued expenses | 5,151 | 3,648 | |||||||||||||||
| Due to Prospect Administration (Note 13) | 1,910 | 1,765 | Due to Prospect Administration (Note 13) | 4,835 | 7,000 | |||||||||||||
| Accrued expenses | 4,380 | 2,259 | ||||||||||||||||
| Other liabilities | 2,097 | 3,633 | Other liabilities | 482 | 2,027 | |||||||||||||
| Due to broker | 50,371 | 957 | ||||||||||||||||
Total Liabilities | 2,817,837 | 2,800,264 | Total Liabilities | 2,357,575 | 2,244,302 | |||||||||||||
| Commitments and Contingencies (Note 3) | — | — | Commitments and Contingencies (Note 3) | |||||||||||||||
| Net Assets | $ | 3,354,952 | $ | 3,435,917 | Net Assets | $ | 3,945,517 | $ | 3,055,861 | |||||||||
Components of Net Assets | Components of Net Assets | |||||||||||||||||
| Common stock, par value $0.001 per share (1,000,000,000 common shares authorized; 360,076,933 and 357,107,231 issued and outstanding, respectively) (Note 9) | $ | 360 | $ | 357 | ||||||||||||||
| Paid-in capital in excess of par (Note 9) | 3,991,317 | 3,967,397 | ||||||||||||||||
| Accumulated overdistributed net investment income | (54,039 | ) | (3,623 | ) | ||||||||||||||
| Accumulated net realized loss | (439,435 | ) | (334,822 | ) | ||||||||||||||
| Net unrealized loss | (143,251 | ) | (193,392 | ) | ||||||||||||||
| Convertible Preferred Stock, par value $0.001 per share (141,000,000 shares authorized, with 40,000,000 shares of preferred stock authorized for each of the Series A1, Series M1, and Series M2 shares, 20,000,000 shares of preferred stock authorized for the Series AA1 shares and 1,000,000 shares of preferred stock authorized for the Series A2 shares; 5,163,926 and 0 Series A1 shares issued and outstanding, respectively; 187,000 and 0 Series A2 shares issued and outstanding, respectively; 0 and 0 Series AA1 shares issued and outstanding, respectively; 130,666 and 0 Series M1 shares issued and outstanding, respectively; and 0 and 0 Series M2 shares issued and outstanding, respectively) (Note 9) | Convertible Preferred Stock, par value $0.001 per share (141,000,000 shares authorized, with 40,000,000 shares of preferred stock authorized for each of the Series A1, Series M1, and Series M2 shares, 20,000,000 shares of preferred stock authorized for the Series AA1 shares and 1,000,000 shares of preferred stock authorized for the Series A2 shares; 5,163,926 and 0 Series A1 shares issued and outstanding, respectively; 187,000 and 0 Series A2 shares issued and outstanding, respectively; 0 and 0 Series AA1 shares issued and outstanding, respectively; 130,666 and 0 Series M1 shares issued and outstanding, respectively; and 0 and 0 Series M2 shares issued and outstanding, respectively) (Note 9) | $ | 137,040 | $ | — | |||||||||||||
| Common stock, par value $0.001 per share (1,859,000,000 and 1,000,000,000 common shares authorized; 388,419,573 and 373,538,499 issued and outstanding, respectively) (Note 9) | Common stock, par value $0.001 per share (1,859,000,000 and 1,000,000,000 common shares authorized; 388,419,573 and 373,538,499 issued and outstanding, respectively) (Note 9) | 388 | 374 | |||||||||||||||
| Paid-in capital in excess of par (Note 9 and 12) | Paid-in capital in excess of par (Note 9 and 12) | 4,040,748 | 3,986,417 | |||||||||||||||
| Total distributable loss (Note 12) | Total distributable loss (Note 12) | (232,659) | (930,930) | |||||||||||||||
| Net Assets | $ | 3,354,952 | $ | 3,435,917 | Net Assets | $ | 3,945,517 | $ | 3,055,861 | |||||||||
Net Asset Value Per Share (Note 16) | $ | 9.32 | $ | 9.62 | ||||||||||||||
Net Asset Value Per Common Share (Note 16) | Net Asset Value Per Common Share (Note 16) | $ | 9.81 | $ | 8.18 | |||||||||||||
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| Year Ended June 30, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| Investment Income | |||||||||||||||||
| Interest income: | |||||||||||||||||
| Control investments | $ | 201,983 | $ | 200,948 | $ | 211,212 | |||||||||||
| Affiliate investments | 30,971 | 12,649 | 943 | ||||||||||||||
| Non-control/non-affiliate investments | 209,681 | 229,963 | 271,907 | ||||||||||||||
| Structured credit securities | 111,628 | 110,816 | 140,054 | ||||||||||||||
| Total interest income | 554,263 | 554,376 | 624,116 | ||||||||||||||
| Dividend income: | |||||||||||||||||
| Control investments | 4,642 | 10,335 | 34,127 | ||||||||||||||
| Affiliate investments | 378 | — | 659 | ||||||||||||||
| Non-control/non-affiliate investments | 81 | 1,109 | 1,243 | ||||||||||||||
| Total dividend income | 5,101 | 11,444 | 36,029 | ||||||||||||||
| Other income: | |||||||||||||||||
| Control investments | 62,167 | 47,311 | 36,011 | ||||||||||||||
| Affiliate investments | 109 | 38 | — | ||||||||||||||
| Non-control/non-affiliate investments | 10,327 | 10,361 | 7,611 | ||||||||||||||
| Total other income (Note 10) | 72,603 | 57,710 | 43,622 | ||||||||||||||
| Total Investment Income | 631,967 | 623,530 | 703,767 | ||||||||||||||
| Operating Expenses | |||||||||||||||||
| Base management fee (Note 13) | 114,622 | 108,910 | 121,833 | ||||||||||||||
| Income incentive fee (Note 13) | 71,227 | 68,057 | 78,215 | ||||||||||||||
| Interest and credit facility expenses | 130,618 | 148,368 | 157,231 | ||||||||||||||
| Allocation of overhead from Prospect Administration (Note 13) | 14,262 | 18,247 | 14,837 | ||||||||||||||
| Audit, compliance and tax related fees | 3,861 | 4,028 | 5,014 | ||||||||||||||
| Directors’ fees | 450 | 453 | 457 | ||||||||||||||
| Other general and administrative expenses | 11,190 | 9,773 | 13,321 | ||||||||||||||
| Total Operating Expenses | 346,230 | 357,836 | 390,908 | ||||||||||||||
| Net Investment Income | 285,737 | 265,694 | 312,859 | ||||||||||||||
| Net Realized and Change in Unrealized Gains (Losses) from Investments | |||||||||||||||||
| Net realized gains (losses) | |||||||||||||||||
| Control investments | 2,955 | — | 14,309 | ||||||||||||||
| Affiliate investments | 4,469 | — | — | ||||||||||||||
| Non-control/non-affiliate investments | 113 | (7,574) | 375 | ||||||||||||||
| Net realized gains (losses) | 7,537 | (7,574) | 14,684 | ||||||||||||||
| Net change in unrealized gains (losses) | |||||||||||||||||
