UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 814-00659
PROSPECT CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
10 East 40th Street, 42nd Floor
New York, New York
(Address of principal executive offices)
43-2048643
(I.R.S. Employer
Identification No.)
10016
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
Registrant’s telephone number, including area code: (212) 448-0702
Title of each class
Name of each exchange on which registered
Common Stock, par value $0.001 per share
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o
No ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o
No ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý
No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit
and post such files). Yes o
No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to
the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o
No ý
The aggregate market value of the common equity held by non-affiliates of the Registrant as of December 30, 2016 was $2.791 billion (based on the closing price on that date of
$8.35 on the NASDAQ Global Select Market). For the purposes of calculating this amount only, all executive officers and Directors are “affiliates” of the Registrant.
As of August 28, 2017 , there were 360,221,762 shares of the Registrant’s common stock outstanding.
Portions of the Registrant’s definitive Proxy Statement relating to the 2017 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission, are
incorporated by reference in Part III of this Annual Report on Form 10-K to the extent described therein.
Documents Incorporated by Reference
Table of Contents
Forward-Looking Statements
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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FORWARD-LOOKING STATEMENTS
This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,” “intend,” “estimate,” “anticipate,”
“project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or
similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we
expect or anticipate will occur in the future—including statements relating to volume growth, share of sales and earnings per share growth, and statements
expressing general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are
reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements
speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not
limited to, those described in Part I, “Item 1A. Risk Factors” and elsewhere in this report and those described from time to time in our future reports filed with the
Securities and Exchange Commission.
The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:
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our future operating results;
our business prospects and the prospects of our portfolio companies;
the impact of investments that we expect to make;
our contractual arrangements and relationships with third parties;
the dependence of our future success on the general economy and its impact on the industries in which we invest;
the ability of our portfolio companies to achieve their objectives;
difficulty in obtaining financing or raising capital, especially in the current credit and equity environment;
the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;
adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;
a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;
our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;
the adequacy of our cash resources and working capital;
the timing of cash flows, if any, from the operations of our portfolio companies;
the ability of the Investment Adviser to locate suitable investments for us and to monitor and administer our investments; and
authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board,
the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ Global Select Market, and other authorities that we are subject to, as
well as their counterparts in any foreign jurisdictions where we might do business.
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Item 1. Business
PART I
In this report, the terms “Prospect,” “we,” “us” and “our” mean Prospect Capital Corporation and all entities included in our consolidated financial statements,
unless the context specifically requires otherwise.
General
Prospect is a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company
incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940
Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the
“Code”). We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004. We are one of the largest BDCs with
approximately $6.17 billion of total assets as of June 30, 2017 .
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect
Administration LLC (“Prospect Administration” or the “Administrator”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services
and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior
and subordinated debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes.
We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows.
We currently have nine strategies that guide our origination of investment opportunities: (1) lending to companies controlled by private equity sponsors, (2)
lending to companies not controlled by private equity sponsors, (3) purchasing controlling equity positions and lending to operating companies, (4) purchasing
controlling equity positions and lending to financial services companies, (5) purchasing controlling equity positions and lending to real estate companies, (6)
purchasing controlling equity positions and lending to aircraft leasing companies (7) investing in structured credit (8) investing in syndicated debt and (9) investing
in online loans. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination
strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy.
Lending to Companies Controlled by Private Equity Sponsors - We make agented loans to companies which are controlled by private equity sponsors. This
debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. Historically,
this strategy has comprised approximately 40%-60% of our portfolio.
Lending to Companies not Controlled by Private Equity Sponsors - We make loans to companies which are not controlled by private equity sponsors, such as
companies that are controlled by the management team, the founder, a family or public shareholders. This origination strategy may have less competition to
provide debt financing than the private-equity-sponsor origination strategy because such company financing needs are not easily addressed by banks and often
require more diligence preparation. This origination strategy can result in investments with higher returns or lower leverage than the private-equity-sponsor
origination strategy. Historically, this strategy has comprised up to approximately 15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Operating Companies - This strategy involves purchasing yield-producing debt and controlling equity
positions in non-financial-services operating companies. We believe that we can provide enhanced certainty of closure and liquidity to sellers and we look for
management to continue on in their current roles. This strategy has comprised approximately 5%-15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Financial Services Companies - This strategy involves purchasing yield-producing debt and control
equity investments in financial services companies, including consumer direct lending, sub-prime auto lending and other strategies. These investments are
often structured in tax-efficient partnerships, enhancing returns. This strategy has comprised approximately 5%-15% of our portfolio.
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Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate
investment trusts (“REIT” or “REITs”). National Property REIT Corp.’s (“NPRC”), an operating company and the surviving entity of the May 23, 2016
merger with American Property REIT Corp. and United Property REIT Corp, real estate investments are in various classes of developed and occupied real
estate properties that generate current yields, including multi-family properties, student housing, and self-storage. NPRC seeks to identify properties that have
historically significant occupancy rates and recurring cash flow generation. NPRC generally co-invests with established and experienced property
management teams that manage such properties after acquisition. Additionally, NPRC purchases loans originated by certain consumer loan facilitators. It
generally purchases each loan in its entirety (i.e., a “whole loan”). The borrowers are consumers, and the loans are typically serviced by the facilitators of the
loans. This investment strategy has comprised approximately 5%-10% of our business.
Purchasing Controlling Equity Positions and Lending to Aircraft Leasing Companies - We invest in debt as well as equity in companies with aircraft assets
subject to commercial leases to airlines across the globe. We believe that these investments can present attractive return opportunities due to cash flow
consistency from long-term leases coupled with hard asset residual value. We believe that these investment companies seek to deliver risk-adjusted returns
with strong downside protection by analyzing relative value characteristics across a variety of aircraft types and vintages. This strategy historically has
comprised less than 5% of our portfolio.
