Prospect Capital Corporation Q1 FY2026 earnings call

• Net investment income was $79.4 million or $0.17 per common share, net asset value was $3 billion or $6.45 per common share, and net debt to total assets ratio was 28.2%.
• Announced monthly common shareholder distributions of $0.045 per share for November, December, and January. Over 20 years since IPO, over $4.6 billion or $21.79 per share distributed.
• Repositioning business with first lien mix increasing to 71.1%, second lien mix decreasing to 13.5%, and subordinated structured notes mix decreasing to 0.3% from June 2024. Focus on new investments in companies with <$50 million of EBITDA.
• Middle market lending strategy: 85% of investments at cost as of September 2025, first lien senior secured loans 81% of originations in the September quarter. Exited subordinated structured notes portfolio, remaining real estate portfolio has 55 properties with 5.1% income yield in Q3.
• Balance sheet strength: prudent leverage, diversified funding, $1.5 billion in combined balance sheet cash and undrawn revolving credit facility commitments, $4.2 billion unencumbered assets, and $2.12 billion of commitments from 48 banks.

In the September quarter, Prospect Capital's first lien senior secured middle market loans mix increased 701 basis points to 71.1% from June 2024. The second lien senior secured middle market loans mix decreased 292 basis points to 13.5% from June 2024. The subordinated structured notes mix decreased 808 basis points to 0.3% from June 2024. The real estate property portfolio at NPRC represented 14% of investments at cost as of September 2025, with 55 properties remaining and an income yield of 5.1% for the September quarter. The middle market lending strategy was 85% of investments at cost as of September 2025, with first lien senior secured loans totaling 81% of originations during the quarter. Net investment income was $79.4 million or $0.17 per common share, net asset value was $3 billion or $6.45 per common share, and net debt to total assets ratio was 28.2%.

• Announced monthly common shareholder distributions of $0.045 per share for November, December, and January.
• Expect to redeploy future asset sale proceeds primarily into more first lien senior secured loans with selected equity-linked investments.
• Locked in a ladder of liabilities extending 26 years into the future, successfully completed institutional issuance of approximately $168 million in senior unsecured 5.5% Notes due 2030 for refinancing.

• Counterparty risk due to reliance on multiple banks and debt investors.
• Market interest rate risk affecting yields and valuations.
• Competition in the upper middle market leading to lower returns and less favorable terms.

Q: I want to ask about the equity linked rotation. You've made some good progress there as you sort of embark on that. But seeing if you can give us color on how far it goes and what are maybe the sacred cows within a lot of that's in the control book, particularly one area, consumer finance, you're still putting money in. Those companies are doing well. But are there -- is that sort of what's supposed to remain? And/or how much or how much of the rest is sort of a candidate to move versus what you view as a strategic holding?