| Control investments | 464,719 | (117,552) | 5,105 | ||||||||||||||
| Affiliate investments | 129,738 | 67,077 | (35,449) | ||||||||||||||
| Non-control/non-affiliate investments | 99,587 | (221,167) | (144,225) | ||||||||||||||
| Net change in unrealized gains (losses) | 694,044 | (271,642) | (174,569) | ||||||||||||||
| Net Realized and Change in Unrealized Gains (Losses) from Investments | 701,581 | (279,216) | (159,885) | ||||||||||||||
| Net realized losses on extinguishment of debt | (23,511) | (2,702) | (8,487) | ||||||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations | 963,807 | (16,224) | 144,487 | ||||||||||||||
| Preferred stock dividend | (1,711) | — | — | ||||||||||||||
| Net Increase (Decrease) in Net Assets Resulting from Operations attributable to Common Stockholders | $ | 962,096 | $ | (16,224) | $ | 144,487 | |||||||||||
| Year Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Investment Income | |||||||||||
| Interest income: | |||||||||||
| Control investments | $ | 177,496 | $ | 207,377 | $ | 200,409 | |||||
| Affiliate investments | 297 | 896 | 3,799 | ||||||||
| Non-control/non-affiliate investments | 342,696 | 347,132 | 385,710 | ||||||||
| Structured credit securities | 148,228 | 176,213 | 159,056 | ||||||||
| Total interest income | 668,717 | 731,618 | 748,974 | ||||||||
| Dividend income: | |||||||||||
| Control investments | 5,250 | 26,435 | 6,811 | ||||||||
| Affiliate investments | — | — | 778 | ||||||||
| Non-control/non-affiliate investments | 429 | 66 | 74 | ||||||||
| Total dividend income | 5,679 | 26,501 | 7,663 | ||||||||
| Other income: | |||||||||||
| Control investments | 11,470 | 22,528 | 12,975 | ||||||||
| Affiliate investments | — | — | 226 | ||||||||
| Non-control/non-affiliate investments | 15,180 | 11,326 | 21,246 | ||||||||
| Total other income (Note 10) | 26,650 | 33,854 | 34,447 | ||||||||
| Total Investment Income | 701,046 | 791,973 | 791,084 | ||||||||
| Operating Expenses | |||||||||||
| Base management fee (Note 13) | 122,874 | 126,523 | 134,590 | ||||||||
| Income incentive fee (Note 13) | 76,520 | 92,782 | 90,687 | ||||||||
| Interest and credit facility expenses | 164,848 | 167,719 | 170,660 | ||||||||
| Allocation of overhead from Prospect Administration (Note 13) | 13,246 | 12,647 | 14,977 | ||||||||
| Audit, compliance and tax related fees | 5,088 | 4,428 | 3,772 | ||||||||
| Directors’ fees | 454 | 379 | 379 | ||||||||
| Excise Tax | (1,100 | ) | 2,295 | 2,505 | |||||||
| Other general and administrative expenses | 13,034 | 14,072 | 10,767 | ||||||||
| Total Operating Expenses | 394,964 | 420,845 | 428,337 | ||||||||
| Net Investment Income | 306,082 | 371,128 | 362,747 | ||||||||
| Net Realized and Change in Unrealized Gains (Losses) from Investments | |||||||||||
| Net realized gains (losses) | |||||||||||
| Control investments | (65,915 | ) | (5,406 | ) | (80,640 | ) | |||||
| Affiliate investments | 137 | (14,194 | ) | — | |||||||
| Non-control/non-affiliate investments | (30,528 | ) | (4,817 | ) | (99,783 | ) | |||||
| Net realized losses | (96,306 | ) | (24,417 | ) | (180,423 | ) | |||||
| Net change in unrealized gains (losses) | |||||||||||
| Control investments | 86,817 | (88,751 | ) | 158,346 | |||||||
| Affiliate investments | 553 | (233 | ) | 503 | |||||||
| Non-control/non-affiliate investments | (37,229 | ) | (154,589 | ) | 9,116 | ||||||
| Net change in unrealized gains (losses) | 50,141 | (243,573 | ) | 167,965 | |||||||
| Net Realized and Change in Unrealized Losses from Investments | (46,165 | ) | (267,990 | ) | (12,458 | ) | |||||
| Net realized (losses) gains on extinguishment of debt | (7,011 | ) | 224 | (3,950 | ) | ||||||
| Net Increase in Net Assets Resulting from Operations | $ | 252,906 | $ | 103,362 | $ | 346,339 | |||||
| Net increase in net assets resulting from operations per share | $ | 0.70 | $ | 0.29 | $ | 0.98 | |||||
| Dividends declared per share | $ | (1.00 | ) | $ | (1.00 | ) | $ | (1.19 | ) | ||
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
| Basic and diluted earnings (loss) per common share (Note 11) | |||||||||||||||||
| Basic | $ | 2.51 | $ | (0.04) | $ | 0.39 | |||||||||||
| Diluted | $ | 2.50 | $ | (0.04) | $ | 0.39 | |||||||||||
| Weighted-average shares of common stock outstanding (Note 11) | |||||||||||||||||
| Basic | 382,705,106 | 368,094,299 | 365,984,541 | ||||||||||||||
| Diluted | 385,968,567 | 368,094,299 | 365,984,541 | ||||||||||||||
| Dividends declared per common share | $ | (0.72) | $ | (0.72) | $ | (0.72) | |||||||||||
See notes to consolidated financial statements.
138
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share data)
| Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||||
| Liquidation Value | Shares | Par | Paid-in capital in excess of par | Distributable earnings (loss) | Total Net Assets | |||||||||||||||||||||||||||||||||
| Balance as of June 30, 2018 | $ | — | 364,409,938 | $ | 364 | $ | 4,021,541 | $ | (614,858) | $ | 3,407,047 | |||||||||||||||||||||||||||
| Net Decrease in Net Assets Resulting from Operations: | ||||||||||||||||||||||||||||||||||||||
| Net investment income | 312,859 | 312,859 | ||||||||||||||||||||||||||||||||||||
| Net realized gains | 6,197 | 6,197 | ||||||||||||||||||||||||||||||||||||
| Net change in net unrealized losses | (174,569) | (174,569) | ||||||||||||||||||||||||||||||||||||
| Distributions to Stockholders: | ||||||||||||||||||||||||||||||||||||||
| Distributions from earnings | (263,624) | (263,624) | ||||||||||||||||||||||||||||||||||||
| Capital Transactions | ||||||||||||||||||||||||||||||||||||||
| Value of shares issued through reinvestment of dividends | — | 2,721,087 | 3 | 18,362 | 18,365 | |||||||||||||||||||||||||||||||||
| Tax reclassifications of net assets (Note 12) | (31) | 31 | — | |||||||||||||||||||||||||||||||||||
| Total increase (decrease) for the year ended June 30, 2019 | — | 2,721,087 | 3 | 18,331 | (119,106) | (100,772) | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2019 | $ | — | 367,131,025 | $ | 367 | $ | 4,039,872 | $ | (733,964) | $ | 3,306,275 | |||||||||||||||||||||||||||
| Net Decrease in Net Assets Resulting from Operations: | ||||||||||||||||||||||||||||||||||||||
