Prospect Capital Corp (PSEC)

Prospect Capital Corp (NASDAQ:PSEC) has performed well relative to its BDC peers during the recent credit market dislocation due primarily to its energy focus (67% of its portfolio is invested in


energy) and avoidance of syndicated loans. PSEC completed a $50MM equity offering in May and plans to grow its portfolio through an increased focus on sponsor-driven transactions. While energy will continue to remain a core focus the company, PSEC is planning on continuing to diversify away from energy in an


effort to de-risk its portfolio while attracting new investors to its platform.





PSEC currently enjoys an above average asset yield (16.8% as of 3/31/08), which affords the company solid coverage of its common stock dividend (12.5% yield as of market close on Fri., 7/11/08). This compares to asset yields of 11.2% for Ares Capital Corporation (NASDAQ:ARCC) and 12.0% for Apollo Investment Corp. (NASDAQ:AINV). PSEC’s above average yield is a function of (1) its smaller target market (less competition) and (2) incrementally greater credit risk. Ceteris paribus, greater asset yields should help to preserve margins and improve return on equity.





There is also hidden value embedded in PSEC’s portfolio, which could provide some potential upside for shareholders. Specifically, PSEC is currently exploring the sale of one of its wholly owned portfolio companies, Gas Solutions. Based on publicly traded comparables, Gas Solutions is currently undervalued on PSEC's balance sheet. A successful sale of Gas Solutions could be a significant near-term catalyst for PSEC, as it could garner an estimated realized gain to shareholders of $4-6 per share.