Investing in Structured Credit - We make investments in CLOs, often taking a significant position in the subordinated interests (equity) of the CLOs. The
underlying portfolio of each CLO investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real
estate, mortgages, or consumer-based credit assets. The CLOs in which we invest are managed by established collateral management teams with many years
of experience in the industry. This strategy has comprised approximately 10%-20% of our portfolio.
Investing in Syndicated Debt - On a primary or secondary basis, we purchase primarily senior and secured loans and high yield bonds that have been sold to a
club or syndicate of buyers. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to
the transaction by providing anchoring orders. This strategy has comprised approximately 5%-10% of our portfolio.
Investing in Online Loans - We purchase loans originated by certain small-and-medium-sized business (“SME”) loan facilitators. We generally purchase each
loan in its entirety (i.e., a “whole loan”). The borrowers are SMEs and the loans are typically serviced by the facilitators of the loans. This investment strategy
has comprised up to approximately 1% of our portfolio.
Typically, we concentrate on making investments in companies with annual revenues of less than $750 million and enterprise values of less than $1 billion. Our
typical investment involves a secured loan of less than $250 million. We also acquire controlling interests in companies in conjunction with making secured debt
investments in such companies. In most cases, companies in which we invest are privately held at the time we invest in them. We refer to these companies as
“target” or “middle market” companies and these investments as “middle market investments.”
We seek to maximize total returns to our investors, including both current yield and equity upside, by applying rigorous credit analysis and asset-based and cash-
flow based lending techniques to make and monitor our investments. We are constantly pursuing multiple investment opportunities, including purchases of
portfolios from private and public companies, as well as originations and secondary purchases of particular securities. We also regularly evaluate control
investment opportunities in a range of industries, and some of these investments could be material to us. There can be no assurance that we will successfully
consummate any investment opportunity we are currently pursuing. If any of these opportunities are consummated, there can be no assurance that investors will
share our view of valuation or that any assets acquired will not be subject to future write downs, each of which could have an adverse effect on our stock price.
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Our Investment Objective and Policies
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We focus on making
investments in private companies. We are a non-diversified company within the meaning of the 1940 Act.
We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured
loans generally are senior debt instruments that rank ahead of unsecured debt of a given portfolio company. These loans also have the benefit of security interests
on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Our investments in CLOs are subordinated to senior loans
and are generally unsecured. We invest in debt and equity positions of CLOs which are a form of securitization in which the cash flows of a portfolio of loans are
pooled and passed on to different classes of owners in various tranches. Our CLO investments are derived from portfolios of corporate debt securities which are
generally risk rated from BB to B.
We may also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. These may be in several
industries, including industrial, service, aircraft leasing, real estate and financial businesses.
We seek to maximize returns and minimize risk for our investors by applying rigorous analysis to make and monitor our investments. While the structure of our
investments varies, we can invest in senior secured debt, senior unsecured debt, subordinated secured debt, subordinated unsecured debt, convertible debt,
convertible preferred equity, preferred equity, common equity, warrants and other instruments, many of which generate current yield. While our primary focus is to
seek current income through investment in the debt and/or dividend-paying equity securities of eligible privately-held, thinly-traded or distressed companies and
long-term capital appreciation by acquiring accompanying warrants, options or other equity securities of such companies, we may invest up to 30% of the portfolio
in opportunistic investments in order to seek enhanced returns for stockholders. Such investments may include investments in the debt and equity instruments of
broadly-traded public companies. We expect that these public companies generally will have debt securities that are non-investment grade. Such investments may
also include purchases (either in the primary or secondary markets) of the equity and junior debt tranches of a type of pools such as CLOs. Structurally, CLOs are
entities that are formed to hold a portfolio of senior secured loans made to companies whose debt is rated below investment grade or, in limited circumstances,
unrated. The senior secured loans within a CLO are limited to senior secured loans which meet specified credit and diversity criteria and are subject to
concentration limitations in order to create an investment portfolio that is diverse by senior secured loan, borrower, and industry, with limitations on non-U.S.
borrowers. Within this 30% basket, we have and may make additional investments in debt and equity securities of financial companies and companies located
outside of the United States.
Our investments may include other equity investments, such as warrants, options to buy a minority interest in a portfolio company, or contractual payment rights or
rights to receive a proportional interest in the operating cash flow or net income of such company. When determined by the Investment Adviser to be in our best
interest, we may acquire a controlling interest in a portfolio company. Any warrants we receive with our debt securities may require only a nominal cost to
exercise, and thus, as a portfolio company appreciates in value, we may achieve additional investment return from this equity interest. We have structured, and will
continue to structure, some warrants to include provisions protecting our rights as a minority-interest or, if applicable, controlling-interest holder, as well as puts, or
rights to sell such securities back to the company, upon the occurrence of specified events. In many cases, we obtain registration rights in connection with these
equity interests, which may include demand and “piggyback” registration rights.
We plan to hold many of our debt investments to maturity or repayment, but will sell a debt investment earlier if a liquidity event takes place, such as the sale or
recapitalization of a portfolio company, or if we determine a sale of such debt investment to be in our best interest.
We have qualified and elected to be treated for U.S. federal income tax purposes as a RIC under Subchapter M of the Code. As a RIC, we generally do not have to
pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends. To continue to qualify as
a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to qualify for RIC tax
treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our ordinary
income plus the excess of our realized net short-term capital gains over our realized net long-term capital losses.
