Prospect Capital Corporation 2026 Q4 Earnings Call

Please go ahead. Thank you, Chloe.

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 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-K filed previously and available on our website prospectstreet.com.

John. Thank you, Kristin. In the June quarter, our net investment income, or NII, was $78 million, consistent with the prior quarter or $0.15 per common share.

Our NAV was approximately $2.9 billion or $5.71 per common share. At June 30, our net debt to total assets ratio was 28.6%. Unsecured debt plus unsecured perpetual preferred was 83.7% of total debt plus preferred. We are announcing monthly common shareholder distributions of $0.035 per share for each of September and October. Since our IPO 22 years ago, through our October 2026 declared distribution, we will have distributed over $4.8 billion or $22.14 per share. Our preferred shareholder cash distributions continue at their contractual rates. On July 1, 2026, Prospect closed the successful sale of its portfolio company, Valley Electric Company, Inc., with total consideration of approximately $328 million.

Over the life of the Valley Electric investment since 2012, and including expected net exit proceeds of approximately $281 million, together with prior interest on debt, equity distributions, and other cash flow streams, Prospect achieved a 20.5% realized gross annualized IRR and 4.8 times multiple of invested capital, the 13th highest IRR significant investment for Prospect Capital Corporation. If the cash received on July 1 from the sale of Valley Electric had been received previously and repaid borrowings under our revolver, the revolver's drawn amount would have been $323 million on June 30 on a pro forma basis. We are proud of our 38-year history of innovation and first to market accomplishments in alternative asset management, direct lending, and business development companies.

We continue to see many opportunities to deploy large language model, generative, predictive, machine learning, and other AI and automation tools across every one of Prospect's businesses and investment portfolios, including majority equity-owned companies and properties where Prospect captures upside from improvements. We believe these initiatives will capture economic upside from profit enhancements, both in terms of revenues and costs, and may result in tens of millions of dollars of annualized cash flow benefit, some of which we have already realized, and an even greater amount on a multiple driven value basis. We view artificial intelligence as a transformational once in a generation opportunity to enhance profitability and build on our longstanding culture of innovation and first to market leadership in the alternative asset management, direct lending, and business development company industries. We intend Prospect to be the leader applying transformative AI tools to all we do. Thank you. I'll now turn the call over to Grier.

Thank you, John. Over the past two decades, Prospect Capital Corporation has invested approximately $13.4 billion in over 350 exited investments out of approximately $23 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 includes the GFC and has been dominated, in general, by low prevailing market interest rates. In Prospect's primary business of middle-market lending over the same 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 around $11.5 billion and total proceeds from such exited investments of around $14.7 billion, with an annualized loss rate of 20 basis points. Prospect's middle-market portfolio companies compare favorably to peers across key credit metrics with lower net leverage, 4.9 turns versus 6.1 turns for peers.

Stronger cash interest coverage, 223% compared to 160% for peers, and a lower annualized net realized loss rate, 20 basis points versus 100 basis points. Together, these metrics demonstrate the portfolio's stronger credit profile and performance. As of June 2026, we held 91 portfolio companies across 31 different industries with an aggregate fair value of $6.3 billion. Our portfolio at fair market value included 2.3% of investments in software companies, significantly less than the 22% average across business development companies from a recent equity research report in June. We primarily focus on first lien senior secured debt, which was 84% of our portfolio at cost as of June. Our middle-market lending strategy is the primary focus of our company, with such strategy as of June representing 85% of our investments at cost.

Middle-market lending comprised 91% of our originations during the June quarter with a continued focus on first lien senior secured loans. Investments during the quarter included new first lien senior secured loan investments in Safety Solutions Financing, a provider of fire security products and services. Abacus Dermatology Management, a management services organization. Eyefive, a provider of on-demand product and order fulfillment services. As well as 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 June, with such portfolio representing around 0% of our investment portfolio at cost, a reduction of 840 basis points from 8.4% as of June 2024.

Our real estate property portfolio at National Property REIT Corp, or NPRC, totaled 14% of our investments at cost as of June and continued to focus on developed and occupied cash flow multifamily investments. Since inception of the strategy 14 years ago in 2012 and through June of 2026, we have exited nearly 60 property investments, earning an unlevered investment-level gross cash IRR of 24% and cash-on-cash multiple of 2.4 times. We exited six property investments in the most recently completed fiscal year through June 2026, earning an IRR of 18% and multiple of 2.3 times. The remaining real estate property portfolio included 52 properties, paying us an income yield of 5.3% for the June quarter, providing an opportunity for potential income enhancement from a portfolio rotation strategy.

Prospect's aggregate investments in NPRC included a $185 million unrealized gain as of June, and we expect to continue to redeploy future real estate property exit proceeds primarily into more first lien senior secured corporate loans with selected equity-linked investments. Our interest income for the 12-month period ending June 2026 was 91% of our total investment income, reflecting a strong recurring revenue profile for our business. Payment in kind interest income for the last 12-month period ending June 2026 has been reduced 53% for the 12-month period ending June of 2024, and with 10% of total investment income for the June 2026 fiscal year. Nonaccruals as a percentage of total assets as of June stood at approximately 0.7%, based on fair market value consistent with the prior quarter.