| Net investment income | 265,694 | 265,694 | ||||||||||||||||||||||||||||||||||||
| Net realized losses | (10,276) | (10,276) | ||||||||||||||||||||||||||||||||||||
| Net change in net unrealized losses | (271,642) | (271,642) | ||||||||||||||||||||||||||||||||||||
| Distributions to Stockholders (1): | ||||||||||||||||||||||||||||||||||||||
| Distributions from earnings | (180,820) | (180,820) | ||||||||||||||||||||||||||||||||||||
| Return of capital to common stockholders | (84,457) | (84,457) | ||||||||||||||||||||||||||||||||||||
| Capital Transactions | ||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, net of offering and underwriting costs | 1,158,222 | 1 | 6,145 | 6,146 | ||||||||||||||||||||||||||||||||||
| Value of shares issued through reinvestment of dividends | — | 5,249,252 | 6 | 24,935 | 24,941 | |||||||||||||||||||||||||||||||||
| Tax reclassifications of net assets (Note 12) | (78) | 78 | — | |||||||||||||||||||||||||||||||||||
| Total increase (decrease) for the year ended June 30, 2020 | — | 6,407,474 | 7 | (53,455) | (196,966) | (250,414) | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | $ | — | 373,538,499 | $ | 374 | $ | 3,986,417 | $ | (930,930) | $ | 3,055,861 | |||||||||||||||||||||||||||
| Net Increase in Net Assets Resulting from Operations: | ||||||||||||||||||||||||||||||||||||||
| Net investment income | 285,737 | 285,737 | ||||||||||||||||||||||||||||||||||||
| Net realized losses | (15,974) | (15,974) | ||||||||||||||||||||||||||||||||||||
| Net change in net unrealized gains | 694,044 | 694,044 | ||||||||||||||||||||||||||||||||||||
| Distributions to Stockholders(1): | ||||||||||||||||||||||||||||||||||||||
| Distributions from earnings | (265,593) | (265,593) | ||||||||||||||||||||||||||||||||||||
| Return of capital to common stockholders (Note 12) | (12,263) | (12,263) | ||||||||||||||||||||||||||||||||||||
| Capital Transactions | ||||||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | 137,086 | (14,760) | 122,326 | |||||||||||||||||||||||||||||||||||
| Conversion of preferred stock to common stock | (80) | 9,982 | 80 | — | ||||||||||||||||||||||||||||||||||
| Value of shares issued through reinvestment of dividends | 34 | 14,871,092 | 14 | 81,331 | 81,379 | |||||||||||||||||||||||||||||||||
| Tax reclassifications of net assets (Note 12) | (57) | 57 | — | |||||||||||||||||||||||||||||||||||
| Total increase for the year ended June 30, 2021 | 137,040 | 14,881,074 | 14 | 54,331 | 698,271 | 889,656 | ||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 137,040 | 388,419,573 | $ | 388 | $ | 4,040,748 | $ | (232,659) | $ | 3,945,517 | |||||||||||||||||||||||||||
| Year Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Operations | |||||||||||
| Net investment income | $ | 306,082 | $ | 371,128 | $ | 362,747 | |||||
| Net realized losses | (103,317 | ) | (24,193 | ) | (184,373 | ) | |||||
| Net change in unrealized gains (losses) | 50,141 | (243,573 | ) | 167,965 | |||||||
Net Increase in Net Assets Resulting from Operations | 252,906 | 103,362 | 346,339 | ||||||||
| Distributions to Shareholders | |||||||||||
| Distribution from net investment income | (358,987 | ) | (356,110 | ) | (421,594 | ) | |||||
| Net Decrease in Net Assets Resulting from Distributions to Shareholders | (358,987 | ) | (356,110 | ) | (421,594 | ) | |||||
Common Stock Transactions | |||||||||||
| Issuance of common stock, net of underwriting costs | — | — | 146,085 | ||||||||
| Less: Offering costs from issuance of common stock | — | 118 | (644 | ) | |||||||
| Repurchase of common stock under stock repurchase program | — | (34,140 | ) | — | |||||||
| Value of shares issued through reinvestment of dividends | 25,116 | 19,638 | 14,681 | ||||||||
Net Increase (Decrease) in Net Assets Resulting from Common Stock Transactions | 25,116 | (14,384 | ) | 160,122 | |||||||
| Total (Decrease) Increase in Net Assets | (80,965 | ) | (267,132 | ) | 84,867 | ||||||
| Net assets at beginning of year | 3,435,917 | 3,703,049 | 3,618,182 | ||||||||
Net Assets at End of Year (Accumulated Overdistributed Net Investment Income of $54,039, $3,623, and $21,077, respectively) | $ | 3,354,952 | $ | 3,435,917 | $ | 3,703,049 | |||||
| Common Stock Activity | |||||||||||
| Shares sold | — | — | 14,845,556 | ||||||||
| Shares repurchased under stock repurchase program | — | (4,708,750 | ) | — | |||||||
| Shares issued through reinvestment of dividends | 2,969,702 | 2,725,222 | 1,618,566 | ||||||||
| Net shares issued (repurchased) due to common stock activity | 2,969,702 | (1,983,528 | ) | 16,464,122 | |||||||
| Shares issued and outstanding at beginning of year | 357,107,231 | 359,090,759 | 342,626,637 | ||||||||
| Shares Issued and Outstanding at End of Year | 360,076,933 | 357,107,231 | 359,090,759 | ||||||||
(1) Certain reclassifications have been made in the presentation of prior year and prior quarter amounts to conform to the presentation for the current fiscal year. In addition, we have not yet finalized return of capital estimates for the current period. See Note 2 and Note 12 within the accompanying notes to consolidated financial statements for further discussion.
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
| Year Ended June 30, | ||||||||||||||||||||
| 2021 | 2020 | 2019 | ||||||||||||||||||
| Operating Activities | ||||||||||||||||||||
| Net (decrease) increase in net assets resulting from operations | $ | 963,807 | $ | (16,224) | $ | 144,487 | ||||||||||||||
| Net realized losses on extinguishment of debt | 23,511 | 2,702 | 8,487 | |||||||||||||||||
| Net realized losses (gains) on investments | (7,537) | 7,574 | (14,684) | |||||||||||||||||
| Net change in unrealized losses (gains) on investments | (694,044) | 271,642 | 174,569 | |||||||||||||||||
| Net (accretion of discounts) amortization of premiums on investments | (9,743) | 4,436 | (9,595) | |||||||||||||||||
| Accretion of discount on unsecured notes (Note 5 and 6) | 1,264 | 1,042 | 667 | |||||||||||||||||
| Amortization of deferred financing costs | 7,251 | 8,580 | 10,837 | |||||||||||||||||
| Payment-in-kind interest | (75,521) | (55,657) | (43,635) | |||||||||||||||||
