Prospect Capital Corporation (PSEC) Q3 2013 Earnings Report, Transcript and Summary

Good morning, and welcome to the Prospect Capital Corporation Third Fiscal Quarter Earnings Release and Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to John Barry. Please go ahead.

Thank you, Andrew. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Brian Oswald, our Chief Financial Officer. Brian?

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be subject to Safe Harbor Protection. Actual outcomes and results could differ materially from those forecasted due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release and our 10-Q filed previously. Now, I will turn the call back over to John.

Thanks, Brian. Our net investment income was up 90% year-over-year from $123 million to $230 million for the first three quarters of our current fiscal year. In the March quarter, we notched a record origination volume of $784 million. Net investment income for the March quarter was $60 million. On a weighted average per share basis, net investment income for the March 2013 quarter was $0.26. For the March 2012 quarter, our net investment income was $58 million or $0.51 per weighted average number of shares. NAV was $10 and $0.71 on March 31, 2013. Net of cash and equivalents, our debt-to-equity ratio was 44% in March and 29% in December. We estimate our net investment income per weighted average share in the current June quarter will be $0.26 to $0.32. We have substantial debt capacity and liquidity to drive future earnings through prudently increased levels of match book fundings. We have announced more shareholder distributions through August which will be our 61st shareholder distribution and our 38th consecutive per share monthly increase. Our net investment income has exceeded distributions for the current fiscal year to prior fiscal year, and the cumulative history of the company. For the current fiscal year, our net investment income in excess of distributions to shareholders was $42.5 million or $0.22 per share. We have now paid out $11.49 per share and $785 million in distributions over the life of the company. Thank you. I will now turn the call over to Grier.

Thanks, John. Our business continues to grow at a solid and prudent pace. As of today, we have now reached more than 4.6 billion of assets plus undrawn credits. Our team has increased to 75 professionals, representing one of the largest dedicated middle-market credit groups in the industry with our scale, longevity, experience and credit groups in the industry. With our scale, longevity, experience, and deep bench, we continue to focus on a diversified investment strategy that covers third-party private equity sponsor-related lending, direct non-sponsor lending, club and syndicated lending, prospect sponsored transactions, real estate yield investing, and structured credit. This diversity allows us to source a broad range and high volume of opportunities than selecting in a disciplined bottoms-up manner the opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a single-digit percentage of such opportunities. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans. Our approach is one that generates attractive risk-adjusted yields, and our debt investments, we're generating an annualized yield of 13.9% as of March 31. We also hold equity positions in many transactions that can act as yield enhancers or capital gains contributors as such positions generate distributions. Originations in the March 2013 quarter were a record 784 million, up approximately five times originations in the prior year March 2012 quarter. We also experienced a 103million of repayments as a nice validation of our capital preservation objective. As of March, we are up to a 120 portfolio companies, a 54% year-over-year increase and demonstrating both an increase in diversity as well as a migration toward both larger positions and larger portfolio of companies. We also continue to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. Our originations in the March 2013 quarter were weighted towards the last month of the quarter resulting in only a partial quarter positive income impact from such originations. We expect such originations to generate full quarter positive impact in the current June 2013 quarter. The majority of our portfolio consists of agented and self-originated middle market loans. In general, we perceive the risk-adjusted reward in the current environment to be superior for agented and self-originative opportunities compared to the syndicated market causing us to prioritize our proactive sourcing efforts. Our financial services controlled investments are performing well with annualized cash yields in excess of 18%, and our CLOs are currently yielding approximately 20% annualized. Today, we made a few investments in the real estate arena with our private REIT APH, largely focused on multi-family stabilized yield acquisitions with attractive 10-year financing. We hope to increase that activity with more in larger details in the months to come. During calendar-year 2012, we received significant dividend and interest income from our ESHI investments. Our income from ESHI in calendar year 2013 is significantly less than such income in calendar year 2012. We’re targeting to offset this decrease by utilizing existing liquidity and prudent leverage to finance our growth through new originations including attractive yielding investments in the financial services and other sectors. The current June quarter is off to a strong start with 164 million originations and a growing pipeline. Our credit quality continues to be robust, none of our loans originated in nearly six years has gone to non-accrual status. Non-accrual as a percentage of total assets stood at only 1.3% in March, down from 1.9% in June. Our advanced investment pipeline aggregates more than 600 million in potential opportunities, boding well for the coming months. Thank you. I'll now turn the call over to Brian.

Thanks Grier. As John discussed, we have grown our business with low leverage. Net of cash and equivalents, our debt-to-equity ratio stood at 44% in December. We believe our low leverage, diversified access to match book funding, vast majority of unencumbered assets, and weighting towards secured fixed rate debt demonstrates both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, conduct an ATM program, develop a notes program and acquire a competitor as we did with Patriot Capital. We also just issued the first institutional bond in our sector in six years. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction at the right hand side of our balance sheet. As of March, we held approximately $3.3 billion of our assets as unencumbered assets. The remaining assets are pledged to Prospect Capital Funding LLC, which has an AA rated $552.5 million revolver with 17 banks and with a $650 million total size accordion feature at our option. The revolver is priced at LIBOR plus 275 basis points and revolves for three years followed by two years of amortization with interest distributions allowed. We started the June 2012 quarter with a $410 million revolver in 10 banks. So, we haave seen significant lender interest as we have grown the revolver. Outside of our revolver and benefiting from our unencumbered assets, we have issued at Prospect Capital Corporation, multiple types of BBB-rated unsecured debt, including convertible bonds, a baby bond, an institutional bond, and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, and no cross defaults with our revolver. We have now tapped the 5-year to 30-year unsecured term debt market to extend our liability duration. We have no debt maturities until December 2015 with debt maturities extending through 2043. With so many banks and debt investors across so many debt tranches, we substantially reduced our counterparty risk over the years. As of today, we have issued 5 tranches of convertible bonds with staggered maturities that aggregate $847.5 million, have interest rates ranging from 5.38% to 6.25% and have conversion prices ranging from $11.35 to $12.76 per share. In the past, we have repurchased such bonds when we deem such purchases to be attractive for us. We have issued a $100 million, 6.95% baby bond due in 2022, and traded on the New York Stock Exchange with the ticker, PRY. On March 15, 2013, we issued $250 million in aggregate principal amount of 5.78% senior unsecured notes to March 2023. This was the first institutional bond issued in our sector in the last six years. We have issued $264 million of program notes with staggered maturities between 2019 and 2043 and a weighted average interest rate of 5.7%. From June 30 to today, in addition to our revolver expansion, program notes issuance and two convertible bond issues, one in August and one in December, we have issued equity at a premium to net asset value. From February 11 through May 7, we have sold approximately 17.2 million shares of our common stock in our ATM program at an average price of $11.14 per share and raised $191.9 million of gross proceeds. We currently have no borrowings under our revolver. Assuming sufficient asset are pledged to the revolver and that we are in compliance with all revolver terms in taking into account our cash balances on hand. We have approximately $740 million of new investment capacity. Now I will turn the call back to John.

