Prospect Capital Corporation Q2 FY2026 earnings call

Strategic Priorities

• Rotation of assets into first lien senior secured middle market loans, with first lien mix increasing to 71.4% since June 2024.
• Reduction in second lien senior secured middle market loans, with second lien mix decreasing to 12.7% since June 2024.
• Exiting subordinated structured notes, with subordinated structured notes mix decreasing to near 0 since June 2024.
• Exiting targeted equity-linked assets, including selling 5 additional real estate properties and certain corporate investments.
• Enhancement of portfolio company operations, especially where equity-linked investments are held.
• Utilization of cost-efficient floating rate revolver to match floating rate assets.

Financial and Investment Details

• Net investment income for December quarter was $91 million. NAV was approximately $3 billion. Announced monthly common shareholder distributions of $0.045 per share for February, March, and April. Middle market lending comprised 100% of originations during the December quarter with a focus on first lien senior secured loans. Exited subordinated structured notes portfolio, which represented 0.2% of investment portfolio at cost. Real estate portfolio at NPRC had an income yield of 5.4% in the December quarter.

In the December quarter, net investment income was $91 million or $0.19 per common share. NAV was approximately $3 billion, $6.21 per common share. Net debt to total assets ratio was 28.2%. Unsecured debt plus unsecured perpetual preferred was 85.3% of total debt plus preferred. The middle market lending strategy is the primary focus, representing 85% of investments at cost as of December, an increase of 878 basis points from June 2024. First lien mix increased 728 basis points to 71.4% since June 2024, second lien mix decreased 371 basis points to 12.7%, and subordinated structured notes mix decreased 818 basis points to near 0. The real estate property portfolio at National Property REIT Corp (NPRC) totaled 14% of investments at cost as of December, with an income yield of 5.4% for the December quarter.

Forward-Looking Statements

• Announced monthly common shareholder distributions of $0.045 per share for February, March, and April.
• Expect to continue to redeploy future real estate property exit proceeds primarily into more first lien senior secured loans with selected equity-linked investments.

• Market dynamics affecting convertible pref product line due to interest rate changes, with investors rotating towards fixed rate investments.
• Software exposure concerns for peers, but Prospect has historically avoided software, maintaining a lower exposure compared to BDC averages.

Q: To the extent that tax refunds are higher this year, do you anticipate that's a headwind to loan balances? And on Tower, is it part of the optimization strategy to exit equity-linked types of investments or still a firm hold?

A: John Barry stated they want to stick with great winners like First Tower with no current plans to exit. Michael Eliasek added they have no plans to exit Tower, mentioned tax advantages of holding it as a tax partnership, and discussed the favorable income and low delinquencies/charge-offs of Tower.

Q: Conversions of prefs are stable; impact from other products in the nontraded channel?

A: Michael Eliasek said interest rates are a factor, with investors rotating towards fixed rate investments, making fixed rate preferreds and bonds more compelling.

Q: View on software overhang and potential pivot into enterprise SaaS software?

A: John Barry said he's hesitant to comment on others' strategies, and Michael Eliasek explained Prospect's underwriting culture avoids software investments with low fixed charge coverage, maintaining less than 3% software exposure vs BDC average of ~22%.