Prospect Capital's Q3 2025: Navigating Contradictions in Strategy, Leverage, and Yield

Portfolio rotation and investment strategy, financing strategy and diversification, leverage and liquidity, yield and diversification are the key contradictions discussed in Prospect Capital's latest 2025Q3 earnings call.



Dividend Coverage and Yield Optimization:
- Prospect Capital Corporation declared monthly common shareholder distributions of $0.45 per share for each of May, June, July, and August.
- The company's strategy to focus on lower middle market and traditional middle market lending, where spreads are wider, and SOFR floors are higher, aims to enhance net investment income.
- Additionally, rotating assets in the real estate portfolio and utilizing under-leveraged balance sheet capacity are being explored to further boost yields.

Portfolio Composition and Asset Performance:
- As of March 2025, Prospect held 114 portfolio companies with an aggregate fair value of $6.9 billion, 65.5% in first lien debt, 10.5% in senior secured second lien debt, 4.2% in subordinated structured notes, and 19.8% in unsecured debt and equity investments.
- The subordinated structured notes portfolio saw a reduction from 7.3% to 4.2% of the investment portfolio, with remaining investments earning an unlevered gross cash internal rate of return of 12.1% and a cash-on-cash multiple of 1.3x.
- The real estate property portfolio paid an income yield of 4.5% for the March quarter, with a total unrealized gain of $460 million.

Funding and Liquidity Management:
- Prospect has a ladder of liabilities extending 27 years into the future, with a weighted average cost of unsecured debt financing of 4.33%.
- The company has access to diversified funding sources, including multiple types of unsecured debt and a revolving credit facility with commitments from 48 banks.
- Unsecured term debt represents 78% of all Prospect's indebtedness, with a strong focus on reducing counterparty risk by issuing multiple types of debt with no financial covenants or asset restrictions.

Non-Accruals and Payment Performance:
- Prospect's non-accruals as a percentage of total assets stood at approximately 0.6% in March 2025.
- The company reported interest income of 93% of total investment income in the March quarter, reflecting a strong recurring revenue profile.
- The Payment in kind income for the quarter ended March was $19.5 million, down nearly 50% from the June 2024 quarter.