Thank you, Brian. We can answer any questions.

(Operator Instructions) The first question comes from Jonathan Bock of Wells Fargo. Please go ahead.

Grier, one item as it relates to scalability. I know you have built quite a large franchise. Could you give us the number of MDs, VPs, and associates that you have at Prospect working in all different areas, and to maybe talk about your hiring needs just across the platform near term.

Our total head count is about 75 professionals, and what’s differentiated about us versus other externally managed BDCs in our marketplace is our BDC is a main event, this is really our primary area of focus as essentially close to a full-time endeavor for us. The break-out of 75 is about 45 approximately so called front office on the investment and credit staff and about 30 or so in the back office that includes our finance team, our legal team, our administration team, HR recruiting et cetera. And we are always looking for good and talented people, whether it's 2003 or 2013 it really doesn’t matter what year it is, so we’re always on the hunt for talented people, if you know if anyone listening to the call, please let us know we find outstanding people that are creative to our business. And we do think that scale Jonathan is a big advantage in what we do. We have noticed that in the last quarter, the March quarter, some of our peers and others in the marketplace were down in originations. They are referencing discipline as the reason for that. We consider ourselves pretty disciplined as well. We’re closing a single percentage of what of we see, and I think the reason that we have been successful in converting profitable deals is because we’re willing to invest in resources and hire people and build up our staff as opposed to others that may be flat-lining that and not making such investments. So, you have seen the return on that.

I’d like to jump in here and take advantage of this opportunity with your excellent question. The company is no more and no less in all the people that work here, we’re very alert to that. We’re very proud of the fact that we spent a lot of time with our people trying to ensure that they are happy here with us. We have not lost a single senior person that we wanted to have stay going back to 1999 that requires a lot of attention needless to say. I mean, if we have the lowest turnover of anybody that we compete with that I know about. As far as recruiting, our strategy with respect to recruiting is a little different, I think, than what you would normally see. We’re always recruiting people. We’re always looking for the best athletes, whether the person’s last job was a surgeon, a news announcer, a researching analyst, an investment banker, we want the very best people and we spent a large amount of time recruiting these people on my list as per today I’m just looking at it now, four people that I need to be meeting with or speaking to that are in various stages of possibly joining our company. So, anyone who feels that he or she could be additive to what we do should definitely contact us because we will be very interested regardless of experience, regardless of level. We look for people who are capable of adding to the franchise and enhancing shareholder value. That applies through thick and thin, and it’s really my number one job is to be constantly on the lookout for good people, because as you have noticed we have a huge book of assets to keep working hard for our shareholders and it won’t happen unless we keep hiring excellent people as we have been quite fortunate to have been able to do.

I mean, I appreciate that guys. Thank you. Now turning real quickly to…

By the way if you have any interest, let us know.

Okay, alright, I appreciate that. So, turning to First Tower, one quick question as it relates to the valuation, so we saw the valuation in the equity drop and generally valuation moves are important, and I notice that now there is an additive where I say a discounted cash flow valuation metric, that’s now being used in addition to comps, so, there is going to be a question there as it relates to what’s driving the mark in your view and have you seen any fundamental deterioration in the business?

Okay, Jonathan thanks for your question. By the way, the valuation process for our business since inception on equity-type positions has always used discounted cash flow in addition to comps, so there is nothing -- there is nothing new there.

Okay.

Tower is, I would describe a stable business in generating attractive yields. We have seen the growth there moderate. The business had been on a significant growth pattern for number of years, and we have basically seen that level off. So, there is the valuation maybe reflecting more of a growth aspect previously, and with that moderation, that market been taken down a bit, but the sort of EBITDA, the business is quite stable, and we are hoping to see growth commence again with the companies that are expanding into some new markets here in 2013, and it’s a pretty interesting thing going on with the company. So, from our perspective, we are going to read too much into that change in mark, and the business continues to be a solid dividend cash flow distributor to us.

Just a few follow-ups Grier, because I was just reading through and I appreciate the enhanced disclosure on First Tower, so I know you mentioned that there are total assets of $632 million and total financing receivables of $400 million which I would assume is the loan portfolio, but then maybe where I am not understanding it entirely is it says that there is roughly $264 million of debt ahead of Prospect, and I want to know is that total debt ahead of your credit line or is that $264 million inclusive of the revolver that you have out to First Tower?

No, that’s third-party ABL debt.

Okay, so we….

Typical for these types of businesses, they are asset rich companies and we are actually running that business with a fairly- low level of leverage. We are looking at some interesting things to do in that business as well potentially to secure ties. There was another company in the space a few months ago that did securitization in the installment area. So, that’s interesting to diversify beyond the bank’s market and add a little bit of longevity. These are not very long loans, long life loans, they are about two year fully amortizing loans, and the bank market terms are getting more attractive. We hope to actually drive that down over time, maybe as an alternative to securitization. We have got a lot of pretty attractive financing options to that business right now.

