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Below I’ve excerpted a recent analysis he published on Prospect Capital Corporation (PSEC).
Are BDCs At Another Buying Point?
Seeking Alpha Feb. 10, 2016
Obviously there will be an avalanche of positive articles praising PSEC for beating estimates and covering its dividends. My preliminary analysis of the results was littered with red flags including investments that are marked above market levels and dangerously close to asset coverage ratios as well as a lack of share repurchases through February 9, 2016. Keep in mind that the company issues almost 200,000 new shares per month related to its DRIP program. However, since the company is capital constrained due to the leverage and coverage ratios, the company would need to use proceeds from repayments/sales to repurchase shares rather than new originations. Obviously this will be discussed on the call.
I believe that the rumors of the potential SEC query is only the beginning of new set of headaches for the company that could be followed by lawsuits related to overstated assets driving higher fees to management. I am hoping I am wrong as drama with BDC management seems to bring down multiples for the entire sector and PSEC is the most visible.
Plenty of BDCs beat quarterly analyst estimates especially with lumpy non-recurring fee and dividend income and investors usually shrug it off as onetime. As you can see in the table below, the recent quarter had much larger amounts of dividend and fee income this quarter but declining recurring interest income. Also, my prelim vintage assessment is that the company continues to have a riskier than average portfolio for the reasons discussed in my other “PSEC Articles“.