A: Sure. I'll take that. Go ahead, John. John Barry: No, no, please take it Grier. Michael Eliasek: Okay. So Finian, yes, we do like to make first lien and senior and secured loans to companies. And we do really increasing percentage of time like to have some portion of our paper as equity linked. Ideally without a trade-off involved, the best type, of course, is penny warrants, the free type. And then the next best is convertible debt that is still senior and secured, has the cash pay coupon pledgeable to our facility, but then has ups as well and then various types of convertible preferred that have coupons and liquidation preferences on top of third-party capital all the way to a some heads up capital. So our strategy is one of evaluating each investment in the book and looking at it on a foregone yield and foregone IRR. Including giving effect to accretion through our roughly S200 secured credit facility for those foregone returns at a price that we think is actionable with a third-party purchaser in the market that's the guidepost we use to make decisions to optimize the portfolio. And what that leads us to is to look to divest over time generally when you've had appreciated equity-linked assets and we're looking forward and maybe there's upside in the future, but not quite as much as we're not foregoing as much. And we're also paying careful attention to foregone yield as well, wanting to rotate and drive and optimize increase revenue, increase income for our business. The best candidate for that in our portfolio is real estate. I mentioned we've sold 55 properties. We have another 50 or so to go. Returns on recent exits sort of backward looking are fairly similar to the overall returns we've generated on the other 50 or so exits with IRRs in the low 20s and a multiple of invested capital generally above 2x cash on cash. But the extant book after giving effect within real estate to appreciation of value is generating about a 5% income yield. That, of course, is much lower than what we can achieve in the market for new originations. We are focused on smaller companies increasingly sub-$50 million EBITDA and really sub-$25 million to $35 million because there's so much competition in the upper middle market that is bid away spreads, that is bid away floors, that is bid away covenants, that is bid away earnings quality, that is bid away on strong documents, so many problems there that we intensely dislike. And so we're focused on the harder to originate but well worth it when you do smaller end. Our last dozen or so deals closed have had an average spread in the 700s compared to the upper middle market, which is decided with a 4 handle by comparison. We're getting much higher floors, generally above 300 basis points on those deals and look at what's happening with short-term rates were down to about 375 and folks are cutting distributions out there experiencing lower yields. What went up can and almost certainly will go down again from a floating rate perspective. So we can put money out at, call it, 10% to 12% unlevered in the lower middle market then we lever that in our S200 facility at a 50%, 60% advance rate. And we're talking about a 15% plus income yield return before giving effect to any equity-linked benefit. That 15% of course, is vastly superior on an income yield perspective, to the 5% I was quoting on real estate. So we view that as an earnings powerhouse that we're unleashing through that rotation that we're pursuing that doesn't mean we're going to dispose of the real estate portfolio liquidity split. We're doing so on a thoughtful, value maximizing basis on a bottoms-up look at different geographies, different properties, we concluded you maximize value by selling individual assets or smaller groups of assets as opposed to the whole. There's just a lot more buyers who can transact with individual assets as opposed to cut a multibillion dollar check. Usually, those guys look for significant bargains that were not too interested in parting with. So that's what's going on with real estate. We're seeing solid NOI growth. We've had about 7% NOI growth. And we're seeing tailwinds there as supply has diminished and look for us to continue to monetize assets in coming quarters. Then you have other assets on the corporate side, I'll divide that into non-financials and financials that you mentioned. We have a number of very successful nonfinancial deals where you have some equity-linked positions that have appreciated significantly. And again, when you look at on a foregone yield and IRR basis, we say, okay, we think it could make sense at the right price, the deal business is dynamic, and you never know exactly what the outcome will be. But at the right price, there's a potential transaction there. So we've got various processes that are ongoing there and we'll disclose that at the appropriate point should we find interesting exit points. And again, an unleashing of earnings power by rotating those appreciated assets into more in a diversified way of income-producing properties. In the financial book that you talked about, those are really, for the most part, long-term holds for multiple reasons. I mean, that doesn't mean we would say no. if some huge outlier bid came along. But we have substantial tax advantages that aren't enjoyed by other public companies because we're a BDC, we're a RIC, we pay no corporate taxes as long as, of course, we meet the regulatory requirements, which we have for our 20-plus year history and intend on continuing to do and we hold these financials as tax partnerships. So there's no taxes at the underlying portfolio company level. If these companies say, First Tower, for example, were to become its own public company, and it's large enough business that perhaps it could or could some day, it would need to be a corporate taxpayer under the regs, and that would be an erosion of value in any potential buyer would keep that in mind for their eventual exit. So we enjoy a very low cost of capital as the natural resting ground for financials. And just more important than that, we've had terrific success focusing on areas that are highly recurring and recession resilience. And I'm talking about installment lending, which is what First Tower and Credit Central and our latest deal, which is QCHI, all transacting. We do have a small auto book very small. That's been a tougher business. That's a scale business. It's less of a customer loyalty recurring cash flow business because in automobile purchase is episodic. But for these installment lenders, they're doing 50% to 75% plus of their business with current customers, and there's a substantial loyalty element that grounds the business and really creates low volatility. And as short-term rates are starting now to subside, that's a further tailwind for those businesses that utilize third-party ABL that's floating rate in nature. I think with Tower something like every 100 basis point reduction in SOFR increases pretax net income by somewhere in the range of $5 million to $10 million. And then, of course, there's a valuation benefit from that as well. So that's what we're after. We've made a lot of progress in the last year, Finian, exiting our structured credit book was a big part of that process. That book could become low yielding on a GAAP basis as well. And we're rotating and having great success with deals like the Ridge, deals like Verify Diagnostics, deals like Druid City, a Discovery Point, Taos and QC as equity link deals have had substantial write-ups year-to-date since we closed each of them. So the strategy is working well, and we're going to continue to execute on that game plan.

Q: Finian O'Shea: Awesome. Thank you, everybody. Congrats on the quarter.

A: Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for closing remarks. John Barry: Okay. Thank you, everyone. Have a wonderful day. Bye now. Michael Eliasek: Thanks all. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.