Well, that’s interesting because as we were pretty familiar with the space, and in terms of regulation, particularly just both the U.S. and UK do have fairly similar attributes in terms of how the regulatory agencies do react, and the UK limited rollovers, and the installment loan product, I understand it is not payday, but it is subjected to the same amount of rollover risk to a point where if the CSPB does shutdown rollovers, those ones come due and what happened in a company in our coverage ends up having a very high level of defaults that quarter rollover stopped. How does that risk look today and does that compromise in ability to securitize installment loans given the regulatory environment is really anybody’s best guess?

Sure. We analyze that risk pretty extensively as you can imagine in the almost a year we spent diligently in this company and five years that we spent diligently in the sector and being an debt investor and regional management which is another public company in the space. Tower is a different from other insolvent companies like some are in the public arena and that is a A-Loan lender it's not a B-Loan installment lender. B-Loan is a higher APR smaller loan somewhat less credit worthy, deeper subprime sector that’s not Tower, Tower is higher up on the credit quality spectrum, A-Loan lender, $2000 loan which is a little bit at the large end reflecting more credit worthy customers, two year loans. The existing customer refinancing rate is I think 50% and the range of that compared to maybe 75 for the B-Loan crowd. So you’re talking about a different portion within the installment sector, at least a couple of steps removed from pay day, those integral (ph) aspects of regulatory action thing a customer can’t refinance you know X number of times in a year, four times whatever it is, Tower would do just fine with that because it's not a heavy refinancing type model. It's different from other companies in the space. And we have had opportunities to look at those type of businesses for financing and acquisition and have shied away from the higher regulatory risk areas.

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Sure. Well we would like to see that cost to capital go down obviously overtime, we think we have been reflective protective in our issuance in an ATM product that tend to have less of a dampening effect as opposed to the GAAP down effective of marketed deals. What we wanted to do is to make sure we have got the ability to fund the pipeline in front of us and think of it over the long term strategically about driving profit through repeat business relationships with certain sponsors that come to us frequently wanted to make sure was there for the long term and if you’re there for the short term and come through on every deal but on the deal if it makes sense, you’re going to get make sure that business over the long term. They would also set this up with their scale to do differentiated things by having a larger equity base because we have had, we have been able to do things others haven't. For example during the first institutional bond deal in the sector, we also think we don’t get full recognition for how protective we have been in architecting the balance sheet at Prospect. When the next storm comes and it will come, it's not a question of if but when, we have built a very strong fortress here by having over 3 billion of bond convert assets and a entirely fixed rate financing structure on our term debt with no financial covenant. So we will be the ones going in offense when others are liquidity weak, when others are dealing with covenant breaches (ph) and alike we will have that balance sheet strength to give us. So we have equitized the business, today having said that Jonathan we recognize we have run in the business under-levered for quite sometime. And obviously, we get those comments frequently including people on the risk management credit side you are surprised saying well, you are pretty under-levered, you can move that up. And we appreciate that commentary, I think it reflects our carefulness and downside protection and how we approach the business, but because we have so much time in covered assets and fixed rate debt, that’s flexible, we can move that leverage ratio prudently up while still maintaining a healthy cushion versus the 1X regulatory limit that supported by our structure. So, by doing that Jonathan in a prudent way, we think that should be earnings accretive to us and drive that as estimated can grow. We also – we can’t necessarily talk about it in advance, so we are also continue to look at other interesting ways to drive earnings accretion on the financing side, and we hope to have more to announce on some pretty exciting initiatives in that regard in the coming quarters. So, we just can’t get talk about in this particular call.

Jonathan, this is John, and thank you again for that question. Our portfolio yields 13.9%, so heavy with the portfolio you required a lot of perspirations to maintain that. So, we are able to earn a spread over this 12% dividend, but this cost of capital does have our attention front in center. We are perplexed that our cost of capital is as high as it is on equity. We love to get through somebody a list of the reasons, why? So, we could not guess it what they are given how markets are, it provides you a list, so maybe you could provide us a list. And you could examine what’s best we could take. Right now, we only issue stock at a premium to NAV and at a cost of capital underneath the annualized yield of our portfolio. So, you are starting to do that. We are making money for our shareholders. Number two, our method of issuing securities is very cost effective as I believe you know. So, we are doing things that a person would do with his or her household in order to enhance the net worth of the family and it all could translate into advancing the network of the business which it does yet we are stuck with a cost of capital which we don’t have – how much person you are quite unhappy with. And I will be very interested in any observations or suggestions you have as to what the particularized causes might be. And I would be very interested in addressing, because we would like to get our cost of capital down.

I appreciate that. I mean, we always discuss that offline and I appreciate you answering my questions. Thank you.

Thanks, Jonathan.

The next question comes from Greg Mason of KBW. Please go ahead.

Great, good morning gentlemen. Thanks for taking my questions. Grier, could you talk about you have the ability to do both buy apps and just middle-market debt, what are you seeing in terms of the opportunities in those two categories and is one more attractive than the other today?

It’s hard to generalize, Greg, if you look at everything bottoms up, we can drive within middle-market debt at sub-segments and we talk about in the past, we sort of see three rough categories within the middle-market, lower middle market sub $10 million in EBITDA, traditional middle-market tend to say $40 million of EBITDA on 40 to 100 the upper middle market, you get into the equation I think in market.