For a discussion of the risks inherent in our portfolio investments, see “Risk Factors – Risks Relating to Our Investments.”
Industry Sectors
Our portfolio is invested across 33 industry categories. Excluding our CLO investments, which do not have industry concentrations, no individual industry
comprises more than 10.7% of the portfolio on either a cost or fair value basis.
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Ongoing Relationships with Portfolio Companies
Monitoring
Prospect Capital Management monitors our portfolio companies on an ongoing basis. Prospect Capital Management will continue to monitor the financial trends of
each portfolio company to determine if it is meeting its business plan and to assess the appropriate course of action for each company.
Prospect Capital Management employs several methods of evaluating and monitoring the performance and value of our investments, which may include, but are
not limited to, the following:
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Assessment of success in adhering to the portfolio company’s business plan and compliance with covenants;
Regular contact with portfolio company management and, if appropriate, the financial or strategic sponsor to discuss financial position, requirements and
accomplishments;
Comparisons to other portfolio companies in the industry, if any;
Attendance at and participation in board meetings of the portfolio company; and
Review of monthly and quarterly financial statements and financial projections for the portfolio company.
Investment Valuation
To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for
measuring fair value in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and requires disclosures about fair
value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an
orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1 : Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2 : Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not
active, or other observable inputs other than quoted prices.
Level 3 : Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input
that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to each investment.
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such
market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below.
1. Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.
2. The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.
3. The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a
recommendation to the Board of Directors of the value for each investment.
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4. The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the
Investment Adviser, the respective independent valuation firm and the Audit Committee.
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, liquidation technique, discounted
cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by
market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over
the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market
(multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger
and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an
underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider
capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation technique is intended to
approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation
of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate
may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about
those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call
protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal
markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among
other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued primarily using a discounted multi-path cash flow
model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are
sensitized using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-
path) cash flows from the underlying assets and liabilities. These cash flows, after payments to debt tranches senior to our equity positions, are discounted using
appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each
CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the
implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset
management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third party CLO collateral managers.
The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
For a discussion of the risks inherent in determining the value of securities for which readily available market values do not exist, see “Risk Factors – Risks
Relating to Our Business – Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors
and, as a result, there is uncertainty as to the value of our portfolio investments.”
Managerial Assistance
As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significant managerial assistance. “Making available
significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control,
either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us to controlled and non-controlled
portfolio companies will vary according to the particular needs of each portfolio company. Examples of such activities include (i) advice on recruiting, hiring,
management and termination of employees, officers and directors, succession planning and other human resource matters; (ii) advice on capital raising, capital
budgeting, and capital expenditures; (iii) advice on advertising, marketing, and sales; (iv) advice on fulfillment, operations, and execution; (v) advice on managing
relationships with unions and other personnel organizations, financing sources, vendors, customers, lessors, lessees, lawyers, accountants, regulators and other
important counterparties; (vi) evaluating acquisition and divestiture opportunities, plant expansions and closings, and market expansions; (vii) participating in audit
committee, nominating committee, board and management meetings; (viii) consulting with and advising board members and officers of portfolio companies (on
overall strategy and other matters); and (ix) providing other organizational, operational, managerial and financial guidance.
Prospect Administration, when executing a managerial assistance agreement with each portfolio company to which we provide managerial assistance, arranges for
the provision of such managerial assistance on our behalf. When doing so, Prospect Administration utilizes personnel of our Investment Adviser. We, on behalf of
Prospect Administration, invoice portfolio companies
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receiving and paying for managerial assistance, and we remit to Prospect Administration its cost of providing such services, including the charges deemed
appropriate by our Investment Adviser for providing such managerial assistance. No income is recognized by Prospect.
Investment Adviser
Prospect Capital Management, a Delaware limited partnership that is registered as an investment adviser under the Investment Advisers Act of 1940 (the “Advisers
Act”) manages our investments. Prospect Capital Management is led by John F. Barry III and M. Grier Eliasek, two senior executives with significant investment
advisory and business experience. Both Messrs. Barry and Eliasek spend a significant amount of their time in their roles at Prospect Capital Management working
on our behalf. The principal executive offices of Prospect Capital Management are 10 East 40th Street, 42nd Floor, New York, NY 10016. We depend on the due
diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent, on the Investment
Adviser’s investment professionals and the information and deal flow generated by those investment professionals in the course of their investment and portfolio
management activities. The Investment Adviser’s senior management team evaluates, negotiates, structures, closes, monitors and services our investments. Our
future success depends to a significant extent on the continued service of the senior management team, particularly John F. Barry III and M. Grier Eliasek. The
departure of any of the senior managers of the Investment Adviser could have a materially adverse effect on our ability to achieve our investment objective. In
addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to its investment
professionals or its information and deal flow. Under the Investment Advisory Agreement (as defined below), we pay Prospect Capital Management investment
advisory fees, which consist of an annual base management fee based on our gross assets as well as a two-part incentive fee based on our performance. Mr. Barry
currently controls Prospect Capital Management.
Investment Advisory Agreement
Terms
We have entered into an investment advisory and management agreement with the Investment Adviser (the “Investment Advisory Agreement”) under which the
Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services
to, us. Under the terms of the Investment Advisory Agreement, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of
the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make
(including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make.
The Investment Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as
its services to us are not impaired. For providing these services the Investment Adviser receives a fee from us, consisting of two components: a base management
fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our total assets. For services currently rendered under the Investment
Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross
assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar
quarter.
The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment
income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any
other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting
fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base
management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and
outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received
in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital gains or losses. Pre-
incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is
compared to a “hurdle rate” of 1.75% per quarter (7.00% annualized).
