Good morning and welcome to the Prospect Capital Corporation First Fiscal Quarter Earnings Release 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, Chairman and CEO. Please go ahead.

Thank you, Kate. Joining me on the call this morning 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 forecast 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, our 10-Q and our corporate presentation filed previously and available on the Investor Relations tab of our website, prospectstreet.com. Now, I will turn the call back over to John.

Thank you, Brian. For the September 2017 fiscal quarter, our net investment income or NII was $63.7 million, $0.18 per share, down $0.01 from the prior quarter and equal to our current dividends. Executing our plan to preserve capital, reduce risk and avoid chasing yield through investments, being too risky, with poor risk return profiles at this point in the cycle, we booked originations this quarter in line with the prior quarter. We remain committed to our store credit discipline. We currently have a robust pipeline of potential investments in our target range for credit quality and yields. We believe our disciplined approach to credit will serve us well in the coming years just as that disciplined approach has served us well in past years. In the September quarter, we maintained – actually reduced to 71.6% our net debt to equity ratio, down 200 basis points from a year ago. Our net income was $2 million or $0.03 per share, down $0.11 from the prior quarter due to unrealized depreciation within our structured credit investments and a lower interest earning asset base. In the September quarter over the June quarter. We are working to execute on a robust pipeline of new originations, improving cash flows in our structured credit portfolio, including through extensions, refinancings, calls and refax, optimizing NPRC’s online lending business, including through securitizations and refinancings, increasing realizations in NPRC’s multifamily real estate portfolio, improving controlled investment operating performance and enhancing yields through higher floating rate LIBOR based rates. On the liability management side, we plan on lowering our weighted average cost of capital through a combination of increased revolver utilization and lower coupon new term issuance. We are announcing monthly cash distributions to shareholders of $0.06 per share for November, December and January, representing 114 consecutive shareholder distributions.…

Thank you, John. Our scale business with around $6 billion of assets and undrawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals representing one of the largest middle-market 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 and direct non-sponsor lending, Prospect sponsored operating and financial buyouts, structured credit, real estate yield investing and online lending. As of September 2017, our controlled investments at fair value stood at 34% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities that selected 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 low 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. As of September 2017, our portfolio at fair value comprised 48.5% secured first lien, 19.5% secured second lien, 17.0% structured credit with underlying secured first lien collateral, 0.1% small business whole loans, 0.8% unsecured debt and 14.3% equity investment resulting in around 85% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. Prospect’s approach is one that generates attractive risk adjusted yields and are performing debt investments were generating an annualized yield of 11.8% as of September 2017, down 40 basis points from the prior quarter due to continued asset spread compression in the market. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate…

Thanks, Grier. We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets and weighting towards unsecured fixed rate debt demonstrate both balance sheet strength as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in the ladder of fixed rate liabilities extending over 25 years into the future, while the significant majority of our loans float with LIBOR providing potential upside to shareholders as interest rates rise. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken towards construction of the right hand side of our balance sheet. As of September 2017, we held approximately $4.5 billion of our assets as unencumbered assets, representing approximately 75% of our portfolio. The remaining assets are pledged to Prospect capital funding, which has a AA rated $885 million revolver, with 21 banks and with a $1.5 billion total size accordion feature at our option. The revolver is priced at LIBOR plus 225 basis points and revolves until March 2019 followed by 1 year of amortization with interest distributions continuing to be allowed to us. Outside of our revolver and benefiting from our unencumbered assets, we have issued at Prospect Capital Corporation multiple types of investment grade unsecured debt, including convertible bonds, institutional bonds, baby bonds and program notes. All of these types of unsecured debt have no financial covenants, no asset restrictions, no cross defaults with our revolver. We enjoy an investment grade rating of BBB plus from Kroll and investment grade BBB minus rating from S&P, which was recently reaffirmed. We have now tapped the unsecured debt market on multiple occasions to ladder our maturities and to extend our liability duration more than 25 years. Our debt maturities extend through 2043 with so many banks…

Hey, thank you, Brian. We can now answer any questions.

[Operator Instructions] The first question comes from Leslie Vandegrift of Raymond James. Please go ahead.