| Structuring fees | (27,795) | (10,148) | (4,240) | |||||||||||||||||
| Change in operating assets and liabilities: | ||||||||||||||||||||
| Payments for purchases of investments | (984,497) | (753,522) | (656,668) | |||||||||||||||||
| Proceeds from sale of investments and collection of investment principal | 829,687 | 956,901 | 627,978 | |||||||||||||||||
| (Increase) decrease in due from broker | (11,488) | (1,063) | 3,029 | |||||||||||||||||
| (Increase) decrease in interest receivable, net | (863) | 14,792 | (6,721) | |||||||||||||||||
| (Increase) decrease in other receivables | (259) | 3,220 | (1,459) | |||||||||||||||||
| Decrease (increase) in prepaid expenses | 176 | (195) | (69) | |||||||||||||||||
| Decrease in due from affiliate | — | — | 88 | |||||||||||||||||
| Increase (decrease) in due to broker | 14,853 | 1 | (6,159) | |||||||||||||||||
| Increase (decrease) in due to Prospect Capital Management | 6,131 | (4,044) | (2,520) | |||||||||||||||||
| Increase (decrease) in accrued expenses | 1,503 | (1,766) | (12) | |||||||||||||||||
| (Decrease) increase in interest payable | (1,707) | (5,038) | 363 | |||||||||||||||||
| (Decrease) increase in due to Prospect Administration | (2,165) | 5,115 | (327) | |||||||||||||||||
| (Decrease) increase in other liabilities | (1,545) | 1,090 | (578) | |||||||||||||||||
Net Cash Provided by Operating Activities | 31,019 | 429,438 | 223,838 | |||||||||||||||||
| Financing Activities | ||||||||||||||||||||
| Borrowings under Revolving Credit Facility (Note 4) | 1,092,861 | 1,245,000 | 1,178,154 | |||||||||||||||||
| Principal payments under Revolving Credit Facility (Note 4) | (973,460) | (1,174,464) | (1,048,154) | |||||||||||||||||
| Issuances of Public Notes, net of original issue discount (Note 6) | 692,063 | — | 220,092 | |||||||||||||||||
| Repurchase of Public Notes (Note 6) | (362,394) | (446) | (153,536) | |||||||||||||||||
| Redemptions of Convertible Notes (Note 5) | (199,679) | (292,890) | (271,258) | |||||||||||||||||
| Issuance of Convertible Notes (Note 5) | — | — | 201,250 | |||||||||||||||||
| Issuances of Prospect Capital InterNotes® (Note 7) | 188,390 | 233,988 | 236,971 | |||||||||||||||||
| Redemptions of Prospect Capital InterNotes®, net (Note 7) | (359,908) | (261,458) | (290,196) | |||||||||||||||||
| Financing costs paid | (16,595) | (7,897) | (28,725) | |||||||||||||||||
| Proceeds from issuance of preferred stock, net of underwriting costs | 125,874 | — | — | |||||||||||||||||
| Offering costs from issuance of preferred stock | (3,548) | — | — | |||||||||||||||||
| Proceeds from issuance of common stock, net of underwriting costs | — | 6,146 | — | |||||||||||||||||
| Dividends paid and distributions to stockholders | (195,574) | (239,954) | (245,096) | |||||||||||||||||
| Net Cash Used in Financing Activities | (11,970) | (491,975) | (200,498) | |||||||||||||||||
| Net Increase (Decrease) in Cash | 19,049 | (62,537) | 23,340 | |||||||||||||||||
| Cash at beginning of year | 44,561 | 107,098 | 83,758 | |||||||||||||||||
| Cash at End of year | $ | 63,610 | $ | 44,561 | $ | 107,098 | ||||||||||||||
| Supplemental Disclosures | ||||||||||||||||||||
| Cash paid for interest | $ | 123,809 | $ | 143,785 | $ | 145,364 | ||||||||||||||
| Purchases of investments settled net of proceeds from sale of investments | $ | — | $ | 61,086 | $ | — | ||||||||||||||
| Non-Cash Financing Activities | ||||||||||||||||||||
| Value of shares issued through reinvestment of dividends | $ | 81,379 | $ | 24,941 | $ | 18,365 | ||||||||||||||
| Cost basis of investments written off as worthless | $ | — | $ | 12,139 | $ | 371 | ||||||||||||||
| Year Ended June 30, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Operating Activities | |||||||||||
| Net increase in net assets resulting from operations | $ | 252,906 | $ | 103,362 | $ | 346,339 | |||||
| Net realized losses (gains) on extinguishment of debt | 7,011 | (224 | ) | 3,950 | |||||||
| Net realized losses on investments | 96,306 | 24,417 | 180,423 | ||||||||
| Net change in unrealized (gains) losses on investments | (50,141 | ) | 243,573 | (167,965 | ) | ||||||
| Amortization of discounts and (accretion of premiums), net | 88,827 | 84,087 | 87,638 | ||||||||
| Accretion of discount on Public Notes (Note 6) | 269 | 200 | 213 | ||||||||
| Amortization of deferred financing costs | 13,013 | 13,561 | 14,266 | ||||||||
| Payment-in-kind interest | (17,808 | ) | (20,531 | ) | (29,277 | ) | |||||
| Structuring fees | (12,929 | ) | (9,393 | ) | (20,916 | ) | |||||
| Change in operating assets and liabilities: | |||||||||||
| Payments for purchases of investments | (1,458,733 | ) | (921,679 | ) | (1,817,284 | ) | |||||
| Proceeds from sale of investments and collection of investment principal | 1,413,882 | 1,311,375 | 1,411,562 | ||||||||
| Increase (decrease) in due to broker | 49,414 | (25,821 | ) | 26,778 | |||||||
| (Decrease) increase in due to Prospect Capital Management | (5,900 | ) | 51,599 | 2,547 | |||||||
| Decrease in interest receivable, net | 2,568 | 8,281 | 1,589 | ||||||||
| (Decrease) increase in interest payable | (2,174 | ) | 1,145 | 2,200 | |||||||
| Increase (decrease) in accrued expenses | 2,121 | (1,149 | ) | (1,382 | ) | ||||||
| (Decrease) increase in other liabilities | (1,536 | ) | (1,080 | ) | 980 | ||||||
| (Increase) decrease in other receivables | (756 | ) | 2,717 | (298 | ) | ||||||
| (Increase) in due from affiliate | (14 | ) | — | — | |||||||
| (Increase) decrease in prepaid expenses | (270 | ) | (98 | ) | 2,071 | ||||||
| Increase (decrease) in due to Prospect Administration | 145 | (2,473 | ) | 2,030 | |||||||
Net Cash Provided by Operating Activities | 376,201 | 861,869 | 45,464 | ||||||||
| Financing Activities | |||||||||||
| Borrowings under Revolving Credit Facility (Note 4) | 635,000 | 615,000 | 1,567,000 | ||||||||
| Principal payments under Revolving Credit Facility (Note 4) | (635,000 | ) | (983,700 | ) | (1,290,300 | ) | |||||
| Issuances of Public Notes, net of original issue discount (Note 6) | 37,466 | 161,364 | — | ||||||||
| Redemptions of Public Notes (Note 6) | — | — | (102,600 | ) | |||||||
