Good day and welcome to the Prospect Capital Fiscal Year Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that 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, Chuck. Joining me on the call today are Grier Eliasek, our President and Chief Operating Officer; and Kristin Van Dask, our Chief Financial Officer. Kristin?

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, and our 10-K filed previously and available on the Investor Relations tab on our website, prospectstreet.com. Now, I'll turn the call back over to John.

Thank you, Kristin. For the June 2019 quarter, our net investment income or NII is $69.6 million or $0.19 per share, down $0.02 from the prior quarter and exceeding our current dividend rate of $0.18 per share by $0.01. Our ratio of NII to distributions is 105%. In the June 2019 quarter, our net debt to equity ratio is 70%, up 0.9% from the prior quarter. Our net income for the quarter is $89.2 million [Later changed by the Company to $38.9 million] or $0.24 [Later changed by the Company to $0.11] per share, an increase of $0.42 [Later changed by the Company to $0.24] from the prior quarter, primarily due to realized and unrealized gains from our portfolio. We are announcing monthly cash distributions to shareholders of $0.06 per share for each of September and October, representing 135 consecutive shareholder distributions. We plan on announcing our next series of shareholder distributions in November. Since our IPO over 15 years ago, through our October 2019 distribution at our current share count, we would have paid out $17.52 per share to original shareholders, aggregating approximately $3 billion in cumulative distributions to all shareholders. Our NAV stood at $9.01 per share in June, down $0.07 from the prior quarter. Our balance sheet as of June 2019 consists of 87.4% floating rate interest earning assets and 93% fixed rate liabilities. In recent weeks, we've trimmed our cost of term debt issuance, commensurate with reductions in treasuries. Our percentage of total investment income from interest income is 92.2% in the June 2019 quarter, an increase of 1.6% from the prior quarter. I'll now turn the call over to Grier.

Thank you, 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, which represents 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 June 2019, our controlled investments at fair value stood at 43.8% of our portfolio, up 1.8% from the prior quarter. This diversity allows us to source a broad range in 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 the 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 June, our portfolio at fair value comprised 43.9% secured first lien, 23.5% secured second lien, 15.1% subordinated structured notes with underlying secured first lien collateral, 0.8% rated secured structured notes, 0.6% unsecured debt and 16.1% 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 performing interest bearing investments we're generating, an annualized yield of 13.1% as of June, up 0.3% 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've…

Thanks, Grier. We believe our prudent leverage, diversified access to matchbook funding, substantial majority of unencumbered assets and waiting towards unsecured fixed rate debt, demonstrates both balance sheet strength, as well as substantial liquidity to capitalize on attractive opportunities. Our company has locked in a ladder of liabilities extending 24 years into the future. We are a leader and innovator in our marketplace. We were the first company in our industry to issue a convertible bond, developed a notes program, issue under a bond ATM, acquire another BDC and many other lists of first. Shareholders and unsecured creditor 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 June 2019, we held approximately 4.12 billion of our assets as unencumbered assets, representing approximately 71% of our portfolio. The remaining assets are pledged to Prospects Capital funding, where in the past year we completed an extension of our revolver by 5.7 years, reducing the interest rate on drawn amounts to one month LIBOR plus 220 basis points. We currently have 1.1325 billion of commitments from 30 banks with a 1.5 billion total size accordion feature at our option. The facility revolves until March 2022, followed by two years 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, including in the past two years, 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. An investment-grade BBB rating from Egan-Jones and investment-grade…

Thank you. We can now answer any questions.

We will now begin the question-and-answer session. [Operator Instructions]. The first question will come from Robert Dodd with Raymond James. Please go ahead.

Just looking at the current rate outlook environment, obviously you've got a primarily floating rate book and fixed rate liabilities. So if the LIBOR curve is correct currently, and we drop from what was something like 2.5 in the June quarter to something more like 1.5 by the end of next year, what plans can you put into place to kind of mitigate that impact? Obviously, one of the options is leveling up. And can you give us any color on how much of your liability structure still has a one-to-one covenant embedded in it versus just fully at compliance and then what you can do on the asset side as well?

Sure. Go ahead, Grier.