Hi, guys. Just a quick question on the market, we saw the markdowns on structured credit, which you mentioned in the comments. Just wanted to get a bit more color there and where you see that going this quarter and into 2018?

Sure, Leslie, thank you for that excellent question. It’s difficult to tell sitting here in November 9 what the state of play will be from a valuation perspective on December 31, which is 7 weeks from now, but in general in the quarter that just wrapped up, the factor of asset spread compression outweighed as a negative factor on the valuation front, positive factors, including an increase in LIBOR, an increase in – rather a reduction in trailing 12-month default rates in which we have significantly outperformed the market and in general, a reduction in discount rates for this type of paper of these securities. There is a lot of capital out there chasing floating rate right now and that’s true not just in the broadly syndicated market, but also the core middle-market business impacting a lot of people in the industry right now, which is why we are being ultra cautious and you have seen us not stop on the gas pedal for new originations, we are passing at a lot of deals right now. But within structured credit, it’s difficult to tell with asset spread compression will continue. Some of it is being enabled by in the structured credit business a reduction in liability of spreads. So, the question is at what point you hit a floor for what say AAA investors will expect to get paid as a spread that impacts then, how much arbitrage is available on the asset side of the ledger. As we have talked about historically in CLOs and structured credit, your two general risk or at times being too good and times being too bad. Too good means a time of declining spreads. Too bad means the time of spiking default rates. The latter generally is worse than the former. We are…

Yes. Just one on, so if being a bit more conservative on that price right now, but you also mentioned in the prepared remarks, 34% of the portfolio is now on the control side now just kind of with those issues right now on the CLOs whether because it’s too good or wherever it is in the cycle, are you going to focus on doing more of the like online lending more of the traditional controlled companies on your portfolio, where is the other route there?

Sure. We have been in the low 30s in kind of the controlled investment side for a while now. That does not include that CLO business. The structured credit business which actually declined to about 17% of our book in part through the write-down in part through not making much in the way of significant new investments in that business. And one chunk of that control piece, the biggest singular chunk is NPRC, of which a majority of which is our real estate business. Our real estate business has arguably been one of our best performing businesses recently, a real bright spot and we are quite pleased with the performance of business. We have generated something or we meaning NPRC has generated something like a 30% realized internal rate of return on exited deals that have gone the distance. And as we mentioned in our prepared remarks, we have got other exits as well. We are constantly evaluating the hold, sell and force purchase new properties optimization and we prune the properties we deem important to do so where we have already captured the value from a renovation program. So, we are selling properties and we are also buying new properties this quarter today the December quarter has been particularly active for that. We have already closed two significant deals and we have got others who are planning and we continue to find interesting pocket. There is a lot of capital out there sort of everywhere in all asset classes, but on a relative basis, interestingly our view is real estate has less than corporate credit right now, which I think is something to do with how institutional investors have allocated in the last year or two to anything touching a floating rate. So, we like the real estate business,…

Alright. Well, thank you for answering the questions and all the color on that. Appreciate it.

Thank you, Leslie.

Your next question is from Christopher Testa of National Securities Corporation. Please go ahead.

Hi, good morning. Thanks for taking my questions. Just looking at the challenging loan market environment, where you guys are trading in the dividend yield, just wondering why you are not massively repurchasing stock?

Chris, thank you for your question, we have repurchased stock in the past, we have about $100 million authorization from the board, for repurchases, I think we have used about a third of that to-date. We had slowed buybacks previously, because we are worried about the volatility impact on leverage. Circumstances can change pretty swiftly 2 years ago, 1.5 year, end of 2015, early 2016. Folks thought we are about to hit another recession and you had a huge uptick in volatility. The rating agencies have made it crystal clear to us and I think others in the industry that buybacks are big negative from a rating standpoint, which makes us cautious and we need to be careful in managing other compliance baskets that are critical to manage from a legal and tax standpoint, including our 30% basket. If we get a big surge in repayments coming out of the 70% basket and you end up off-sized on the 30% basket, which is an incurrence, not a maintenance test. It means you actually can’t put in a single $0.01 into a 30% basket investment even something that might have a 200% IRR attached to it like some of the resets and areas in our structured credit business or attractive synergistic add-ons that we are exploring for example in our financial services portfolio. So, we should be careful about that. We should be careful about our diversity tests as well in other aspects where scale is important. We have earned on the real estate size I mentioned 30% IRRs approximately within NPRC and Richardson actively redeploying capital there. So, those are some of the factors, Chris, which I would say makes it an ongoing discussion item for the business.