| Redemptions of Convertible Notes (Note 5) | (366,433 | ) | (150,500 | ) | (7,668 | ) | |||||
| Issuance of Convertible Notes (Note 5) | 225,000 | — | — | ||||||||
| Issuances of Prospect Capital InterNotes® (Note 7) | 138,882 | 88,435 | 125,696 | ||||||||
| Redemptions of Prospect Capital InterNotes®, net (Note 7) | (67,196 | ) | (7,069 | ) | (85,606 | ) | |||||
| Financing costs paid and deferred | (10,012 | ) | (6,968 | ) | (6,793 | ) | |||||
| Cost of shares repurchased under stock repurchase program | — | (34,140 | ) | — | |||||||
| Proceeds from issuance of common stock, net of underwriting costs | — | — | 146,085 | ||||||||
| Offering costs from issuance of common stock | — | 118 | (644 | ) | |||||||
| Dividends paid | (333,623 | ) | (336,637 | ) | (414,833 | ) | |||||
| Net Cash Used in Financing Activities | (375,916 | ) | (654,097 | ) | (69,663 | ) | |||||
| Net Increase (Decrease) in Cash | 285 | 207,772 | (24,199 | ) | |||||||
| Cash at beginning of year | 317,798 | 110,026 | 134,225 | ||||||||
| Cash at End of year | $ | 318,083 | $ | 317,798 | $ | 110,026 | |||||
| Supplemental Disclosures | |||||||||||
| Cash paid for interest | $ | 153,740 | $ | 152,817 | $ | 153,982 | |||||
| Non-Cash Financing Activities | |||||||||||
| Value of shares issued through reinvestment of dividends | $ | 25,116 | $ | 19,638 | $ | 14,681 | |||||
| Cost basis of investments written off as worthless | $ | 86,605 | $ | 25,138 | $ | 123,555 | |||||
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS
(in thousands, except share data)
| June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Portfolio Company | Industry | Investments(1) | Acquisition Date(44) | Coupon/Yield | Floor | Legal Maturity | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | |||||||||||||||||||||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | |||||||||||||||||||||||||||||||||||
| Control Investments (greater than 25.00% voting control)(46) | |||||||||||||||||||||||||||||||||||
| CP Energy Services Inc. (20) | Energy Equipment & Services | Senior Secured Term Loan | 10/1/2017 | 12.00% (3ML+ 11.00%) | 1.00 | 1/31/2024 | $ | 41,422 | $ | 41,422 | $ | 41,422 | 1.0% | (10)(39) | |||||||||||||||||||||
| Senior Secured Term Loan A to Spartan Energy Services, LLC | 10/20/2014 | 9.00% (1ML+ 8.00%) | 1.00 | 12/31/2022 | 15,656 | 15,656 | 15,656 | 0.4% | (10) | ||||||||||||||||||||||||||
| Series A Preferred Units to Spartan Energy Holdings, Inc. (10,000 shares) | 9/25/2020 | — | N/A | — | 26,193 | 11,210 | 0.3% | (16) | |||||||||||||||||||||||||||
| Series B Convertible Preferred Stock (790 shares) | 10/30/2015 | — | N/A | — | 63,225 | 3,199 | 0.1% | (16) | |||||||||||||||||||||||||||
| Common Stock (102,924 shares) | 8/2/2013 | — | N/A | — | 86,239 | — | —% | (16) | |||||||||||||||||||||||||||
| 232,735 | 71,487 | 1.8% | |||||||||||||||||||||||||||||||||
| Credit Central Loan Company, LLC (21) | Consumer Finance | Subordinated Term Loan | 12/28/2012 | 10.00% plus 10.00% PIK | — | 6/26/2024 | 68,137 | 65,599 | 68,137 | 1.7% | (14)(39) | ||||||||||||||||||||||||
| Class A Units (14,867,312 units) | 12/28/2012 | — | N/A | — | 19,331 | 9,886 | 0.3% | (14)(16) | |||||||||||||||||||||||||||
| Net Revenues Interest (25% of Net Revenues) | 1/28/2015 | — | N/A | — | — | — | —% | (14)(16) | |||||||||||||||||||||||||||
| 84,930 | 78,023 | 2.0% | |||||||||||||||||||||||||||||||||
| Echelon Transportation, LLC | Aerospace & Defense | Senior Secured Term Loan | 3/31/2014 | 11.75% (1ML+ 9.75%) plus 2.25% PIK | 2.00 | 3/31/2022 | 52,457 | 52,457 | 52,457 | 1.3% | (10)(39) | ||||||||||||||||||||||||
| Senior Secured Term Loan | 12/9/2016 | 11.00% (1ML+ 9.00%) plus 1.00% PIK | 2.00 | 12/7/2024 | 22,949 | 22,949 | 22,949 | 0.6% | (10)(39) | ||||||||||||||||||||||||||
| Membership Interest (100%) | 3/31/2014 | — | N/A | — | 22,738 | 8,834 | 0.2% | (16) | |||||||||||||||||||||||||||
| 98,144 | 84,240 | 2.1% | |||||||||||||||||||||||||||||||||
| First Tower Finance Company LLC (23) | Consumer Finance | First Lien Term Loan | 6/24/2014 | 10.00% plus 12.00% PIK | — | 6/24/2024 | 324,708 | 324,708 | 324,708 | 8.2% | (14)(39) | ||||||||||||||||||||||||
| Class A Units (95,709,910 units) | 6/14/2012 | — | N/A | — | 31,146 | 267,648 | 6.8% | (14)(16) | |||||||||||||||||||||||||||
| 355,854 | 592,356 | 15.0% | |||||||||||||||||||||||||||||||||
| Freedom Marine Solutions, LLC (24) | Energy Equipment & Services | Membership Interest (100%) | 11/9/2006 | — | N/A | — | 44,492 | 11,717 | 0.3% | (16) | |||||||||||||||||||||||||
| 44,492 | 11,717 | 0.3% | |||||||||||||||||||||||||||||||||
| InterDent, Inc. | Health Care Providers & Services | Senior Secured Term Loan A/B | 8/1/2018 | 11.85% (1ML+ 9.85%) | 2.00 | 9/5/2022 | 14,249 | 14,249 | 14,249 | 0.4% | (10) | ||||||||||||||||||||||||
| Senior Secured Term Loan A | 8/3/2012 | 6.50% (1ML+ 5.50%) | 1.00 | 9/5/2022 | 79,242 | 79,242 | 79,242 | 2.0% | (10) | ||||||||||||||||||||||||||
| Senior Secured Term Loan B | 8/3/2012 | 12.00% PIK | — | 9/5/2022 | 144,080 | 144,080 | 144,080 | 3.7% | (39) | ||||||||||||||||||||||||||
| Common Stock (99,900 shares) | 5/3/2019 | — | N/A | — | 45,118 | 174,768 | 4.4% | (16) | |||||||||||||||||||||||||||
| 282,689 | 412,339 | 10.5% | |||||||||||||||||||||||||||||||||
| Kickapoo Ranch Pet Resort | Diversified Consumer Services | Membership Interest (100%) | 8/26/2019 | — | N/A | — | 2,378 | 3,833 | 0.1% | (16) | |||||||||||||||||||||||||
| 2,378 | 3,833 | 0.1% | |||||||||||||||||||||||||||||||||
| MITY, Inc. (25) | Commercial Services & Supplies | Senior Secured Note A | 9/19/2013 | 10.00% (3ML+ 7.00%) | 3.00 | 4/30/2025 | 29,867 | 29,867 | 29,867 | 0.8% | (10)(39) | ||||||||||||||||||||||||
| Senior Secured Note B | 6/23/2014 | 10.00% (3ML+ 7.00%) plus 10.00% PIK | 3.00 | 4/30/2025 | 16,098 | 16,098 | 16,098 | 0.4% | (10)(39) | ||||||||||||||||||||||||||
| Subordinated Unsecured Note to Broda Enterprises ULC | 9/19/2013 | 10.00% | — | 1/1/2028 | 5,949 | 7,200 | 3,715 | 0.1% | (14) | ||||||||||||||||||||||||||
| Common Stock (42,053 shares) | 9/19/2013 | — | N/A | — | 27,349 | — | —% | (16) | |||||||||||||||||||||||||||
| 80,514 | 49,680 | 1.3% | |||||||||||||||||||||||||||||||||
| June 30, 2017 | ||||||||||||
