DBRS Morningstar Affirms Prospect Capital Corporation Ratings at BBB (Low); Stable trend
The company’s intrinsic rating (IA) is BBB (low), while its support rating is SA3, making the final rating in line with the IA. The trend on all ratings is stable.
KEY SCORING CONSIDERATIONS
The ratings reflect the company’s good franchise, underpinned by its long presence in the industry and its strong management team, diversified funding profile and low leverage. Over the past year, PSEC has expanded its investment portfolio through strong acquisition volumes while posting strong profits. The ratings also take into account the degree of risk of the Company’s investment portfolio due to its significant exposure to subordinated investments as well as concentrations in real estate, consumer credit and structured investments.
The stable trend reflects our expectation that PSEC will continue to show strong operating performance accompanied by risk management discipline and prudence in capital management, including maintaining its leverage within its range. target. That said, a significant overflow on the
Strengthening of the risk profile through a greater proportion of senior loans in
The firm’s strong franchise is underpinned by its long track record of expertise, scale, broad origination platform and a diverse set of investment strategy capabilities. PSEC is one of the oldest and largest business development companies (BDC) with approximately two decades in business,
The Company has historically demonstrated a consistent and resilient ability to generate earnings. PSEC’s investment portfolio has also generated fairly stable returns (defined as net investment income relative to average investments at cost) over the past five years of around 5%, slightly above the group median from DBRS Morningstar BDC peers. Nevertheless, a notable portion of interest income comes from interest in kind (PIK) and equity investments in CLOs. Specifically, in 1HFY22 (six months ended
We consider PSEC’s risk profile to be high given its significant exposure to inherently riskier subordinated debt and equity investments. Specifically, as of YE21, of the total investment portfolio (at FV), subordinated secured debt represented 19.5%, subordinated structured notes 10.6%, while equity positions represented 23.1% . Collectively, the portion of these subordinated and equity investments represented nearly 53% of the investment portfolio, essentially unchanged year-over-year, and compared to the DBRS Morningstar BDC peer median of about 20%. Additionally, nearly 38% of PSEC’s debt investments are associated with non-sponsored supported companies. That said, the Company’s portfolio risk exposure is partially mitigated by its well-established risk management processes, integrated into investment opportunity assessment, underwriting, monitoring as well as restructuring capabilities. We also welcome the Company’s engagement with independent valuation firms to determine the FV of each portfolio company on a quarterly basis. The credit performance of the investment portfolio improved slightly over the past year, with defaults as a percentage of the total portfolio at cost at 2.6% in YE21, compared to 3.5% in YE20.
The Company has a strong funding profile from diversified funding sources and a large investor base. PSEC’s funding profile is also supported by a low balance sheet burden and a staggered debt maturity profile that is well aligned with the maturities of the investment portfolio. At YE21, senior unsecured debt of
The company has a history of disciplined balance sheet management by maintaining leverage near or even below its desired target levels and mostly below the DBRS Morningstar peer median. In YE21, PSEC’s leverage ratio, defined as debt to equity and including preferred shares in total equity, was 0.52x, significantly below its target leverage of 0.70x at 0, 85x (based on net debt and reported as such 0.51x at YE21). In addition, PSEC has a fairly large regulatory capital buffer of approximately
A description of how DBRS Morningstar considers ESG factors in the DBRS Morningstar analytical framework is available in DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.
All figures are in
The main methodology is the Global Rating Methodology for Non-Banking Financial Institutions (
Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (
The primary sources of information used for this rating are Morningstar, Inc. and company documents. DBRS Morningstar considers that the information available to it for the purpose of providing this rating was of satisfactory quality.
The rated entity or its related entities participated in the rating process for this rating metric. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
Generally, conditions that lead to a negative or positive trend assignment are resolved within 12 months. DBRS Morningstar’s outlook and ratings are monitored regularly.
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Date Issued Debt Rated Action Rating Trend Attributesi
US = Lead Analyst based in the USA
CA = Lead Analyst based in
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21-Apr-22Long-Term Issuer Rating Confirmed BBB (low) Stb US
21-Apr-22Long-Term Senior Debt Confirmed BBB (low) Stb US