Prospect Capital Plunges on First Dividend Cut Since 2017

(Bloomberg) — Shares of Prospect Capital Corp., a $7.6 billion publicly-traded private credit fund, tumbled more than 16% Friday after the firm cut its dividend for the first time in seven years. 

Prospect said in a statement that the 25% dividend cut is needed as it shifts holdings away from the riskiest slices of collateralized loan obligations and real estate investments into its core business of first-lien senior-secured loans and equity stakes in mid-sized companies.

The firm also attributed the dividend cut to the Federal Reserve’s recent rate reductions, which will lessen the amount of interest it gets from providing floating-rate loans. 

Prospect has faced increased scrutiny in recent months over the share of borrowers that pay it by accumulating more debt with the fund, its relationship with a real estate investment trust it fully controls and its reliance on retail investors for financing. In late September Moody’s Ratings cut the outlook on its Baa3 credit grade to negative, the second such revision by a ratings firm in as many weeks.

Analysts say the dividend cut — to 4.5 cents per share monthly from 6 cents per share — is likely in part an effort by the private credit fund to maintain its investment-grade rating.

Shares in the fund, which trades under the PSEC ticker, were down 16% on Friday at $4.41 as of 1:01 p.m. New York time, the lowest since May 2020.

Prospect reported net investment income of $89.9 million for its first fiscal quarter, a drop of 28% compared to the same period last year. Its net asset value per share, a measure of the value of its investments, dropped to $8.10 at the end the quarter, the lowest reading since 2020, according to data compiled by Bloomberg.

Prospect also significantly marked down several loans on its book, including to real estate investment trust National Property REIT Corp. and dental practice support provider InterDent Inc. The private credit firm wrote down its investment in market research firm Dynata, previously know as Research Now SSI, after the company emerged from Chapter 11 having extinguished almost 40% of its total debt.

A Bloomberg News analysis of data from fixed-income specialist Solve, which collects filings from publicly-traded private credit funds, previously found Prospect to be among the most reluctant firms to mark down their loans compared to peers.

Prospect Chief Executive Officer John F. Barry III also apologized to Wells Fargo & Co. analyst Finian O’Shea after Barry lashed out at him during the company’s previous earnings call for asking under what circumstances Prospect would force the conversion of some of its preferred stock into common shares.

“When the love of your life tells you after an earnings call, John, you shouldn’t have said that, you instantly know you shouldn’t have said that,” Barry said. “When you’ve been doing this for 37 years like I have, and founded Prospect from scratch, sometimes criticism of our people can feel unfair.”

When O’Shea asked a question during Friday’s earnings call, Barry said that he was no longer allowed to field questions. He then deferred to Prospect’s president and COO Grier Eliasek who took over.

(Updates with earnings call details in final paragraph. A previous version of this story corrected the new dividend amount)

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