| Portfolio Company | Locale / Industry | Investments(1) | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | ||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | ||||||||||||
| Control Investments (greater than 25.00% voting control)(49) | ||||||||||||
| Arctic Energy Services, LLC(18) | Wyoming / Energy Equipment & Services | Class D Units (32,915 units)(16) | $ | 31,640 | $ | 17,370 | 0.5% | |||||
| Class E Units (21,080 units)(16) | 20,230 | — | —% | |||||||||
| Class A Units (700 units)(16) | 9,006 | — | —% | |||||||||
| Class C Units (10 units)(16) | — | — | —% | |||||||||
| 60,876 | 17,370 | 0.5% | ||||||||||
| CCPI Inc.(19) | Ohio / Electronic Equipment, Instruments & Components | Senior Secured Term Loan A (10.00%, due 12/31/2020)(3) | 2,966 | 2,966 | 2,966 | 0.1% | ||||||
| Senior Secured Term Loan B (12.00% plus 7.00% PIK, due 12/31/2020)(3)(48) | 18,216 | 18,216 | 18,216 | 0.5% | ||||||||
| Common Stock (14,857 shares) | 6,759 | 21,870 | 0.7% | |||||||||
| 27,941 | 43,052 | 1.3% | ||||||||||
| CP Energy Services Inc.(20) | Oklahoma / Energy Equipment & Services | Series B Convertible Preferred Stock (1,043 shares)(16) | 98,273 | 72,216 | 2.2% | |||||||
| Common Stock (2,924 shares)(16) | 15,227 | — | —% | |||||||||
| 113,500 | 72,216 | 2.2% | ||||||||||
| Credit Central Loan Company, LLC(21) | South Carolina / Consumer Finance | Subordinated Term Loan (10.00% plus 10.00% PIK, due 6/26/2019)(14)(48) | 51,855 | 45,255 | 51,855 | 1.5% | ||||||
| Class A Units (10,640,642 units)(14)(16) | 13,731 | 9,881 | 0.3% | |||||||||
| Net Revenues Interest (25% of Net Revenues)(14)(16) | — | 2,699 | 0.1% | |||||||||
| 58,986 | 64,435 | 1.9% | ||||||||||
| Echelon Aviation LLC | New York / Aerospace & Defense | Senior Secured Term Loan (11.75% (LIBOR + 9.75% with 2.00% LIBOR floor) plus 2.25% PIK, due 3/31/2022)(10)(13)(48) | 31,055 | 31,055 | 31,055 | 0.9% | ||||||
| Senior Secured Term Loan (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor) plus 1.00% PIK, due 12/7/2024)(10)(13)(48) | 16,044 | 16,044 | 16,044 | 0.5% | ||||||||
| Membership Interest (99%) | 22,738 | 24,219 | 0.7% | |||||||||
| 69,837 | 71,318 | 2.1% | ||||||||||
| Edmentum Ultimate Holdings, LLC(22) | Minnesota / Diversified Consumer Services | Second Lien Revolving Credit Facility to Edmentum, Inc. – $7,834 Commitment (5.00%, due 6/9/2020)(15) | 7,834 | 7,834 | 7,834 | 0.2% | ||||||
| Unsecured Senior PIK Note (8.50% PIK, due 6/9/2020)(48) | 6,905 | 6,905 | 6,905 | 0.2% | ||||||||
| Unsecured Junior PIK Note (10.00% PIK, in non-accrual status effective 1/1/2017, due 6/9/2020) | 31,870 | 23,829 | 31,870 | 1.0% | ||||||||
| Class A Units (370,964 units)(16) | 6,577 | 286 | —% | |||||||||
| 45,145 | 46,895 | 1.4% | ||||||||||
| First Tower Finance Company LLC(23) | Mississippi / Consumer Finance | Subordinated Term Loan to First Tower, LLC (10.00% plus 7.00% PIK, due 6/24/2019)(14)(48) | 261,114 | 261,114 | 261,114 | 7.8% | ||||||
| Class A Units (93,997,533 units)(14)(16) | 78,481 | 104,474 | 3.1% | |||||||||
| 339,595 | 365,588 | 10.9% | ||||||||||
| Freedom Marine Solutions, LLC(24) | Louisiana / Energy Equipment & Services | Membership Interest (100%)(16) | 42,610 | 23,994 | 0.7% | |||||||
| 42,610 | 23,994 | 0.7% | ||||||||||
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
| June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Portfolio Company | Industry | Investments(1) | Acquisition Date(44) | Coupon/Yield | Floor | Legal Maturity | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | |||||||||||||||||||||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | |||||||||||||||||||||||||||||||||||
| Control Investments (greater than 25.00% voting control)(46) | |||||||||||||||||||||||||||||||||||
| National Property REIT Corp. (26) | Equity Real Estate Investment Trusts (REITs) / Online Lending / Structured Finance | Senior Secured Term Loan A | 12/31/2018 | 4.44% (3ML+ 1.44%) plus 3.53% PIK | 3.00 | 12/31/2023 | $ | 473,276 | $ | 473,276 | $ | 473,276 | 12.0% | (10)(39) | |||||||||||||||||||||
| Senior Secured Term Loan B | 12/31/2018 | 5.00% (3ML+ 2.00%) plus 5.50% PIK | 3.00 | 12/31/2023 | 6,600 | 6,600 | 6,600 | 0.2% | (10)(39) | ||||||||||||||||||||||||||
| Senior Secured Term Loan C | 10/31/2019 | 11.00% (3ML+ 10.00%) plus 2.25% PIK | 1.00 | 12/31/2023 | 90,200 | 90,200 | 90,200 | 2.3% | (10)(39) | ||||||||||||||||||||||||||
| Senior Secured Term Loan D | 6/19/2020 | 3.50% (3ML+ 0.50%) plus 2.50% PIK | 3.00 | 12/31/2023 | 183,425 | 183,425 | 183,425 | 4.6% | (10)(39) | ||||||||||||||||||||||||||
| Residual Profit Interest | 12/31/2018 | — | N/A | — | — | 34,507 | 0.9% | (35) | |||||||||||||||||||||||||||
| Common Stock (3,254,594 shares) | 12/31/2013 | — | N/A | — | 210 | 401,747 | 10.2% | (45) | |||||||||||||||||||||||||||
| 753,711 | 1,189,755 | 30.2% | |||||||||||||||||||||||||||||||||
| Nationwide Loan Company LLC (27) | Consumer Finance | First Lien Term Loan | 6/18/2014 | 10.00% plus 10.00% PIK | — | 6/18/2022 | 20,260 | 20,260 | 20,260 | 0.5% | (14)(39) | ||||||||||||||||||||||||
| Class A Units (38,550,460 units) | 1/31/2013 | — | N/A | — | 20,846 | 27,733 | 0.7% | (14)(16) | |||||||||||||||||||||||||||
| 41,106 | 47,993 | 1.2% | |||||||||||||||||||||||||||||||||
| NMMB, Inc. (28) | Media | Delayed Draw Term Loan - $10,000 Commitment | 3/25/2020 | 10.50% (3ML+ 8.50%) | 2.00 | 12/30/2024 | — | — | — | —% | (10)(15) | ||||||||||||||||||||||||
| Senior Secured Note | 12/30/2019 | 10.50% (3ML+ 8.50%) | 2.00 | 12/30/2024 | 4,874 | 4,874 | 4,874 | 0.1% | (3)(10) | ||||||||||||||||||||||||||
| Common Stock (21,418 shares) | 12/30/2019 | — | N/A | — | 12,869 | 42,014 | 1.1% | (16) | |||||||||||||||||||||||||||
| 17,743 | 46,888 | 1.2% | |||||||||||||||||||||||||||||||||
| Pacific World Corporation (36) | Personal Products | Revolving Line of Credit - $26,000 Commitment | 9/26/2014 | 8.25% (1ML+ 7.25%) | 1.00 | 9/26/2025 | 20,825 | 20,825 | 20,825 | 0.5% | (10)(15) | ||||||||||||||||||||||||
| Senior Secured Term Loan A | 12/31/2014 | 6.25% PIK (1ML+ 5.25%) | 1.00 | 9/26/2025 | 41,625 | 41,625 | 41,625 | 1.1% | (10)(39) | ||||||||||||||||||||||||||