We are far less excited about the upper middle-market syndicated market in which new covenants seemed to have disappeared from the market leverages popping up. We call it desperate lender syndrome, sort of like desperate housefly. People just seemed to have forgotten about risk sometimes in that marketplace. And so we shot away from that and you are seeing our average portfolio company size increased about $30 million EBITDA level. The interesting feedback continues to increase much over time to suspect that further increases might be tough just because of the efficiency that kick in when you get larger than that. In terms of buying versus financing directly to address your question our buyout business has always been highly opportunistic and special situation in nature. You’re not going to see us as a company getting on one of these calls bragging about closing 20% of (inaudible) options we see as others have done in this space before were highly uninterested in market share and in the volumes and that sort of thing and said highly interested in doing good deals. So, we have seen a pickup in a number of controlled deals that have been one or two a year for many years and then in the last year it has been in the range of closer to half a dozen still a minority of our deals. So we have about a 120 portfolio companies and small percentage of those are control ones but we do try to find ones that move the needle and there are situations in with some move to quickly and having the ability to win deal with both debt and equity is very attractive. You know selling your company and going through an auction with dozens of buyers to then hand you off a dozen of lenders on the double auction scenario and then maybe someone retrace the price at the last second and the deal collapses and you got nothing. It's pretty exhausting for a private company owner to go through and when we show up and say you’re just dealing with us as one party it's not always interesting to every last counter party but enough where we can find some pretty interesting deals. As to that tax advantages we have on the financial services, (inaudible) quite a strategic investors and you have got a pretty interesting control business for us that we expect to see continue. We have huge amount of capacity in our 50%, 10% plus voting control, BDC “control basket”.

Great and then one additional question on the real estate environment looks like post quarter end you did another roughly $20 million real estate acquisition, what are you seeing in that market and how quickly do you think you can continue to make investments in the real estate business?

I would describe our last six months as putting our toe in the water with experienced people but being very careful to get down our financial model, underwriting model and make sure we think we’re on the right path for our strategy. We really like the multi-family sector because of the diversity that’s involved there because we can get 10 year fixed rate financing from Fannie and Freddie and it's a spread business where we are evaluating the cap rate available to us and comparing that to the cost of financing and for oversight if we can lock in nice double digit yield over a 10 year period and also have a potential for upside through capital improvement program and rent enhancement, occupancy enhancement that’s the plus two. We work with operating partners there. They are very experienced and obviously run the day to day operations, it's a management intensive type of business and we are looking at other deals in this space. It's hard for me to say that we’re going to do X million filling what X is for this quarter next, but I would be surprised if we don’t see meaningful growth in that book in the next six to nine months.

The next question comes from Bo Ladyman of Raymond James. Please go ahead.

One on the competitive environment from the CLOs obviously the amount of CLOs originated over the past year has grown pretty substantially, could you give us an idea of how what the competitive environment looks like now versus six to 12 months ago?

Sure. Volumes are up and competition is up, both have occurred in tandem but we have continued to maintain a disciplined approach towards that market. Of the deals that we do are controlled deals which we control the call, we think that’s highly protective control the manager removal rate as well and they are all primary issuance so we continue to underwrite the collateral, sponging lower credit quality collateral so we have clean baskets from the get-go. And we continue to have a very high bar for collateral to manage our partners that we work with, only the top 10% to 25% need to fly. It has some pretty big brand name, AUM folks that we turned down that don’t have teams of work together across economic cycles and for a decade plus. So, you see a lot of repeat business that we are doing those relationships. Those relationships don’t see everything we built up, but they recognize that we have long-term capital that we our credit folks understand the space. We are not sort of a marquee hedge fund in one day, in one year, and up the next. And well, there is a consistent long-term player in the space. That portfolio continues to perform very well. We have I think $750 million loans in that portfolio spread across the 14 deals at this point, 15 in that range and zero defaults, not a single one, which granted we have been in a benign default environment, but we think zero is pretty good, but we would also doesn’t get appreciated, same thing we were closing as the deals gosh, you must be closing every deal they see, no we close a very small percentage of what we looked at in the CLO business, our model stipulations have to be hit, we don’t foresee. And it’s a pretty rigorous underwriting standard that is also not met.

Great, thank you. I appreciate that. One more on the CLS, CLO income was flat sequentially, I imagine that’s timing related, could you give us an idea on the current portfolio that you have what the seasonality of the income stream that we should expect?

There isn’t too much seasonality of the income stream. We did have across our certain new originations in the March quarter was fairly back end weighted in the last month, I think accounted for two-thirds the originations for the quarter, so that’s why we made a comment about the quarter earnings down reflecting a full quarter benefit, but overall, not a lot of seasonality. Even with the underlying portfolio company’s origination, can they be seasonal, sometimes the time, I mean, January was a fairly slow month, but that’s what we expected I think, January is always a probably the slower month as people back from the holidays and then you had probably a little bit of pull-forward effect from all the deals that closed in December from the tax change figures. So, in the summer time, I know we have had some pretty busy summer month originations. So, it can be hard to predict that.

And then one more from me on guidance, $0.26 to $0.32 per share, does that include any material dividends that while all you received in the quarter?

No, it is not.

Okay, wonderful, thank you.

The next question comes from (indiscernible) Securities. Please go ahead.

Yes, good morning. Most of my questions were just answered on the CLOs, and I think you mentioned this before, but the CLOs are what percentage of the overall portfolio?

17% or 18%.

17% or 18%.

As of 03/31 the lower end.

Right, right, that’s what I mean. And do you have kind of a – does it – it’s not offered in your release, I could figure it out from the portfolio, but do you have a breakdown of the investments as a percentage of the portfolio firstly and secondly in CLO equity that you could share with us?

We have that in the Q and price looking at precise page, as we speak for that, but yeah, we have broken that out for many years, which page numbers.

That’s on page 41?

Page 41, you can see the breakdown.

Terrific. I will go look it up. Thanks.

The next question comes from (indiscernible) Entertainment. Please go ahead.

Hi, good morning everybody. Congratulations on record originations in the quarter. My question relates specifically to the undistributed dividends or distributions. In Q2 we got $82 million of undistributed income and in the current quarter we have 66 million, was that 16.6 million paid towards the January, February, March distribution?