Okay. Thank you, Robert, for your question. Obviously, an environment in which LIBOR is decreasing can also signal concerns on an economic basis. So, it starts with a principal protection and credit protection from an underwriting standpoint. So that's always going to be our prioritization on the asset side of the ledger, on the left-hand side the balance sheet. I wouldn't be surprised to see a little bit of a spread give back, because you had spreads dropping as LIBOR was increasing. So a little bit of the opposite dynamic occurring in the inverse, I think it's reasonable to assume to offset. And we do have LIBOR floors in number of our deals, where we act as agent. We've attempted to set LIBOR at close to prevailing rate, so new originations on an agented basis in the last year. So we're in the 200 plus LIBOR category. Also in our controlled investments we're somewhat insulated from that because we've got the ability to sustain yield. On the right-hand side of our balance sheet, as John mentioned in our opening remarks, we have been trimming our cost of capital. And while respecting and maintaining diversity of access in multiple debt capital markets, we have been prioritizing those that we deem to be more efficient and appropriate from a risk management standpoint. So that means our programmatic issuance has been prioritized and we've trimmed the cost of that capital by at least 150 basis points in the last six weeks alone. We also expect to be prioritizing and already are, usage of our revolver, which we just extended and amended in the past year, which gives us longevity from a maturity standpoint, that's obviously floating rates that will benefit by increasing usage. And we've been retiring debt in our near-term maturities, especially…

Okay. Is that helpful, Robert?

Yes, that's helpful. If I can two quick follow-ups to that. To your point, Grier, we can see spreads give back and they do tend to widen when rates come down. The ability to kind of capture that depends on how fast a portfolio turns over for the most part, right? And so, over the last year, we've seen relatively lower turnover in your portfolio, I mean about $600 million in repayments, about 10% of the portfolio '19 versus much higher than in '18 and '17. So, that turnover has slowed down asset life [indiscernible], that reduces potentially the ability to capture that spread widening. So, should we expect that your turnover within the portfolio should be accelerating, or -- and/or kind of the asset life shrinking to take advantage of those widening spreads?

Yes. Portfolio turnover is a little bit tricky measure, I think the way you're describing it, Robert, because there are two important pieces to that. One is NPRC as a controlled investment, looks like it never turns over. But in reality on an underlying individual asset basis, we are exiting up to seven assets per annum. That's the tax REIT maximum that's allowed as per the rules, we've been coming close to that. So we actually have been turning over that particular book. Also, in our structured credit business, when we do an extension we actually maintain the same two-step. And so it looks like it's not turning over and it isn't. But the asset is actually changing in a positive way by extending tenor of the deal, which allows us to do one of and ideally two things simultaneously. One, by extending the deal, purchase a wider spread, longer dated assets as per individual indenture weighted average life test. And number two, reduce our cost of liability financing. So -- and there's turnover that happens also in the individual deals where you're seeing spread widening finally on the asset front. I mean 2018 was the year of asset compression and now we've had three straight quarters of asset spread widening that benefits us and of course both liabilities and assets are floating rate. So you only have kind of a stub floating rate exposure for the sort of unhedged portion, which is your investment amount essentially. So we're getting some capture back there. In terms of middle market book and that turnover, we are getting repayments occurring to start increase a little bit. It's been a very tricky market, because every time there's a significant bout of volatility, if you like it, it impacts your M&A that's such a…

Got it. I appreciate it. One quick -- maybe quick…

Hey, Robert. It's John. I think you got the gist of it, which is that, there is more than one natural hedge in our business, right? We are funding ourselves to PCF, which is our -- I guess, our incremental swing factor funding source, that's floating rate. So as LIBOR declines that source of funding goes down. Our company -- our portfolio companies are funding themselves primarily with LIBOR based paper. So lowering interest rates is intended to make their life easier and does, all things being equal. So just to mention, just those two items are examples of the natural hedge in our business. It is true, I think, that we would prefer much more inflation and much greater spreads. But I think that would erode the real returns to our shareholders. So as far as our shareholders are concerned, measuring real returns, I believe that they are net winners as interest rates decline.

Yes, I appreciate that John. Just one more I got on the REIT. In the past you told us something like the dividends from the REIT correlate with exits because it creates a taxable event, et cetera, et cetera. And in your commentary Grier, John, you said that you've got a number -- you've done a number of exits and got a number that are coming soon. So would it be fair to say that there should be more dividend income from the REIT or is that any gains within that more likely to be reinvested?

So I would describe our outlook for NPRC as a reasonably stable within a band income distribution expectation. And based on assets that we have already exited, as well as ones that are under contract, as well as ones we expect to be under contract soon, we think we have over two years of kind of rough run rate income distributions in effect banked probably more like 2.5 years. And then we would be looking to add to that by exiting other assets as we identify them. And essentially what we do is every quarter reupdate our cash flows and run NPV analysis of the individual assets. Should we exit? Should we refinance? How should we refinance and what tenor and structure should we do a dividend recap, a so-called supplemental financing? Should we stick with the GSE, Fannie and Freddie? The CMBS bid has actually become more competitive off late, in part because the GSEs are reaching some of their regulatory maximums for multi-family. So it's nice to see the private bid come in more strongly. So we do all these things and when that spits out of the analysis to exit, we do so with an optimal fashion. So we feel very good about the sustained cash flow income generation power of that business to get multiple years in effect banked. And we're looking to add to and extend that tenor.

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

Yes, so I think we're all set. Thanks everyone. Bye now.

Thank you.

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