Good day and welcome to the Second 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, Chairman and CEO. Please go ahead, sir.

Thank you, Rachel. 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 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 on our website, prospectstreet.com. Now, I will turn the call back over to John.

Thank you, Brian. For the December 2017 fiscal quarter, our net investment income, or NII was $73.2 million, or $0.20 per share, up $0.02 from the prior quarter and exceeding our current dividend rate by $0.02 as well. NII increased due to better loan performance and a reduction in administrative overhead expenses. Executing our plan to preserve capital, reduce risk and avoid chasing yield through investments deemed too risky, with a poor risk return profile at this point in the economic cycle, we booked originations below our level of repayments this quarter. We remain committed to our historic credit discipline. We currently have a robust pipeline of potential investments in our target range for credit quality and yield. 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 December 2017 quarter, we also maintained our objective to protect risk with a prudent net debt to equity ratio of 60.2%, down a 11.4% from the prior quarter. Our net income was $121.7 million, or $0.34 per share, up $0.31 from the prior quarter, as a result of net investment income in excess of dividends, and an increase in the fair market value of certain investments. We have multiple disciplined strategies in place with a goal of enhancing our future income. On the asset management side, we plan on executing on a robust pipeline of new originations; improving cash flows in our structured credit portfolio through extensions, refinancings, and calls; optimizing NPRC’s online lending business through asset selection, securitizations and refinancing; enhancing NPRC’s multi-family real estate portfolio through realizations and supplemental financings; improving controlled investment operating performance and enhancing yields to higher floating rate LIBOR-based rates. On the liability management side, we plan…

Thanks, John. Our scale business with over $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 December 2017, our controlled investments at fair value stood at 37.1% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities then select 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 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 December 2017, our portfolio at fair value comprised 44.6% secured first lien, 21.3% secured second lien, 17.3% structured credit with underlying secured first lien collateral, 0.6% unsecured debt and 16.2% equity investments, resulting in 83% 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 our debt investments were generating an annualized yield of 12.5% as of December 2017, up 0.7% from the prior quarter. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We have continued to prioritize first lien, senior and secured debt with our originations to protect against…

Thanks, Grier. We believe our prudent leverage diversified access to matched-book 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 a 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. We’re a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond, acquire another BBC and many other first. 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 December 2017, we held approximately $4.6 billion of our assets as unencumbered assets, representing approximately 78% of our portfolio. The remaining assets are pledged to Prospect Capital Funding, which has a AA rated $885 million revolver with 21 banks, 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 one year of amortization with interest distributions continuing to be allowed to us. Outside of our revolver and benefiting from our unencumbered assets, we’ve 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 and no cross defaults with our revolver. We enjoy an investment-grade BBB rating from Kroll and an investment-grade BBB minus rating from S&P. We’ve now tapped the unsecured term debt market on…

Thank you, Brian. We can now answer any questions.

Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question comes from Leslie Vandegrift with Raymond James. Please go ahead.

Hi, good morning, and thank you for taking my questions. First, on the CLO effective yields, I noticed on a few of them in the footnotes, they are marked as 0% effective yield, and it says that’s because you do not expect being able to get the cost of the investment out of there. Can you explain how that’s different in the notation of the normal non-accruals and also the major changes quarter-over-quarter in the cent [ph] CLO and Madison Park CLO?

Okay. Well, Leslie, that’s a great question. Thank you very much. I’m going to ask Brian to take that one on. Brian?

Okay.

Brian and – by the way, Brian and Grier, because I think, there’s both an accounting and a – not that Brian is limited to accounting, but an accounting and a business answer. So why don’t you start Brian and then Grier can finish up.

Okay. The way that the – this may get a little complicated. But the way that the recognition of income on the CLOs work is based on an expected cash flows on the underlying securities, which then generates cash flows to the holders of the subordinated notes. When there’s changes in the assumptions, there is the effect of changing the future cash flows or the expectations for future cash flows. And you have to excuse us, we have lot of noise occurring outside here. The – when that happens, there’s a potential that the expectations for repayment of the remaining amount outstanding may be diminished or reduced to zero. When that happens, the CLO does not recognize any additional yield until there’s a change in the assumptions, and there’s an expectation that all principal plus some interest may be recorded. I hope that helps.

Is it the – yes Is it the principal that you are trying to get repaid fully on other costs there, because the footnote says you don’t expect costs back?

It’s the cost basis.

Okay. All right.