Yes.

The next question comes from (inaudible). Please go ahead.

I can’t believe I finally got through to you guys after all these years. I’m quite excited to talk to you guys, can you all hear me?

We can hear you perfectly.

Okay great. Let me my mind is going a gazillion miles an hour because there is actually a couple of things that have been said earlier in this call that I hadn’t planned on addressing but I would like to briefly as well as some of my other questions, now I got a long term investor with you guys since 2007. I have now roughly 35,000 shares with you guys. So I think you can see that I’m a long term investor and I like you guys a lot and I make my living even though I’m an individual investor I made my living as a full time investor, have done so for 20 years and by the way one of the things I want to interject is that I had no doubt in my mind that I can work for you guys. I don’t want to do that but I’m the type of person that you’re looking for. So that’s how you know right now that I know what I’m doing and what I’m talking about. Now one of the things as an individual investor I wish that you all will pay attention to besides the great yield that you guys have and it kind of relates to your cost of capital question that you were talking about earlier is the share price, the share price back in 2007 I have shares that I bought at 16 bucks a share, 15 bucks a share, 14 bucks a share, 13 bucks a share. I go back to that long with you guys and it seems like we can’t get out of the $9, $10, $11 a share range. I remember the last time the shares got close to 12 bucks maybe got over 12 bucks we did a secondary and boom that went away. So what you’re cost to capital not go down what you guys paid more attention to getting the share price up, am I ever going to see $13, $14, $15 a share? I would like to because as an individual investor I think a lot of times in these BDCs and these REITs and mortgage REITs and stuff I think companies think that individual investors are satisfied with a 10%, 11%, 12% yield. While I’m not satisfied with that, I want that and I want share price appreciation just like you guys want what the investments that you make. I want that share price appreciation and we have been stuck because of these secondaries and things like that, you know this last secondary that you guys did in November just killed the stock. I mean looked at it as an opportunity and I bought shares in the high 9 and you guys were what 11 and 11.5 at that time? I mean you guys have to understand as a retail investor that’s just devastating to us and I believe, now correct me if I’m wrong but what I look at and my database says that 30% of your shares are held by institutions and let’s assume 5% to 10% of the shares are held by insiders. So does that not mean that you have a substantial shareholder base as the retail investors? Guys like me out there. Now I know you got to these secondaries to raise more capital to invest and it's a tough I think that’s the toughest things you have to do is balance the amount of debt that you’re using and the capital that you’re raising. I hear you, it needs to be done but it's just, it's devastating to have a stock you guys are roll along stock climbing and then you announce one of these secondaries and boom the bottom drops out and boom the bottom drops out. And you are offering to secondary and a 3% or 4% discount which I believe is God knows that Wall Street is on you, you don’t need to offer that stock, let’s get Barry you are a very confident guy, I haven’t missed a conference call from you guys in six years, seven years, you are a feisty guy, and I like that, I am a feisty guy, I like that. You guys know what you could do on, again I love you guys, but be confident when you are offering a secondary, the Street sold you, we say you love to make this to sell this, you got to operate out of 3% or 4% or 5% discount to the Street and that gives us individual investors who are loyal to you, who hang in there quarter-after-quarter, I have been invested with you guys in your Prospect Energy. (indiscernible) what about us, we don’t get any respect. Are you telling me that if you do a secondary and you don’t offered at the market price, those shares are kind of sell, you said a couple of quarters ago, that’s just a cost of doing a secondary? But you are such a confident guy, you are confident in the people you want to hire. You are confident in the management fees that you ask, why not be confident and say hey, Prospect Capital is selling at $11.10 a share the day we have this secondary, we are going to keep it at $11, just got to hit the Street at $11.10 a share. I can guarantee that’s going to give individual investors like me the confidence in that share price. And that’s going to feed on itself. And that’s the one way you can get your cost of capital down. And the other thing is that I want to say is you guys got a great story to tell. I invest in all kinds of companies and I have been in business and I am the young guy. I got more letters after the end of my names and then I don’t need to mention on this call, and I have been making my living as a small guy out there by and lo for 20 years, 20 years. So, I have a passion for investing. And (indiscernible) in all kinds of companies, the CEOs of other companies, they do these investment conferences, because they are getting out there and they are getting their names, they are telling their story. I am not aware of any investment conferences that you guys have done. You got a great story to tell, get out there and tell it. And by the way, that (indiscernible) at CNBC, he gives you guys no respect, no respect, zero, anytime somebody calls in and says hey, what do you think about Prospect Capital? He did this, you got to go out there and meet that guy head-to-head and tell you a story and tell them why you got a 12% yield. He pushes you guys aside and he recommends a mortgage of somebody else out there. He does not recommend you guys and those are the people if you got a shareholder base, retail investors, 50%, let’s say, 50%, 55%, 40%, those are the people that listen to this guy, the retail investor. You need to get him behind you, that’s going to get your share price up, that’s going to lower your cost of capital, but your cost of capital on the equity side is not going to go down, unless you cut the dividend, you don’t want to do that or you get the share price up, you had got to get the share price up, and you got to get out there and tell you story. You guys got a great story to tell. I love you guys. And Mr. Barry, you are such a confident guy, get out there and take on a guy like that, take on a guy, he loves that. He wants you to come in there and tell your story, and you do and you get his respect and that’s going to help you get your share price up and that’s going to and then the next time you do secondary, you got to get more money, because the share price is higher.

Hey, Craig, this is John and this is my favorite, I am going to call it a question of all-time. Okay, let me just comment first on Jim Cramer, okay, the guy has underperformed the S&P as long as Barrons has been able to get numbers on them, okay.

(Indiscernible), quest, I believe I know.

He is misleading a lot of people into stock.

I know.