7
The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base
management fee. We pay the Investment Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as
follows:
•
•
•
No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds
the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate),
i.e., the “catch-up”; and
20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized assuming a 7.00% annualized hurdle rate).
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current
quarter.
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of
the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all
realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser,
we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each
investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted
against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital
gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment
when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less
than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the
differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar
year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee
involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate
unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount
of any capital gains incentive fees paid since inception.
Examples of Quarterly Incentive Fee Calculation
Example 1: Income Incentive Fee*
*The hypothetical amount of pre-incentive fee net investment income shown is based on a percentage of total net assets.
Alternative 1
Assumptions
•
•
•
•
•
Investment income (including interest, dividends, fees, etc.) = 1.25%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 0.55%
Pre-incentive net investment income does not exceed hurdle rate, therefore there is no income incentive fee.
8
Alternative 2
Assumptions
•
•
•
•
•
Investment income (including interest, dividends, fees, etc.) = 2.70%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 2.00%
Pre-incentive net investment income exceeds hurdle rate, therefore there is an income incentive fee payable by us to the Investment Adviser. The Income Incentive
Fee would be calculated as follows:
= 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.1875%)
= (100% × (2.00% - 1.75%)) + 0%
= 100% × 0.25% + 0%
= 0.25%
Alternative 3
Assumptions
•
•
•
•
•
Investment income (including interest, dividends, fees, etc.) = 3.00%
Hurdle rate(1) = 1.75%
Base management fee(2) = 0.50%
Other expenses (legal, accounting, custodian, transfer agent, etc.)(3) = 0.20%
Pre-incentive fee net investment income (investment income – (base management fee + other expenses)) = 2.30%
Pre-incentive net investment income exceeds hurdle rate, therefore there is an income incentive fee payable by us to the Investment Adviser. The Income Incentive
Fee would be calculated as follows:
= 100% × “Catch Up” + the greater of 0% AND (20% × (pre-incentive fee net investment income – 2.1875%)
= (100% × (2.1875% – 1.75%)) + the greater of 0% AND (20% × (2.30% – 2.1875%))
= (100% × 0.4375%) + (20% × 0.1125%)
= 0.4375% + 0.0225%
= 0.46%
(1) Represents 7% annualized hurdle rate.
(2) Represents 2% annualized base management fee.
(3) Excludes organizational and offering expenses.
9
Example 2: Capital Gains Incentive Fee
Alternative 1
Assumptions
•
•
•
•
Year 1: $20 million investment made
Year 2: Fair market value (“FMV”) of investment determined to be $22 million
Year 3: FMV of investment determined to be $17 million
Year 4: Investment sold for $21 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•
•
•
•
Year 1: No impact
Year 2: No impact
Year 3: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation)
Year 4: Increase base amount on which the second part of the incentive fee is calculated by $4 million ($1 million of realized capital gain and $3 million
reversal in unrealized capital depreciation)
Alternative 2
Assumptions
•
•
•
•
•
•
Year 1: $20 million investment made
Year 2: FMV of investment determined to be $17 million
Year 3: FMV of investment determined to be $17 million
Year 4: FMV of investment determined to be $21 million
Year 5: FMV of investment determined to be $18 million
Year 6: Investment sold for $15 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•
•
•
•
•
•
Year 1: No impact
Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation)
Year 3: No impact
Year 4: Increase base amount on which the second part of the incentive fee is calculated by $3 million ( reversal in unrealized capital depreciation)
Year 5: Decrease base amount on which the second part of the incentive fee is calculated by $2 million (unrealized capital depreciation)
Year 6: Decrease base amount on which the second part of the incentive fee is calculated by $3 million ($5 million of realized capital loss offset by a
$2 million reversal in unrealized capital depreciation)
10
Alternative 3
Assumptions
•
•
•
Year 1: $20 million investment made in company A (“Investment A”) and $20 million investment made in company B (“Investment B”)
Year 2: FMV of Investment A is determined to be $21 million and Investment B is sold for $18 million
Year 3: Investment A is sold for $23 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•
•
•
Year 1: No impact
Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $2 million (realized capital loss on Investment B)
Year 3: Increase base amount on which the second part of the incentive fee is calculated by $3 million (realized capital gain on Investment A)
Alternative 4
Assumptions
•
•
•
•
•
Year 1: $20 million investment made in company A (“Investment A”) and $20 million investment made in company B (“Investment B”)
Year 2: FMV of Investment A is determined to be $21 million and FMV of Investment B is determined to be $17 million
Year 3: FMV of Investment A is determined to be $18 million and FMV of Investment B is determined to be $18 million
Year 4: FMV of Investment A is determined to be $19 million and FMV of Investment B is determined to be $21 million
Year 5: Investment A is sold for $17 million and Investment B is sold for $23 million
The impact, if any, on the capital gains portion of the incentive fee would be:
•
•
•
•
•
Year 1: No impact
Year 2: Decrease base amount on which the second part of the incentive fee is calculated by $3 million (unrealized capital depreciation on Investment B)
Year 3: Decrease base amount on which the second part of the incentive fee is calculated by $1 million ($2 million in unrealized capital depreciation on
Investment A and $1 million recovery in unrealized capital depreciation on Investment B)
Year 4: Increase base amount on which the second part of the incentive fee is calculated by $3 million ($1 million recovery in unrealized capital
depreciation on Investment A and $2 million recovery in unrealized capital depreciation on Investment B)
Year 5: Increase base amount on which the second part of the incentive fee is calculated by $1 million ($3 million realized capital gain on Investment B
offset by $3 million realized capital loss on Investment A plus a $1 million reversal in unrealized capital depreciation on Investment A from Year 4)
11
Duration and Termination
The Investment Advisory Agreement was originally approved by our Board of Directors on June 23, 2004 and was recently re-approved by the Board of Directors
on June 13, 2017 for an additional one-year term expiring June 22, 2018. Unless terminated earlier as described below, it will remain in effect from year to year
thereafter if approved annually by our Board of Directors or by the affirmative vote of the holders of a majority of our outstanding voting securities, including, in
either case, approval by a majority of our directors who are not interested persons. The Investment Advisory Agreement will automatically terminate in the event
of its assignment. The Investment Advisory Agreement may be terminated by either party without penalty upon not more than 60 days’ written notice to the other.