| Convertible Preferred Equity (287,021 shares) | 6/15/2018 | — | N/A | — | 186,795 | 8,647 | 0.2% | (16) | |||||||||||||||||||||||||||
| Common Stock (6,778,414 shares) | 9/29/2017 | — | N/A | — | — | — | —% | (16) | |||||||||||||||||||||||||||
| 249,245 | 71,097 | 1.8% | |||||||||||||||||||||||||||||||||
| R-V Industries, Inc. | Machinery | Senior Secured Term Loan | 12/15/2020 | 10.00% (3ML+ 9.00%) | 1.00 | 12/15/2028 | 28,622 | 28,622 | 28,622 | 0.7% | (3)(10) | ||||||||||||||||||||||||
| Common Stock (745,107 shares) | 6/26/2007 | — | N/A | — | 6,866 | 21,071 | 0.5% | (16) | |||||||||||||||||||||||||||
| 35,488 | 49,693 | 1.2% | |||||||||||||||||||||||||||||||||
| Universal Turbine Parts, LLC (34) | Trading Companies & Distributors | Delayed Draw Term Loan - $5,000 Commitment | 2/28/2019 | 10.25% (1ML+ 7.75%) | 2.50 | 4/5/2024 | 3,173 | 3,173 | 3,173 | 0.1% | (10)(15) | ||||||||||||||||||||||||
| Senior Secured Term Loan A | 7/22/2016 | 6.75% (3ML+ 5.75%) | 1.00 | 4/5/2024 | 29,575 | 29,575 | 23,933 | 0.6% | (10) | ||||||||||||||||||||||||||
| Preferred Units (47,244,213 units) | 3/31/2021 | — | N/A | — | 32,500 | — | —% | (16) | |||||||||||||||||||||||||||
| Common Stock (10,000 units) | 12/10/2018 | — | N/A | — | — | — | —% | (16) | |||||||||||||||||||||||||||
| 65,248 | 27,106 | 0.7% | |||||||||||||||||||||||||||||||||
| USES Corp. (30) | Commercial Services & Supplies | Senior Secured Term Loan A | 3/31/2014 | 9.00% PIK | — | 7/29/2024 | 55,117 | 30,651 | 31,815 | 0.8% | (9) | ||||||||||||||||||||||||
| Senior Secured Term Loan B | 3/31/2014 | 15.50% PIK | — | 7/29/2024 | 77,483 | 35,568 | — | —% | (9) | ||||||||||||||||||||||||||
| Senior Secured Term Loan | 12/30/2020 | 10.00% (1ML+ 9.00%) | 1.00 | 7/29/2024 | 2,000 | 2,000 | 2,000 | 0.1% | (10) | ||||||||||||||||||||||||||
| Common Stock (268,962 shares) | 6/15/2016 | — | N/A | — | — | — | —% | (16) | |||||||||||||||||||||||||||
| 68,219 | 33,815 | 0.9% | |||||||||||||||||||||||||||||||||
| Valley Electric Company, Inc. (31) | Construction & Engineering | Senior Secured Note to Valley Electric Co. of Mt. Vernon, Inc. | 12/31/2012 | 8.00% (3ML+ 5.00%) plus 2.50% PIK | 3.00 | 12/31/2024 | 10,430 | 10,430 | 10,430 | 0.3% | (3)(10)(39) | ||||||||||||||||||||||||
| Senior Secured Note | 6/24/2014 | 8.00% plus 10.00% PIK | — | 6/23/2024 | 33,301 | 33,301 | 33,301 | 0.8% | (39) | ||||||||||||||||||||||||||
| Consolidated Revenue Interest (2.0%) | 6/22/2018 | — | N/A | — | — | 1,857 | —% | (12) | |||||||||||||||||||||||||||
| Common Stock (50,000 shares) | 12/31/2012 | — | N/A | — | 26,204 | 104,107 | 2.6% | ||||||||||||||||||||||||||||
| 69,935 | 149,695 | 3.7% | |||||||||||||||||||||||||||||||||
| Total Control Investments (Level 3) | $ | 2,482,431 | $ | 2,919,717 | 74.0% | ||||||||||||||||||||||||||||||
| June 30, 2017 | ||||||||||||
| Portfolio Company | Locale / Industry | Investments(1) | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | ||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | ||||||||||||
| Control Investments (greater than 25.00% voting control)(49) | ||||||||||||
| MITY, Inc.(25) | Utah / Commercial Services & Supplies | Senior Secured Note A (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor), due 1/30/2020)(3)(10)(11) | $ | 26,250 | $ | 26,250 | $ | 26,250 | 0.8% | |||
| Senior Secured Note B (10.00% (LIBOR + 7.00% with 3.00% LIBOR floor) plus 10.00% PIK, due 1/30/2020)(3)(10)(11)(48) | 24,442 | 24,442 | 24,442 | 0.7% | ||||||||
| Subordinated Unsecured Note to Broda Enterprises ULC (10.00%, due on demand)(14) | 5,659 | 7,200 | 5,659 | 0.2% | ||||||||
| Common Stock (42,053 shares) | 6,849 | 20,161 | 0.6% | |||||||||
| 64,741 | 76,512 | 2.3% | ||||||||||
| National Property REIT Corp.(26) | Various / Equity Real Estate Investment Trusts (REITs) / Online Lending | Senior Secured Term Loan A (6.00% (LIBOR + 4.00% with 2.00% LIBOR floor) plus 5.50% PIK, due 4/1/2019)(10)(11)(48) | 291,315 | 291,315 | 291,315 | 8.7% | ||||||
| Senior Secured Term Loan E (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor) plus 5.00% PIK, due 4/1/2019)(10)(11)(48) | 122,314 | 122,314 | 122,314 | 3.6% | ||||||||
| Senior Secured Term Loan C to ACL Loan Holdings, Inc. (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor) plus 5.00% PIK, due 4/1/2019)(10)(11)(14)(48) | 59,722 | 59,722 | 59,722 | 1.8% | ||||||||
| Senior Secured Term Loan C to American Consumer Lending Limited (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor) plus 5.00% PIK, due 12/15/2020)(10)(11)(14)(48) | 87,130 | 87,130 | 87,130 | 2.6% | ||||||||
| Common Stock (2,280,992 shares)(16) | 229,815 | 338,046 | 10.1% | |||||||||
| Net Operating Income Interest (5% of Net Operating Income) | — | 88,777 | 2.6% | |||||||||
| 790,296 | 987,304 | 29.4% | ||||||||||
| Nationwide Loan Company LLC(27) | Illinois / Consumer Finance | Senior Subordinated Term Loan to Nationwide Acceptance LLC (10.00% plus 10.00% PIK, due 6/18/2019)(14)(48) | 16,819 | 16,819 | 16,819 | 0.5% | ||||||
| Class A Units (32,456,159 units)(14) | 18,183 | 20,126 | 0.6% | |||||||||
| 35,002 | 36,945 | 1.1% | ||||||||||
| NMMB, Inc.(28) | New York / Media | Senior Secured Note (14.00%, due 5/6/2021) | 3,714 | 3,714 | 3,714 | 0.1% | ||||||
| Senior Secured Note to Armed Forces Communications, Inc. (14.00%, due 5/6/2021) | 6,900 | 6,900 | 6,900 | 0.2% | ||||||||
| Series A Preferred Stock (7,200 shares)(16) | 7,200 | 5,713 | 0.2% | |||||||||
| Series B Preferred Stock (5,669 shares)(16) | 5,669 | 4,498 | 0.1% | |||||||||
| 23,483 | 20,825 | 0.6% | ||||||||||
| R-V Industries, Inc. | Pennsylvania / Machinery | Senior Subordinated Note (10.30% (LIBOR + 9.00% with 1.00% LIBOR floor), due 3/31/2022)(3)(10)(11) | 28,622 | 28,622 | 28,622 | 0.9% | ||||||
| Common Stock (745,107 shares) | 6,866 | 4,056 | 0.1% | |||||||||
| 35,488 | 32,678 | 1.0% | ||||||||||
| SB Forging Company II, Inc. (f/k/a Gulf Coast Machine & Supply Company)(29) | Texas / Energy Equipment & Services | Series A Convertible Preferred Stock (99,900 shares)(16) | — | 1,940 | 0.1% | |||||||
| Common Stock (100 shares)(16) | — | — | —% | |||||||||
| — | 1,940 | 0.1% | ||||||||||
See notes to consolidated financial statements.