And where we cut – yeah, so we used to go on new jobs and these other shows, and we felt that it’s a better the more important thing to ask for us is to focus on our (inaudible) and try to do divest job if we can. Now number two, a lot of these shares have to send us your resume okay? We may be making you an offer that you can’t refuse okay Craig? You have my email address please send me information on yourself we can take this call offline, we can talk a long time about all these things that you have mentioned. We have been thinking very hard about them and just because we don’t, we couldn’t possibly cover all that ground in this call. I will just say few things quickly as I said, Cramer is a massive under performer including it's charitable trust and (inaudible) that’s why he is a clown. I’m embarrassed to say he went to Harvard Law School, number two, on the shares I know a lot of those shares are very expensive, it has been painful for us, we’re perplexed, we have thought about every single thing that you mentioned and more and that’s where we want to talk to you more offline. Number three, you obviously get what’s going, we will just make a couple of comments on the secondaries okay? We haven’t done one in a very long time, the stock typically bounces back. Our number one method of raising equity capital is through the ATM which is way cheaper but we are now beginning to examine with much more care than we have in the past, the trade-off between trying to run a business every day and have adequate liquidity and are we doing things such as the ATM that are artificially depressing the share price because the share price is important to us. The share price and the cost of capital are one and the same, one of the things that occurred is that maybe there is people out there who think well these guys can’t possibly have a 13.9% annualized yield in their portfolio without taking on a lot of risk, CLOs those are risky. Well we need to get out there and just as you say and educate people and that’s what we are thinking about how to do. What we don’t want to do is leave the factory, go out into the four corners of the world and tell the story and then comeback and find there is no story to tell. So main thing is to make sure that the home front is well attended to and we’re looking into every single thing that you mentioned, every single thing and maybe by the next time we have an earnings call you will be very happy with the fact that we have addressed a number of the items that you have mentioned because they are right in front for us now and the best way we learn is by listening to people who disagree with us, listening not in Cramer we are not learning anything from him unfortunately but other people who are thoughtful not bouncing around in a studio making funny noises and Craig I would like to learn from you so could you schedule a time that we could talk with you offline and let some other people ask some less exciting and interesting questions.

Sure.

How do we get a hold of you? Just me your phone number.

Let’s not do this on the call.

Well I want to do it right now because I don’t have time left. Give me your number Craig please.

Okay, 407-678-5240.

Somebody will call you. Thank you Craig.

Thank you.

And one other piece is I think we’re doing four different investor relations conferences in the next month. The folks there are other opportunities to get out the message for happy to present. Thank you, Craig.

The next question comes from (inaudible). Please go ahead.

The private investor I was listening to you address the other fellow so, and one of my concerns when I looked at the paper was advisory fees for that quarter was some 23 million to 33 million which is about a 40% increase. During that quarter the net asset value dropped $0.10 and the income came in light at around $0.26. How am I to think of that for the future?

For the future we don’t publish net asset value projections, we have put out an estimate for the June quarter for net investment income with the lower end of that range with the last quarter and then greater than that at the higher end of the range, and we are focused on deploying capital right now. We have seen an uptick in our pipeline that we hope bodes well for future deployment that can help to drive accretive growth for the business. So, that’s what we are focused on as we said.

As a private investor the same thing the other fellow did, do you now have secondaries increased, the advisory fees this quarter went up considerably, now that’s very good for you, but how good is that for the (indiscernible)?

Actually it’s actually good the advisory fees were down from the December quarter, they were down in the March quarter versus December, not up.

Was that number then for the year that 23% as opposed to 30%?

It may have been.

In the three quarters?

Sequential quarters were down.

Okay. And as far as you people also invest in – you are in the property businesses in Florida, I noticed a property you purchased in Tampa, well, I am a refi builder and I have 70 miles from Tampa out of the New York in some of that. So, does that have any interest in someone checking out properties aren’t certainly capable of doing that?

Good. Well, Patrick, we are very, very interested in that, because when we doing anything in real estate, we like to get as much local knowledgeable expertise as we can, and we have lots of stories about things we learned just talking to neighbors and talking to people down the street and across the street. Would you please send me, John Barry, an e-mail? Grier suggested ask your phone numbers and then choosing on privacy, so.

I will give you my phone number.

Okay, what is it?

My phone number in New York is 315-947-5242.

We’ll call you. Thank you, Patrick.

The next question comes from Steve Collup, Private Investor. Please go ahead.

Good morning, gentlemen. This is Steve Collup. I had met you I think two years ago at your annual meeting and I also was on a conference call, I think two conferences ago I couldn’t be on the last one because it was on either on Monday, Wednesday, Friday when I have patients, but I was fortunate that you held this one on a Tuesday, so I wanted to say thank you. I have commentary and two questions. The first one commentary is simply that two quarters ago, I gave you guys a real hard time that I was kind of upset, because I thought that the dividend income was increasing miniscule, and I have mentioned how about a special one-time dividend. And you gentlemen have actually team listened and you actually did something better instead of given me a one-time lollipop, you gave me over 10% dividend for the year. So, I know a lot of times you only hear from people when they complain, and you don’t hear from people why they are expressing gratitude and appreciation, and I want to say thank you very much for listening and listening very well to me, and I am sure to various other shareholders. So, thank you. Number one.

Well, Steve, thank you very much. I was afraid of the reason we are not on the last call, we missed you out of the phrase that you shunned us, because the dividend increase wasn’t big enough.

So, you do remember who I was?

Absolutely.