See “Risk Factors – Risks Relating to Our Business – We are dependent upon Prospect Capital Management’s key management personnel for our future success.”
Indemnification
The Investment Advisory Agreement provides that, absent willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of the
reckless disregard of its duties and obligations, Prospect Capital Management and its officers, managers, agents, employees, controlling persons, members and any
other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees
and amounts reasonably paid in settlement) arising from the rendering of Prospect Capital Management’s services under the Investment Advisory Agreement or
otherwise as the Investment Adviser.
Administration Agreement
We have also entered into an administration agreement (the “Administration Agreement”) with Prospect Administration under which Prospect Administration,
among other things, provides (or arranges for the provision of) administrative services and facilities for us. For providing these services, we reimburse Prospect
Administration for our allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement,
including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and his staff, including the internal legal staff.
Under this agreement, Prospect Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such
facilities. Prospect Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being
responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Prospect
Administration assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and
dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services
rendered to us by others. Under the Administration Agreement, Prospect Administration also provides on our behalf managerial assistance to those portfolio
companies to which we are required to provide such assistance (see Managerial Assistance section below). The Administration Agreement may be terminated by
either party without penalty upon 60 days’ written notice to the other party. Prospect Administration is a wholly-owned subsidiary of the Investment Adviser.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other
person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) arising from the rendering of Prospect Administration’s services under the Administration Agreement or otherwise as
administrator for us. Our payments to Prospect Administration are reviewed quarterly by our Board of Directors.
Payment of Our Expenses
All investment professionals of the Investment Adviser and its respective staff, when and to the extent engaged in providing investment advisory and management
services, and the compensation and routine overhead expenses of such personnel allocable to such services, will be provided and paid for by the Investment
Adviser. We bear all other costs and expenses of our operations and transactions, including those relating to: organization and offering; calculation of our net asset
value (including the cost and expenses of any independent valuation firm); expenses incurred by Prospect Capital Management payable to third parties, including
agents, consultants or other advisers (such as independent valuation firms, accountants and legal counsel), in monitoring our financial and legal affairs and in
monitoring our investments and performing due diligence on our prospective portfolio companies; interest payable on debt, if any, and dividends payable on
preferred stock, if any, incurred to finance our investments; offerings of our debt, our preferred shares, our common stock and other securities; investment advisory
fees; fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments; transfer agent
and custodial fees; registration fees; listing fees; taxes; independent directors’ fees and expenses; costs of preparing and filing reports or other documents with the
SEC; the costs of any reports, proxy statements or other notices to stockholders, including printing costs; our allocable portion of the fidelity bond, directors and
officers/errors and omissions liability insurance, and any
12
other insurance premiums; direct costs and expenses of administration, including auditor and legal costs; and all other expenses incurred by us, by the Investment
Adviser or by Prospect Administration in connection with administering our business, such as our allocable portion of overhead under the Administration
Agreement, including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and his staff.
License Agreement
We entered into a license agreement with Prospect Capital Management pursuant to which Prospect Capital Management agreed to grant us a non-exclusive,
royalty free license to use the name “Prospect Capital.” Under this agreement, we have a right to use the Prospect Capital name, for so long as Prospect Capital
Management or one of its affiliates remains the Investment Adviser. Other than with respect to this limited license, we have no legal right to the Prospect Capital
name. This license agreement will remain in effect for so long as the Investment Advisory Agreement with the Investment Adviser is in effect.
Determination of Net Asset Value
The net asset value per share of our outstanding shares of common stock will be determined quarterly by dividing the value of total assets minus liabilities by the
total number of shares outstanding.
In calculating the value of our total assets, we will value investments for which market quotations are readily available at such market quotations. Short-term
investments which mature in 60 days or less, such as U.S. Treasury bills, are valued at amortized cost, which approximates market value. The amortized cost
method involves recording a security at its cost (i.e., principal amount plus any premium and less any discount) on the date of purchase and thereafter
amortizing/accreting that difference between the principal amount due at maturity and cost assuming a constant yield to maturity as determined at the time of
purchase. Short-term securities which mature in more than 60 days are valued at current market quotations by an independent pricing service or at the mean
between the bid and ask prices obtained from at least two brokers or dealers (if available, or otherwise by a principal market maker or a primary market dealer).
Investments in money market mutual funds are valued at their net asset value as of the close of business on the day of valuation.
Most of the investments in our portfolio do not have market quotations which are readily available, meaning the investments do not have actively traded markets.
Debt and equity securities for which market quotations are not readily available are valued with the assistance of an independent valuation service using a
documented valuation policy and a valuation process that is consistently applied under the direction of our Board of Directors. For a discussion of the risks inherent
in determining the value of securities for which readily available market values do not exist, see “Risk Factors – Risks Relating to Our Business – Most of our
portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to
the value of our portfolio investments.”
