Prospect Capital: Many Credit Challenges Remain Despite Higher Earnings
The problem we all have in evaluating any BDC's financial performance is that there are multiple metrics to consider which - sometimes - point in different directions. A case in point are Prospect Capital's (PSEC) latest results which saw the long troubled BDC boost its recurring earnings per share to $0.19, up from $0.17 in the prior two quarters, which were multi-year lows. On the other hand, PSEC's net asset value per share (NAVPS) dropped by (3.7%) quarter over quarter. (By the way, that happens to be the biggest percentage decrease we've recorded in the BDC NAV Change Table so far for the IVQ 2025 versus the prior period).
Investors seem to have focused on the earnings and pushed up PSEC's stock price by 11% since the numbers were published. Maybe that's the right response and maybe not. We thought we'd quickly review where PSEC's credit performance stands to allow anyone interested to get a full picture.AGENDA
Big Losses
As recently covered in the BDC Credit Reporter, the BDC took a ($66.2mn) realized loss on a portfolio company of long standing - USES Corp - in the IVQ 2025. Besides USES, the BDC also booked an even bigger realized loss - ($73.5mn) - on United Sporting Goods - another "control" investment that began liquidating its assets in 2019...Both companies had been on non-accrual as of the IIIQ 2025, and United Sporting remains there, but with a much smaller balance. USES is "performing" but almost exclusively in PIK form and is valued at a material discount, so further losses could be forthcoming.
More
Then there are significant unrealized losses booked this quarter, as this extract from its most recent 10-Q shows:
As noted earlier, the BDC's net asset value per share fell (3.7%), and brings NAVPS loss in the past 12 months to (20.8%). However, if we leave out the write-up of PSEC's "control" position in First Tower - a consumer finance company - which the BDC lends to at a rate of 16.0%, PSEC's NAVPS drop would have been (5.9%) in the last 3 months. (We treat the write-up with a degree of skepticism because of the BDC's full control of the business).
Longer Term Trends
Since the end of FY 2022, which ended in June of that year, PSEC has booked net realized losses of ($1.12bn). That amounts to about a quarter of the BDC's par equity. 12% of those realized losses were booked this quarter.
Looking Forward
The realized losses at USES and United Sporting were likely part of PSEC's long-announced strategic re-positioning, which includes "exiting targeted equity-linked assets". However, investors must be asking themselves: "Are we done yet?"
The evidence seems to suggest otherwise. We've compiled a list of 13 PSEC portfolio companies whose value is below 70% of cost in a table below. Note that companies on non-accrual are marked with an asterisk.
| Portfolio Company | Business | Cost (in thousands) | Fair Value (in thousands) | FMV % of Cost |
| CP Energy Services Inc. | Energy Equipment & Services | $332,200 | $133,060 | 40.1% |
| Pacific World Corporation | Personal Care Products | $352,251 | $107,626 | 30.6% |
| Credit Central Loan Company, LLC | Consumer Finance | $123,744 | $83,156 | 67.2% |
| Aventiv Technologies, LLC* | Diversified Telecommunication | $134,423 | $77,984 | 58.0% |
| Echelon Transportation, LLC | Trading Companies & Distributors | $77,327 | $29,526 | 38.2% |
| Medical Solutions Holdings, Inc. | Health Care Providers & Services | $54,442 | $21,785 | 40.0% |
| Redstone Holdco 2 LP | IT Services | $49,623 | $20,500 | 41.3% |
| STG Distribution, LLC* | Air Freight & Logistics | $74,906 | $15,529 | 20.7% |
| Credit.com Holdings, LLC* | Diversified Consumer Services | $115,977 | $13,350 | 11.5% |
| USES Corp | Commercial Services & Supplies | $21,102 | $10,708 | 50.7% |
| Victor Technology, LLC | Commercial Services & Supplies | $10,800 | $5,972 | 55.3% |
| Rising Tide Holdings, Inc. | Specialty Retail | $32,638 | $5,740 | 17.6% |
| First Brands Group* | Automobile Components | $69,702 | $2,727 | 3.9% |
| TOTALS | $1,449,135 | $527,663 | 36.4% |
PSEC: Troubled Companies IVQ 2025
Proportion
Outside of CLO securities - now a negligible part of the portfolio in terms of value - PSEC has 73 portfolio companies. Apparently, going by this table, nearly 20% are credit-troubled. At cost, these entities involve 23% of the portfolio and 8% at FMV.
Other Considerations
We won't speculate here on the ultimate value of these 13 companies. That's the purview of the BDC Credit Reporter. Nor can we tell if there are other companies valued at greater than 70% that might contribute to losses down the line. However, we did note that PSEC booked ($50mn) in unrealized losses on National Property REIT, an entity that overall continues to be valued at a $270mn premium to its cost:
To each their own. Clearly some investors are delighted by the unexpected increase in PSEC's recurring earnings. (We will point out, though, that the boost has everything to do with a surge in dividend payments from "Controlled Companies" even as interest income continued to decline). Others, though, could be concerned that PSEC's eroding NAVPS - down (43%) since the IIQ 2022 - could continue, eventually impacting both book value and earnings power. BOTH SIDES NOW