Prospect Capital Corporation ($PSEC)

Good morning, and welcome to the Prospect Capital Third Quarter 2026 Earnings Release and Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to John Barry, Chairman and CEO. Please go ahead, sir.

Thank you, Drew. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

Thanks, John. This call contains forward-looking statements that are intended to be subject to safe harbor protection. Future results are highly likely to vary materially. We do not undertake to update our forward-looking statements. For additional disclosure, see our earnings press release and 10-Q filed previously and available on our website, prospectstreet.com. Now I'll turn the call back over to John.

Thank you, Kristin. In the March quarter, our net investment income, or NII, was $78 million or $0.16 per common share. Our NAV was approximately $3 billion or $6.05 per common share. At March 31, our net debt to total assets ratio was 27%. Unsecured debt plus unsecured perpetual preferred was 88% of total debt plus preferred. We are announcing monthly common shareholder distributions of $0.035 per share for each of May, June, July and August. Since our IPO nearly 22 years ago, through our August 2026 declared distribution, we will have distributed approximately $4.8 billion or $22.07 per share. Our preferred shareholder cash distributions continue at their contract rates. We continue to progress our strategic priorities, including rotation of assets into an increased focus on our core business of first lien senior secured middle market loans with our first lien mix increasing 790 basis points to 72% since June 2024. We are focusing on new investments in companies with less than $50 million of EBITDA, including companies with smaller funded private equity sponsors, independent sponsors and no third-party financial sponsors. Number two, reduction in second lien senior secured middle market loans with our second lien mix decreasing 404 basis points to 12.4% since June 2024 exiting subordinated structured notes with our subordinated structured notes mix decreasing 837 basis points to near 0 since June 2024. Number four, exiting targeted equity-linked assets, including real estate, with 5 additional properties sold in the current fiscal year and certain corporate investments, including the exit of Echelon Transportation in February 2026, with other exits targeted and in progress. Number five, enhancement of portfolio company operating performance and profitability, including through adoption of artificial intelligence and automation initiatives focused on enhancing revenues and reducing costs. And number six, utilization of our cost-effective floating rate revolver, which significantly matches our floating rate assets. Thank you. I will now turn the call over to Grier.