Well, I do say thank you, because I am a healthcare person, I am not a financial person, I am not really that good with the numbers, and I was thinking to myself why don’t one-time special dividend is probably not going to hurt them too much. I know that you run your business extremely conservatively, fiscally speaking as I do, and you are always waiting, waiting for rainy day, because you never know it’s going to happen and I run my business the same way and where my wife and my kids are actually for next year block, I am always maybe want to get again $0.50 just in case, and because they need a full balance. In fact, they gave me probably more than a $1, so I do want to say thank you. I think I spoke probably for many individual shareholders, and frankly it goes a long way. And that increase in dividend I want you know is not just representing remuneration in forms of money, but it’s actually college tuition for my kids and others, it’s being able to perhaps go on vacation, it’s being able to pay rent whatever it maybe. So, I am sure if you don’t realize that it means a lot, it means a hell of a lot so thank you.

We’re (inaudible) raising the dividend as you probably observed because once we do that we feel it's a locked in obligation that we need to be able to pay as far out as we can see, number two we’re conscious of the stock price and we feel that at least more protective of the stock price to make a permanent increase than a onetime but no matter what we do we then have to get back on the treadmill and run that much harder and perspire that much more to make sure that we’re growing our net investment income which we’re trying to do, we discussed this on this call. So I appreciate Steve of course we would never forget you and I’m sure the shareholders of our company are glad to know that your advice has been given a heavy weight here.

I appreciate that very much, it means a lot to me personally but I think I tried to be extremely fair and not just be one side, it's all, I will start the commentary now that I have two questions, I will get to my second question first simply because it was already addressed I think by individual shareholder who unlike that individual shareholder I don’t have a lot of letters behind my name and I do still work for a living and I don’t know in 15 or 20 different companies but I do humbly speaking I own a 139,100 shares so I also I’m a long time investor I have a lot of trust in you guys as managing the team and having said that I wanted to ask you and I can see that bits and pieces that you’re saying yes to my question which was that I wanted to know if you were able to say because you guys this management do a meeting and say hey man I can’t believe what’s going on with the stock price. How do we work on getting our stock price? Prospects says that you want to have and I’m paraphrasing but basically high amounts of current dividend income with long term capital appreciation and I think you can appreciate no pun intended that the appreciation of the stock price is not been what it is and I’m asking you I guess rhetorically, do you in fact as a company or as a management team do you talk about frustration with the lack of appreciation in the stock price especially in light of the fact that the share market indices has been they have been doing pretty well and I think Prospect Capital unfortunately and much to my dismay and disappointment doesn’t seem to be anecdotally speaking been on the health side and not on the financial side but anecdotally speaking it doesn’t seem to have participated visa a vie with the general market indices in terms of stock price.

Well Steve we have definitely noticed that it's not how you thought, I have quite few shares that I forget what the top tick was, was it $18 or?

You brought it all the way up and all the way down for sure.

Alright so I have significant capital losses there and as we discuss with Craig and with other people this is a topic of continuous attention and we are hopefully going to be speaking Jonathan offline, to Craig offline and trying to figure out what it is that we can do that we haven't been doing that would better protect the stock price. Don’t worry we are not thinking about it.

Okay good and if I know just a (inaudible) I have one more question but the one gentlemen an individual shareholder said that people might ask us how can you because I know I went to a party about six months I was talking to a very skewed real estate investor, he owns 100 properties, he is an attorney. He does invest in stock and I always tell Prospect Capital and I tell them exactly what they do. I’m always looking for more investors to come because I feel it's just the management team is extremely trust worthy, you do your business thoroughly, you always have attention to risk but the average retail investors are like come on how can you get 12% that’s got to be so risky and I feel like shouting at them, half of the properties are 100% more riskier than Prospect Capital. SO I think that general sentiment is probably something that is echoed out there with many people and if there is a way to satisfy that dilemma I think that maybe an impetus that might propel this company to another level.

You know Steve we have numbers that show us how we’re performing in various ways and we were to the place we mentioned on a particular project a few years ago doing more than a few. And when the place made you looked at the number, they said well, people just won’t believe that you performed at this level. I mean, they will just assume that there is risk in here as well, I don’t know what to say, why don’t we just show a lesser return? And I think I am learning a lot from what everyone has to say. Of course, we have already thought about these things sure. We addressed things one at a time typically. This has moved up on in keeping the portfolio invested, keeping the risk under control of winning non-accruals, maintaining a 13.9% annualized yields, trying to make sure our cost of capital stays low, making sure we have sufficient liquidity, these are all, if you don’t see those things, you will be out of business. So, we think we don’t this first. Then secondarily we do focus on stock price and needless to say that as always had our retention, but it’s going to have a more, because we don’t think their cost of capital on dividend basis, should be near 12%.

Right.

And look I am an efficient market guy I think the markets are efficient.

Right.

I think on this one, I am now thinking maybe not that efficient when it comes to particular sub-sectors, and in particular, BDCs and maybe people need to get back on the (indiscernible) show and even speak to guys like Cremer and things like that, though we hope to have ideas that are more meaningful than that. So, but we are thinking – Steve, if you have additional ideas, please send me to.

I will, I will. Just one more question and I’ll get off, anybody else can go.

I hope you are telling all of your patients what a good buy.

You got to believe it, I got 4300 in total, but you said you hope I will tell my patients’ life.

What a good buy Prospect is?

You’ve got to believe it, I tell everyone and I will continue I mean, like on 27.5 year of practicing, god willing of at least another 15 or 20 to go, so you are going to have a lot of investors coming in from little tiny cost at New Jersey and Bergen County, but my last question.

Okay, (indiscernible) Gary, I have your contact information.

Barry you know me too well. I am a personal e-mail buddy, so you can call me that Steve Collup, first of all set a role and secondly (indiscernible) ankle healed up nicely over the last six months for the year, okay.