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
| June 30, 2021 | |||||||||||||||||||||||||||||||||||
| Portfolio Company | Industry | Investments(1) | Acquisition Date(44) | Coupon/Yield | Floor | Legal Maturity | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | |||||||||||||||||||||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | |||||||||||||||||||||||||||||||||||
| Affiliate Investments (5.00% to 24.99% voting control)(47) | |||||||||||||||||||||||||||||||||||
| Nixon, Inc. (32) | Textiles, Apparel & Luxury Goods | Common Stock (857 units) | 5/12/2017 | — | N/A | $ | — | $ | — | $ | — | —% | (16) | ||||||||||||||||||||||
| — | — | —% | |||||||||||||||||||||||||||||||||
| PGX Holdings, Inc. (6) | Diversified Consumer Services | First Lien Term Loan | 11/13/2020 | 6.25% (12ML+ 5.25%) plus 4.25% PIK | 1.00 | 9/29/2023 | 47,746 | 45,720 | 47,746 | 1.2% | (3)(10)(39) | ||||||||||||||||||||||||
| 1.5 Lien Term Loan | 5/27/2020 | 14.50% PIK (12ML+ 13.50%) | 1.00 | 6/28/2024 | 18,164 | 18,164 | 18,164 | 0.5% | (10)(39) | ||||||||||||||||||||||||||
| Second Lien Term Loan | 9/29/2014 | 15.75% PIK (1ML+ 14.75%) | 1.00 | 9/29/2024 | 122,272 | 122,272 | 122,272 | 3.1% | (10)(39) | ||||||||||||||||||||||||||
| Common Stock (40,780,359 shares) | 5/27/2020 | — | N/A | — | — | 124,907 | 3.2% | (16) | |||||||||||||||||||||||||||
| 186,156 | 313,089 | 8.0% | |||||||||||||||||||||||||||||||||
| RGIS Services, LLC | Commercial Services & Supplies | Senior Secured Term Loan | 6/25/2020 | 8.50% (1ML+ 7.50%) | 1.00 | 6/25/2025 | 3,680 | 3,680 | 3,680 | 0.1% | (8)(10) | ||||||||||||||||||||||||
| Membership Interest (5.11%) | 6/25/2020 | — | N/A | — | 10,302 | 13,760 | 0.3% | (16) | |||||||||||||||||||||||||||
| 13,982 | 17,440 | 0.4% | |||||||||||||||||||||||||||||||||
| Targus Cayman HoldCo Limited (33) | Textiles, Apparel & Luxury Goods | Common Stock (7,383,395 shares) | 2/12/2016 | — | N/A | — | 2,805 | 26,205 | 0.6% | (16) | |||||||||||||||||||||||||
| 2,805 | 26,205 | 0.6% | |||||||||||||||||||||||||||||||||
| Total Affiliate Investments (Level 3) | $ | 202,943 | $ | 356,734 | 9.0% | ||||||||||||||||||||||||||||||
| June 30, 2017 | ||||||||||||
| Portfolio Company | Locale / Industry | Investments(1) | Principal Value | Amortized Cost | Fair Value(2) | % of Net Assets | ||||||
| LEVEL 3 PORTFOLIO INVESTMENTS | ||||||||||||
| Control Investments (greater than 25.00% voting control)(49) | ||||||||||||
| USES Corp.(30) | Texas / Commercial Services & Supplies | Senior Secured Term Loan A (9.00% PIK, in non-accrual status effective 4/1/2016, due 7/22/2020) | $ | 31,068 | $ | 28,604 | $ | 12,517 | 0.4% | |||
| Senior Secured Term Loan B (15.50% PIK, in non-accrual status effective 4/1/2016, due 7/22/2020) | 41,475 | 35,568 | — | —% | ||||||||
| Common Stock (268,962 shares)(16) | — | — | —% | |||||||||
| 64,172 | 12,517 | 0.4% | ||||||||||
| Valley Electric Company, Inc.(31) | Washington / Construction & Engineering | Senior Secured Note to Valley Electric Co. of Mt. Vernon, Inc. (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor) plus 2.50% PIK, due 12/31/2024)(3)(10)(11)(48) | 10,430 | 10,430 | 10,430 | 0.3% | ||||||
| Senior Secured Note (10.00% plus 8.50% PIK, due 6/23/2024)(48) | 25,624 | 25,624 | 22,079 | 0.7% | ||||||||
| Common Stock (50,000 shares)(16) | 26,204 | — | —% | |||||||||
| 62,258 | 32,509 | 1.0% | ||||||||||
| Wolf Energy, LLC(32) | Kansas / Energy Equipment & Services | Membership Interest (100%)(16) | — | — | —% | |||||||
| Membership Interest in Wolf Energy Services Company, LLC (100%)(16) | 6,801 | 5,662 | 0.1% | |||||||||
| Net Profits Interest (8% of Equity Distributions)(4)(16) | — | 15 | —% | |||||||||
| 6,801 | 5,677 | 0.1% | ||||||||||
| $ | 1,840,731 | $ | 1,911,775 | 57.0% | ||||||||
| Affiliate Investments (5.00% to 24.99% voting control)(50) | ||||||||||||
| Nixon, Inc.(39) | California / Textiles, Apparel & Luxury Goods | Senior Secured Term Loan (11.50% PIK, in non-accrual status effective 7/1/2016, due 11/12/2022)(8) | $ | 16,499 | $ | 14,197 | $ | — | —% | |||
| Common Stock (857 units)(16) | — | — | — | —% | ||||||||
| 14,197 | — | —% | ||||||||||
| Targus International, LLC(33) | California / Textiles, Apparel & Luxury Goods | Senior Secured Term Loan A (15.00% PIK, due 12/31/2019)(8)(48) | 1,532 | 1,320 | 1,532 | —% | ||||||
| Senior Secured Term Loan B (15.00% PIK, due 12/31/2019)(8)(48) | 4,596 | 3,961 | 4,596 | 0.1% | ||||||||
| Common Stock (1,262,737 shares)(16) | 3,479 | 5,301 | 0.2% | |||||||||
| 8,760 | 11,429 | 0.3% | ||||||||||
| $ | 22,957 | $ | 11,429 | 0.3% | ||||||||
See notes to consolidated financial statements.