The factors that may be taken into account in valuing such investments include, as relevant, the portfolio company’s ability to make payments, its estimated
earnings and projected discounted cash flows, the nature and realizable value of any collateral, the financial environment in which the portfolio company operates,
comparisons to securities of similar publicly traded companies, changes in interest rates for similar debt instruments and other relevant factors. Due to the inherent
uncertainty of determining the fair value of investments that do not have readily available market quotations, the fair value of these investments may differ
significantly from the values that would have been used had such market quotations existed for such investments, and any such differences could be material.
As part of the fair valuation process, the independent valuation firms engaged by the Board of Directors perform a review of each debt and equity investment
requiring fair valuation and provide a range of values for each investment, which, along with management’s valuation recommendations, is reviewed by our Audit
Committee. Management and the independent valuation firms may adjust their preliminary evaluations to reflect comments provided by our Audit Committee. The
Audit Committee reviews the final valuation reports and management’s valuation recommendations and makes a recommendation to the Board of Directors based
on its analysis of the methodologies employed and the various weights that should be accorded to each portion of the valuation as well as factors that the
independent valuation firms and management may not have included in their evaluation processes. The Board of Directors then evaluates the Audit Committee
recommendations and undertakes a similar analysis to determine the fair value of each investment in the portfolio in good faith.
Determination of fair values involves subjective judgments and estimates. Accordingly, under current accounting standards, the notes to our financial statements
will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our financial statements.
13
Dividend Reinvestment Plan
We have adopted a dividend reinvestment and direct stock purchase plan that provides for reinvestment of our dividends or distributions on behalf of our
stockholders, unless a stockholder elects to receive cash as provided below, and the ability to purchase additional shares by making optional cash investments. As a
result, when our Board of Directors authorizes, and we declare, a cash dividend or distribution, then our stockholders who have not “opted out” of our dividend
reinvestment and direct stock purchase plan will have their cash dividends or distributions automatically reinvested in additional shares of our common stock,
rather than receiving the cash dividends or distributions. If you are not a current stockholder and want to enroll or have “opted out” and wish to rejoin, you may
purchase shares directly through the plan or opt in by enrolling online or submitting to the plan administrator a completed enrollment form and, if you are not a
current stockholder, making an initial investment of at least $250.
No action is required on the part of a registered stockholder to have their cash dividend or distribution reinvested in shares of our common stock. A registered
stockholder may elect to receive an entire dividend or distribution in cash by notifying the plan administrator and our transfer agent and registrar, in writing so that
such notice is received by the plan administrator no later than the record date for dividends to stockholders. The plan administrator will set up a dividend
reinvestment account for shares acquired pursuant to the plan for each stockholder who has not so elected to receive dividends and distributions in cash or who has
enrolled in the plan as described herein (each, a “Participant”). The plan administrator will hold each Participant’s shares, together with the shares of other
Participants, in non-certificated form in the plan administrator’s name or that of its nominee. Upon request by a Participant to terminate their participation in the
plan, received in writing, via the internet or the plan administrator’s toll free number no later than 3 business days prior to a dividend or distribution payment date,
such dividend or distribution will be paid out in cash and not be reinvested. If such request is received fewer than 3 business days prior to a dividend or distribution
payment date, such dividend or distribution will be reinvested but all subsequent dividends and distributions will be paid to the stockholder in cash on all balances.
Upon such termination of the Participant’s participation in the plan, all whole shares owned by the Participant will be issued to the Participant in certificated form
and a check will be issued to the Participant for the proceeds of fractional shares less a transaction fee of $15. Those stockholders whose shares are held by a
broker or other financial intermediary may receive dividends or distributions in cash by notifying their broker or other financial intermediary of their election.
We primarily use newly-issued shares to implement reinvestment of dividends and distributions under the plan, whether our shares are trading at a premium or at a
discount to net asset value. However, we reserve the right to purchase shares in the open market in connection with the implementation of reinvestment of
dividends or distributions under the plan. The number of shares to be issued to a stockholder is determined by dividing the total dollar amount of the dividend or
distribution payable to such stockholder by the market price per share of our common stock at the close of regular trading on the NASDAQ Global Select Market
on the last business day before the payment date for such dividend or distribution. Market price per share on that date will be the closing price for such shares on
the NASDAQ Global Select Market or, if no sale is reported for such day, at the average of their reported bid and asked prices. The number of shares of our
common stock to be outstanding after giving effect to payment of the dividend or distribution cannot be established until the value per share at which additional
shares will be issued has been determined and elections of our stockholders have been tabulated. Stockholders who do not elect to receive dividends and
distributions in shares of common stock may experience accretion to the net asset value of their shares if our shares are trading at a premium at the time we issue
new shares under the plan and dilution if our shares are trading at a discount. The level of accretion or discount would depend on various factors, including the
proportion of our stockholders who participate in the plan, the level of premium or discount at which our shares are trading and the amount of the dividend or
distribution payable to a stockholder.
There are no brokerage charges or other charges to stockholders who participate in reinvestment of dividends or distributions under the plan. The plan
administrator’s fees under the plan are paid by us. If a participant elects by written notice to the plan administrator to have the plan administrator sell part or all of
the shares held by the plan administrator in the participant’s account and remit the proceeds to the participant, the plan administrator is authorized to deduct a $15
transaction fee plus a $0.10 per share brokerage commissions from the proceeds.