Thank you very much…

Well, yes, just got one more thing and I will let you go with the question is that I went the other day a week ago, Leon Black, who is the CEO of Apollo we are talking about, and then he is a private equity guy was talking about how he is basically trying to sell everything that is a nail down to the Warren in his portfolio. And then I have got another CEO who is in your space, the BBC space, the guy named last name is Collup, who I think also runs BBC said that this is a lot – a lot of deals at least half of that they have companies passing on, we are seeing deals done by somebody else. So, that tells me the new (indiscernible) that perhaps there is a lot of liquidity in the market that people are doing deals sloppily. And I guess my question to you is do you see that happening, is that what you see also in the arena and along those lines when you say in your question and answer that you have $3 billion potentially of unencumbered assets to work with. Does that mean you are like a mini Warren Buffett where go off a bit, the world comes to an end in 2007 like you said before that you guys have 3 billion bucks that lenders are contractually obligated to give you to be able to start investing in companies.

Okay, well, Steve let me thank you for the question and just mentioned I am going to be very clear to be sure.

Okay.

So, that we can take here the other people, because we are out of time, but number one, Warren Buffett is a very, very, very, very, mini, mini, mini more important one. Okay, number two as far as compression, there is compression in margins, compression in yields, the yields that go in cycles, they get compressed and there is some classes sometime and then they go back out again. And it’s our job to continue to earn a margin between our cost of capital, which we have discussed already. And what we can earn we are still able to earn a margin, but yes, when margins compressed it does get harder, but they will some day expand out as well. So, Steve could we finish this conversation offline.

Yes, yes, thanks gentlemen. Thanks for moving it again. Thank you, okay.

Before we are completely out of time.

Thank you.

The next question comes from John Ellis, a Private Investor. Please go ahead.

I’m not particularly interested in the higher share price unless we speak in buying 10.86 for over 12% yield and that’s just fine. So but I have argued your case with a lot of people over the years and I made a list of why I think get a higher share price.

Could you send that to us?

Yeah sure that’s fair enough.

I really I can take more rational action of reading something that’s written down as opposed to taking notes.

I understand and John just let me say I think you’re too smart for the market. You’re very smart guy.

You know what that reminds me it's you Ellis, I used to read (inaudible) and he said hey John you want? This guy thinks he is smarter than the market. No one is smarter than the market, nobody.

Yeah I understand.

But will you send us the list please? We would love to see it and we would love to talk to you about it.

Okay thanks.

Thank you so much Mr. Ellis.

The next question comes from (inaudible). Please go ahead.

One thing I think you can probably do is actually sort of like digest your one thing you have already done you just got your debt up in 29 back up there was it 48?

Yes we actually as we said in our earnings release that is right there at the potential, the amount of debt we have is low. We can increase that and in fact it's rising virtually as we speak as a percentage of our assets.

I mean digest to where you basically taken loans and then spend all your money into different companies and stuff like that and basically what you do is you pay down the debt again then comeback around and then do your loan debt there again.

Well what we try to do is fund the loans with a mix of debt and equity that has an all in cost as much substantially as we can get in below the earnings on the loan net of all fees and expenses in overhead and so forth. And so when the loan is paid off that’s right we may pay the debt down more likely when the loan is paid off we invest in new loan.

So once you do is basically have more money to actually borrow more money you understand what I’m saying? You’re basically stacking up.

I mean that is if I understand what your point that is what we do, we increase our footings, we increase the assets and we increase the liabilities, as the percentage of debt is used to fund and investments goes up the margin normally all the things being equal will increase.

Yeah and that also when you offer the shares that kind of cuts into your teams, like it cuts into your (inaudible) and everything like that.

We have only offered shares above net asset value as far back as I can remember. So I would tell you that the report shows the offering shares above net asset value as we have done for as far as I can remember as I said increases the net asset value.

Okay what I’m talking about is it adds more (inaudible) is what I’m trying to say and it actually kind of like dilutes the going up higher.

Arithmetically yes more shares out there, you better have more net investment income. I think we double them, what’s that Donald?

That’s what I’m talking about basically digesting and which is you, you know what I’m saying.

Right I wish it was as easy as just saying hey let’s stop everything and digest what we’re doing like giving--

What I’m saying maybe it can slow down a little bit because you did a lot of deals and everything like that but sometimes you take it down just maybe like a notch, because I basically do the same thing what you guys do. I learned off you guys, that is the money I borrowed and I invested, I made a new system, but I have cash daily money plus our dividends face to face on my own?

Well, we don’t anything. It doesn’t earn a profit and arithmetically, if you walk away from a profit, I don’t know how that, it varies medically good to be talked.

Every time if you make a profit, it’s good, yes.

But we are not doing anything that we know of, that we can identify in advance is unprofitable, but Donald we certainly are taking under consideration what you guys would say and what others have had to say. We need to go on to the next question, because we are out of time. Thank you so much.

One more thing though, it’s like I said, I basically get bigger loans, because I am actually did bigger dividends at (indiscernible) that’s what I want to say.

You are right.

Okay, thank you.

We wish you the best of luck. Thank you sir.

I love you guys too.

And then three scale 3D e-mail me out as we try to respond.

Okay, thank you.

The next question comes from (indiscernible), Private Investor. Please go ahead.

Yes, our first comment, I have question, you can go on BloombergTV to easy to promote yourself other business development companies like the Street, I have been on there. And my question is you mentioned that you have a lot of your own money in this company and the stock, do you do reinvest your dividends back into the stock on monthly basis?

Yes, 100%. I have never sold a share and I have never failed to reinvest the dividend in the stock.

Okay, alright thank you very much.

Thank you, Al.

And we have a question from (indiscernible) Entertainment. Please go ahead.

Thank you so much for your patience. This is an actual question. I have a question in terms of the unrealized depreciation in the quarter, was that solely due to the First Tower lowering of the value of First Tower?

I am sorry, can you repeat the question sir? It’s very low.

The unrealized depreciation in the quarter that actually increased by approximately $9 million, was that due to the First Tower’s reevaluation of the First Tower investment?

Yes, we discussed it earlier in the call about taking value down and that’s because growth had slowed down.

Perfect. Thank you so much.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

Thank you all very much. Have a wonderful lunch guys.

Thank you all. Bye.