• Prospect Capital Corp.'s investment portfolio risk has increased in our view, reflecting elevated levels of loans on nonaccrual status and unrealized depreciation, particularly in some of its largest holdings.
  • We are revising our outlook on Prospect to negative from stable, and we are affirming our 'BBB-' issuer credit and senior unsecured debt ratings.
  • The negative outlook reflects our expectation that we could lower the ratings if investment portfolio performance further deteriorates or debt to adjusted total equity approaches 1.50x.

NEW YORK (S&P Global Ratings) Sept. 16, 2019--S&P Global Ratings said today it revised the outlook on Prospect Capital Corp. (PSEC) to negative from stable. At the same time we affirmed our 'BBB-' issuer credit and senior unsecured debt ratings.

The outlook revision primarily reflects elevated risk in PSEC's investment portfolio, in our view. Nonaccruals at cost represented 11.5% of loans as of June 30, 2019, which compares unfavorably to similarly rated business development company peers. Although only six names are nonaccrual status, they include some of PSEC's largest investments, including InterDent and Pacific World Corp., which are PSEC's third- and fourth-largest investments at cost. CP Energy Services Inc., an oilfield services company that is carried at an unrealized loss of $75 million, is now PSEC's fifth-largest investment following the merger with Arctic Energy and acquisition of a majority interest in Spartan Energy. Furthermore, PSEC's top five investments at cost represent 54% of adjusted total equity (ATE), excluding National Property REIT Corp. (NPRC), which includes 60 underlying properties and PSEC's online consumer lending portfolio.

We believe we are late in the credit cycle, so the risk of further losses in leveraged lending in general is increasing in our view, and PSEC's investments in collateralized loan obligation residual interests, which accounted for about 15% of its investment portfolio as of June 30, 2019, are subject to heightened volatility in a downturn. Positively, NPRC, which is carried at an unrealized gain of $235 million, has generated strong results in its real estate portfolio. Also, PSEC had unrealized appreciation of about $135 million as of June 30, 2019, on First Tower Finance, its largest investment after NPRC.

The ratings continue to reflect PSEC's strong capital position, favorable funding profile, scale, and diversified origination capabilities. Reported debt to equity was 0.72x as June 30, 2019, and debt to ATE was 1.09x. Our measure of ATE deducts from reported equity investments in subordinated structured notes and equity in finance companies. We continue to view PSEC's largely unsecured funding profile favorably. The company's unsecured debt is well laddered with little refinancing risk due to the modest size of individual maturities and significant undrawn capacity on revolving credit facility. PSEC had $167 million outstanding on the credit facility as of June 30, 2019, which was recently extended to September 2024 with a $1.1 billion commitment that can be increased to $1.5 billion via its accordion feature. Our ratings continue to reflect PSEC's broad capabilities and diversified origination strategies.

The negative outlook reflects the risk of increasing losses in PSEC's investment portfolio, reflecting an elevated level of loans at cost on nonaccrual status, investment concentration within its top five positions, and holdings of subordinated structured notes. We expect PSEC will maintain a 200% asset coverage requirement, debt to ATE comfortably below 1.50x, and adequate liquidity to meet unsecured debt maturities.

We could lower the ratings over the next 12-24 months if:

  • Investment portfolio performance deteriorates, as indicated by rising realized or unrealized losses, loans on nonaccrual status, or increases in payment in kind;
  • Debt to ATE approaches 1.50x or higher; or
  • Investment portfolio concentrations increase.

We could revise the outlook to stable if the risk of loss in PSEC's investment portfolio subsides in our view, and the company maintains debt to ATE comfortably below 1.5x while maintaining its current funding and liquidity profile. We would view a reduction in investment portfolio concentration and loans on nonaccrual status favorably.

Related Criteria

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Matthew T Carroll, CFA, New York (1) 212-438-3112;
matthew.carroll@spglobal.com
Secondary Contact:Gaurav A Parikh, CFA, New York + 1 (212) 438 1131;
gaurav.parikh@spglobal.com

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