Stockholders who receive dividends or distributions in the form of stock are subject to the same U.S. federal, state and local tax consequences as are stockholders
who elect to receive their dividends or distributions in cash. A stockholder’s basis for determining gain or loss upon the sale of stock received in a dividend or
distribution from us will be equal to the total dollar amount of the dividend or distribution payable to the stockholder. Any stock received in a dividend or
distribution will have a new holding period for tax purposes commencing on the day following the day on which the shares are credited to the U.S. Stockholder’s
account (as defined below).
Participants in the plan have the option of making additional cash payments to the plan administrator for investment in the shares at the then current market price.
Such payments may be made in any amount from $25 to $10,000 per transaction. Participants in the plan may also elect to have funds electronically withdrawn
from their checking or savings account each month. Direct debit of cash will be performed on the 10th of each month. Participants may elect this option by
submitting a written authorization form or by enrolling online at the plan administrator’s website. The plan administrator will use all funds received from
participants
14
since the prior investment of funds to purchase shares of our common stock in the open market. We will not use newly-issued shares of our common stock to
implement such purchases. Purchase orders will be submitted daily. The plan administrator may, at its discretion, submit purchase orders less frequently but no
later than 30 days after receipt. The plan administrator will charge each stockholder who makes such additional cash payments $2.50, plus a $0.10 per share
brokerage commission. Cash dividends and distributions payable on all shares credited to your plan account will be automatically reinvested in additional shares
pursuant to the terms of the plan. Brokerage charges for some purchases are expected to be less than the usual brokerage charge for such transactions. Instructions
sent by a participant to the plan administrator in connection with such participant’s cash payment may not be rescinded.
Participants may terminate their accounts under the plan by notifying the plan administrator via its website at www.amstock.com or by filling out the transaction
request form located at the bottom of their statement and sending it to the plan administrator at American Stock Transfer & Trust Company, P.O. Box 922, Wall
Street Station, New York, NY 10269-0560 or by calling the plan administrator’s Interactive Voice Response System at (888) 888-0313. Upon termination, the
stockholder will receive certificates for the full shares credited to your plan account. If you elect to receive cash, the plan administrator sells such shares and
delivers a check for the proceeds, less the $0.10 per share commission and the plan administrator’s transaction fee of $15. In every case of termination, fractional
shares credited to a terminating plan account are paid in cash at the then-current market price, less any commission and transaction fee.
The plan may be terminated by us upon notice in writing mailed to each participant at least 30 days prior to any payable date for the payment of any dividend by us
or distribution pursuant to any additional cash payment made. All correspondence concerning the plan should be directed to the plan administrator by mail at
American Stock Transfer and Trust Company LLC, 6201 15th Avenue, Brooklyn, New York 11219, or by telephone at 888-888-0313.
Stockholders who purchased their shares through or hold their shares in the name of a broker or financial institution should consult with a representative of their
broker or financial institution with respect to their participation in our dividend reinvestment plan and direct stock purchase plan. Such holders of our stock may
not be identified as our registered stockholders with the plan administrator and may not automatically have their cash dividend or distribution reinvested in shares
of our common stock by the plan administrator.
Material U.S. Federal Income Tax Considerations
The following discussion is a general summary of the material U.S. federal income tax considerations applicable to us and to an investment in our common shares.
This summary does not purport to be a complete description of the income tax considerations applicable to us or our investors on such an investment. For example,
we have not described tax consequences that we assume to be generally known by investors or certain considerations that may be relevant to certain types of
holders subject to special treatment under U.S. federal income tax laws, including stockholders subject to the alternative minimum tax, tax-exempt organizations,
insurance companies, dealers in securities, pension plans and trusts, financial institutions, U.S. Stockholders (as defined below) whose functional currency is not
the U.S. dollar, persons who mark-to-market our shares and persons who hold our shares as part of a “straddle,” “hedge” or “conversion” transaction. This
summary assumes that investors hold our common stock as capital assets (within the meaning of the Code). The discussion is based upon the Code, Treasury
regulations, and administrative and judicial interpretations, each as of the date of this report and all of which are subject to change, possibly retroactively, which
could affect the continuing validity of this discussion. This summary does not discuss any aspects of U.S. estate or gift tax or foreign, state or local tax. It does not
discuss the special treatment under U.S. federal income tax laws that could result if we invested in tax-exempt securities or certain other investment assets.
A “U.S. Stockholder” is a beneficial owner of shares of our common stock that is for U.S. federal income tax purposes:
•
•
•
•
A citizen or individual resident of the United States;
A corporation, or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the laws of the United States
or any state thereof or the District of Columbia;
An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or
A trust if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person.
A “Non-U.S. Stockholder” is a beneficial owner of shares of our common stock that is not a partnership and is not a U.S. Stockholder.
15
If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds shares of our common stock, the tax treatment of a partner
in the partnership will generally depend upon the status of the partner and the activities of the partnership. A prospective stockholder that is a partner of a
partnership holding shares of our common stock should consult its tax advisor with respect to the purchase, ownership and disposition of shares of our common
stock.
Tax matters are very complicated and the tax consequences to an investor of an investment in our shares will depend on the facts of his, her or its particular
situation. We encourage investors to consult their own tax advisors regarding the specific consequences of such an investment, including tax reporting
requirements, the applicability of U.S. federal, state, local and foreign tax laws, eligibility for the benefits of any applicable tax treaty and the effect of any possible
changes in the tax laws.
Election to be Taxed as a RIC
As a business development company, we have elected and intend to continue to qualify to be treated as a RIC under Subchapter M of the Code. As a RIC, we
generally are not subject to corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute to our stockholders as dividends.
To qualify as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, to obtain
RIC tax treatment, we must distribute to our stockholders, for each taxable year, at least 90% of our “investment company taxable income,” which is generally our
ordinary income plus the excess of realized net short-term capital gains over realized net long-term capital losses (the “Annual Distribution Requirement”).