Thank you, John. Over the past 2 decades, Prospect Capital Corporation has invested approximately $13.4 billion in over 350 exited investments out of over $22 billion invested in over 450 total investments that have earned a 12% unlevered investment level gross cash IRR to Prospect Capital Corporation. This multi-decade time period predates and includes the GSE and has been dominated in general by low prevailing market interest rates. In Prospect's primary business of middle market lending over the same nearly 22-year time period, Prospect's exited investments resulted in an investment level exited gross IRR of approximately 14.4% based on total capital invested of approximately $11.4 billion and total proceeds from such exit investments of about $14.7 billion, with an annualized realized loss rate of 20 basis points. In Prospect's core targeted business of middle market lending to companies with less than $50 million of EBITDA over the same nearly 22-year time period, Prospect's exited investments resulted in an investment level exited gross IRR of approximately 16.9% based on total capital invested of around $6.5 billion and total proceeds from such exit investments of about $8.6 billion with an annualized net realized loss rate of 10 basis points. Prospect's EBITDA to interest coverage for our primary business of middle market lending is about 205%, which increases to around 230% for Prospect's core targeted middle market lending to companies with less than $50 million of EBITDA. As of March 2026, we held 89 portfolio companies across 31 different industries with an aggregate fair value of $6.3 billion. Our portfolio at fair market value included 2.5% of investments in software companies, which is significantly less than the 23% average across BDCs with publicly traded unsecured bonds from the Wall Street Fixed Income Research report in the last couple of months. We primarily focus on senior and secured debt, which was 84% of our portfolio at cost as of March. Our middle market lending strategy is the primary focus of our company with such strategy as of March, representing 85% of our investments at cost, an increase of 875 basis points in our business mix from June of 2024. Middle market lending comprised 94% of our originations during the March quarter with a continued focus on first lien senior secured loans. Investments during the quarter included follow-on investments in existing portfolio companies to support acquisitions, working capital needs, organic growth initiatives and other objectives. We've essentially completed the exit of our subordinated structured notes portfolio as of March, with such portfolio representing nearly 0% of our investment portfolio at cost and representing a reduction of 837 basis points from 8.4% in June of 2024. Our real estate property portfolio at National Property REIT Corp. NPRC totaled 14% of our investments at cost as of March and continue to focus on developed and occupied cash flow multifamily investments. Since inception of this strategy 14 years ago in 2012 and through March of 2026, we have exited 57 property investments, earning an unlevered investment level gross cash IRR of 24% and cash-on-cash multiple of 2.4x. We exited 5 property investments in the current fiscal year through March 2026, earning an unlevered investment level gross cash IRR of 18% and cash and cash multiple of 2.3x. The remaining real estate property portfolio included 53 properties and paid us an income yield of 5.2% for the March quarter, providing an opportunity for potential income enhancement at Prospect from a portfolio rotation strategy into more corporate first lien senior secured middle market originations. Prospect's aggregate investment in NPRC included a $229 million unrealized gain as of March. We expect to continue to redeploy future real estate property exit proceeds primarily into more first lien senior secured loans with selected equity-linked investments. Our interest income for the 12-month period ending March 2026 was 92% of total investment income, reflecting a strong recurring revenue profile of our business. Payment-in-kind interest income for the last 12-month period ending March 2026 was reduced by 41% for the prior 12-month period and was 11% of total investment income for the quarter. Nonaccruals as a percentage of total assets as of March stood at around 0.7% based on fair market value, consistent with the prior quarter. Investment originations in the March quarter aggregated $115 million and consisted of 94% middle market investments with a significant majority first lien senior secured loans. We also experienced $222 million in repayments and exits as a validation of our capital preservation objective, resulting in net repayments of $107 million. Thank you. I'll now turn the call over to Kristin. Kristin?

Thanks, Grier. We believe our prudent leverage, diversified access to matched book funding, substantial majority of unencumbered assets, weighting toward unsecured fixed rate debt and avoidance of unfunded asset commitments all demonstrate balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 25 years into the future. On October 30, 2025, we successfully completed the institutional issuance of approximately $168 million in aggregate principal amount of senior unsecured 5.5% notes due 2030, which mature on December 31, 2030. Our unfunded eligible commitments to portfolio companies totaled approximately $28 million, of which $17 million are considered at our sole discretion, representing approximately 0.4% and 0.3% of our total assets as of March 2026, respectively. Our combined balance sheet cash and undrawn revolving credit facility commitments stood at $1.8 billion as of March, and we held $4.2 billion of our assets as unencumbered assets, representing approximately 65% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, a nonrecourse SPV. We currently have $2.12 billion of commitments from 48 banks, demonstrating strong support of our company from the lender community with a diversity unmatched by any other company in our industry. The facility does not mature until June 2029 and revolves until June 2028. Our drawn pricing continues to be SOFR plus 2.05%. Outside of our revolver, we have access to diversified funding sources across multiple investor types and have successfully issued securities in an array of markets. Prospect has issued multiple types of unsecured debt, institutional nonconvertible bonds, institutional convertible bonds, retail baby bonds and retail program notes. All of these types of unsecured debt have no asset restrictions and no cross defaults with our revolver. We've tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 25 years with our debt maturities extending through 2052. With so many banks and debt investors across so many unsecured and nonrecourse debt tranches, we have substantially reduced our counterparty risk. At March 31, 2026, our weighted average cost of unsecured debt financing was 4.71%. Now I'll turn the call back over to John.

Kristin, thank you very much. We can now answer any questions.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to John Barry, Chairman and CEO, for any closing remarks.

Okay. Well, thank you, everyone. Have a wonderful day and a wonderful weekend. Bye now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.