Leslie, let me add to that answer. So and I think it – we can talk about kind of broader strategy in context as well. What’s happening, of course, in the credit markets due in significant part to fed activity and an increase short-term yields or short-term interest rates is a flood of capital into anything labeled floating rate, as we all know, which is causing significant downtick in assets spreads, which happens reasonably predictably this part of the cycle. So this is where or having substantial weight in these deals is important and what’s attractive about this spread business, because we can recapture on the liability side of the ledger a reduction in liability borrowing costs to offset, some cases, more than offset asset spread compression. So we are aggressively pursuing this strategy of reducing our weighted average cost of liabilities in our structured credit book, while also simultaneously reducing risk by extending tenor. So for deals that would otherwise be coming due in one year or two years in the natural course, we’re expanding them years into the future, which is a significant risk reducer, because what you don’t want to have in this business is the ending of a deal during a recession, or during a spike and default and a downtick in loan values, a suboptimal time to be realizing investments. So you want to have significant option value to your equity holding. So what we’re doing by resetting, aka extending the deals reduces our risk for the reason I just mentioned of extending tenor and enhances our reward at the same time by reducing the weighted average cost of liabilities. Certain deals that are pending and it does take weeks and months to get these resets done, you have to get the deals rerated by…

It does. Thank you. I appreciate the color on that. And then my next question is actually, you mentioned it in the prepared remarks on insider buying. Obviously, there has been a lot since the previous earnings call from the outstanding filings, I think, about 28.3 million shares so far the sense, I guess, the beginning of November. Now that’s a lot more than even was done in first quarter 2016, when we had the tradeoff in the market. So just curious, what is driving that large purchase position?

Well, why don’t I address that Leslie, since I’m the major person. I would say that, when I see somebody buying something, I can choose from bunch of observations and a bunch of conclusions. Usually, it’s because the person thinks, he or she is getting value equal to or greater than the price being paid. That would be true buying a car, or a house, or certainly a financial instrument, right?

Yes.

What motivates you to buy a share of stock? Anything besides the price?

Well, the question, I guess, it was the comparison between in first quarter 2016, the level of purchases were much lower than the stock was trading just as low, if not lower at certain points compared to NAV. So why NAV is more the question, and why this volume?

I guess, I would say, speaking only for myself, I happen to believe, the stock is a good buy.

Okay.

If I didn’t, I don’t know why I would be spending my money on it.

Okay, great. Thank you. And then on the yields quarter-over-quarter, you talked about the large jump incrementally. Is any of that due to some outside fee income in there, or are there nonrecurring that you can specifically call out?

With a large jump, are you referring…?

And the 70 basis point, I believe you said jump in yields on debt quarter-over-quarter?

Brian, do you want to address that, and then Grier?

I’ll take that. Leslie, we have been have it for sometime now of reporting our interest income or interest revenue as a percentage of total revenue which, of course, folks then calculate for themselves as well, that’s make it easier to point out that our business for quite a while now has not been so dependent on one-time structuring fee income, which can be a driver of a, let’s say, a smaller version company that’s growing and booking fees and that are highly the nonrecurring variety, that’s not the case with our business, we’re at over 94% interest as a percentage of total investment income. The increase in the yields in the quarter, which was – what you quoted was a net increase, that does continue to be asset spread competition in the marketplace. You’ve had an increase in LIBOR, which has helped us submit again. But really because of the improvement in yields from the improvement in certain portfolio companies restored to accruing status, as well as a key driver there, so multiple factors.

Okay. And I – oh, perfect. And I guess, my last little question is on that, the two that came back on to an accruing status, Spartan and Venio, just some color around those changes?

Sure. Well, Spartan is an energy services company. And as I’m sure, as everybody on this phone call knows, there has been a significant recovery in the oil patch with the most volatile downward segment arguably being energy in oilfield services, and the same is true on the recovery side as well. So you’ve seen businesses in that segment. They were generating tens of millions of EBITDA, they went to zero a couple years ago. Now we’re back to generating tens of millions of EBITDA. And that’s quite a peak mind you, you saw in 2014, but substantial recovery. We have levered those businesses or purchased in a couple of cases at recently low multiples of then profitability. So it doesn’t take much of an uptick to get back into significant account for recovery mode and maybe even net gains for areas, where we own upside. So that covers Spartan. In the case of Venio, that’s a – more of a financial services, really business services company, less of a macro reason there and more just specific, company-specific reasons for improved performance.

All right. Thank you. I appreciate you answering my questions.

Thank you.

Thank you, Leslie.

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

Okay. Well, thank you, everyone, for joining our call. Have a wonderful afternoon. Bye now.

Thank you.