I can understand those points, but I mean what type of discount and risk less return on capital from accretive buybacks would the board need to induce them to actually implement the program and you guys actually do it?

Yes. Chris, it doesn’t come down to one number, the cost of not complying the cost of having liability access issues, those can be incalculable as well. So, it’s a multifactor analysis, Chris. It doesn’t come down to one simple formulaic number.

Okay, that’s fair. And just touching on the online consumer lending business, just wondering if your outlook on that business has changed given the kind of tepid results coming out of Lending Club and On Deck?

Sure. Well, with On Deck, that’s always been a very small part of our business. I think how big is that book right now, Brian, $15 million maybe it’s a tiny part of our business.

I understand. I just mean, but it’s in the same line of business as what you are doing in the online?

Yes. The small business lending has always been a very small business in part because originators liked it when you mentioned have become balance sheet lenders themselves as opposed to sellers of assets to folks like us in part because they are such short-term assets of 3 to 6 months. There has been good performance, but capital comes back to you so swiftly. You don’t see large portfolios out there really of any scale kind of like venture lending, for example, it’s very hard to scale that business, because money comes back to you so fast. And then on the consumer side which is the bulk of what we do within NPRC and the team there, you talked about tepid results at a Lending Club, we are very happy with our Lending Club platform results. The remarks that they made this week pertain to other types of assets that are not the assets we hold. We are in their policy too, which is not publicly reported in really more near-prime centric as opposed to lower prime centric. So, we are happy with the performance. Debt investors are happy with the performance. Securitization arrangers are happy with the performance, which is why you saw a securitization in June and why in our prepared remarks I have talked about gearing up for the next securitization as well. And some of the other platforms that we have done sort of legacy ones years ago, we have not been actively deploying new capital or growing those books in any significant fashion for quite a while and we are actually looking at doing a effectively a dividend recap to take capital out of that business and then redeploy it, might deploy it into Lending Club near-prime originations, might deploy it somewhere else within NPRC or take it back to PSEC and deploy it somewhere else entirely. So, that’s all part of the ongoing optimization for the online business. Is that helpful, Chris?

I am sorry I had that muted I guess. Just on the CLO equity valuation, how many instances are there, when the third-party that you use has a valuation that’s higher than the nonbinding indicative bids that you receive in the portfolio?

Yes. I am trying to understand the question, I mean, the valuation which is 100% third-party as you know it speaks as of a certain date. These are highly illiquid Level 3 assets. You don’t really have daily trades in the marketplace so.

If you have let’s say not – if you could receive a nonbinding indicative bid on let’s say a good portion on the portfolio, obviously the third-party valuation firm is coming up with their own valuation, but nonetheless, how many – I am just asking how many times is a valuation that gives you how many times is that higher than what the nonbinding indicative bid is on the book?

I am not sure, Chris. I will say non-binding indicative bids aren’t worth the paper they are written on. Actual close transactions were a lot more meaningful and you don’t have very many data points to look at and what is a highly illiquid part of the marketplace. One piece, I want to address on the valuation front, I know you have had commentary on this as well is when you look at our CLO book and some people compare them to other practitioners in the industry that run RICs and report valuations. And you look at on an aggregate basis, valuation as a percent of cost, what you see actually is that PSECs, CLO structured credit book is in line with or below comps and below by a pretty significant degree. What you also see again this is a 100% third-party. We don’t do valuations around here as the management team, we don’t do the valuations they are done by third-party. What you also see is a significantly below income recognition, which our management team is much more involved in and approved by auditors to the tune of 500 basis points below others in the marketplace. So, we are very secure and confident in our conservative accounting surrounding our structured credit business.

Okay, that’s all for me. Thanks for taking my questions.

Thank you.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference over to John Barry for closing remarks.

Okay. Thank you everyone. Have a wonderful afternoon and thank you for joining the call. Bye now.

Thank you.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.