Taxation as a RIC
In order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:
•
•
•
Qualify to be treated as a business development company or be registered as a management investment company under the 1940 Act at all times during
each taxable year;
Derive in each taxable year at least 90% of our gross income from dividends, interest, payments with respect to certain securities loans, gains from the
sale or other disposition of stock or other securities or currencies or other income derived with respect to our business of investing in such stock, securities
or currencies and net income derived from an interest in a “qualified publicly traded partnership” (as defined in the Code) (the “90% Income Test”); and
Diversify our holdings so that at the end of each quarter of the taxable year:
◦
◦
At least 50% of the value of our assets consists of cash, cash equivalents, U.S. government securities, securities of other RICs, and other
securities if such other securities of any one issuer do not represent more than 5% of the value of our assets or more than 10% of the outstanding
voting securities of the issuer (which for these purposes includes the equity securities of a “qualified publicly traded partnership”); and
No more than 25% of the value of our assets is invested in the securities, other than U.S. government securities or securities of other RICs, (i) of
one issuer (ii) of two or more issuers that are controlled, as determined under applicable tax rules, by us and that are engaged in the same or
similar or related trades or businesses or (iii) of one or more “qualified publicly traded partnerships,” (the “Diversification Tests”).
To the extent that we invest in entities treated as partnerships for U.S. federal income tax purposes (other than a “qualified publicly traded partnership”), we
generally must include the items of gross income derived by the partnerships for purposes of the 90% Income Test, and the income that is derived from a
partnership (other than a “qualified publicly traded partnership”) will be treated as qualifying income for purposes of the 90% Income Test only to the extent that
such income is attributable to items of income of the partnership which would be qualifying income if realized by us directly. In addition, we generally must take
into account our proportionate share of the assets held by partnerships (other than a “qualified publicly traded partnership”) in which we are a partner for purposes
of the Diversification Tests. If the partnership is a “qualified publicly traded partnership,” the net income derived from such partnership will be qualifying income
for purposes of the 90% Income Test, and interests in the partnership will be “securities” for purposes of the Diversification Tests. We monitor our investments in
equity securities of entities that are treated as partnerships for U.S. federal income tax purposes to prevent our disqualification as a RIC.
In order to meet the 90% Income Test, we may establish one or more special purpose corporations to hold assets from which we do not anticipate earning dividend,
interest or other qualifying income under the 90% Income Test. Any such special purpose corporation would generally be subject to U.S. federal income tax, and
could result in a reduced after-tax yield on the portion of our assets held by such corporation.
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Provided that we qualify as a RIC and satisfy the Annual Distribution Requirement, we will not be subject to U.S. federal income tax on the portion of our
investment company taxable income and net capital gain (which we define as net long-term capital gains in excess of net short-term capital losses) we timely
distribute to stockholders. We will be subject to U.S. federal income tax at the regular corporate rates on any income or capital gain not distributed (or deemed
distributed) to our stockholders. Any undistributed taxable income is subject to U.S. federal income tax.
We will be subject to a 4% non-deductible U.S. federal excise tax on certain undistributed income of RICs unless we distribute in a timely manner an amount at
least equal to the sum of (i) 98% of our ordinary income recognized during the calendar year, (ii) 98.2% of our capital gain net income, as defined by the Code,
recognized for the one year period ending October 31 in that calendar year and (iii) any income recognized, but not distributed, in preceding years.
We may be required to recognize taxable income in circumstances in which we do not receive cash. For example, if we hold debt obligations that are treated under
applicable tax rules as having original issue discount, we must include in income each year a portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by us in the same taxable year. Because any original issue discount accrued will be
included in our investment company taxable income for the year of accrual, we may be required to make a distribution to our stockholders in order to satisfy the
Annual Distribution Requirement, even though we will not have received any corresponding cash amount.
Gain or loss realized by us from warrants acquired by us as well as any loss attributable to the lapse of such warrants generally will be treated as capital gain or
loss. Such gain or loss generally will be long-term or short-term, depending on how long we held a particular warrant. As a RIC, we are not allowed to carry
forward or carry back a net operating loss for purposes of computing our investment company taxable income in other taxable years.
Although we do not presently expect to do so, we are authorized to borrow funds and to sell assets in order to satisfy distribution requirements. However, under the
1940 Act, we are not permitted to make distributions to our stockholders while our debt obligations and other senior securities are outstanding unless certain “asset
coverage” tests are met. See “Regulation as a Business Development Company – Senior Securities.” Moreover, our ability to dispose of assets to meet our
distribution requirements may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC, including the
Diversification Tests. If we dispose of assets in order to meet the Annual Distribution Requirement or to avoid the excise tax, we may make such dispositions at
times that, from an investment standpoint, are not advantageous.
If we fail to satisfy the Annual Distribution Requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable
income at regular corporate rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions
would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate
applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements
are met. Subject to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction. To qualify again to be taxed as
a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years. In addition,
if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to
recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had
been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
Certain of our investment practices may be subject to special and complex U.S. federal income tax provisions that may, among other things, (i) disallow, suspend
or otherwise limit the allowance of certain losses or deductions, (ii) convert lower taxed long-term capital gain and qualified dividend income into higher taxed
short-term capital gain or ordinary income, (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited), (iv) cause us
to recognize income or gain without a corresponding receipt of cash, (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to
occur, (vi) adversely alter the characterization of certain complex financial transactions, and (vii) produce income that will not be qualifying income for purposes
of the 90% Income Test. We will monitor our transactions and may make certain tax elections in order to mitigate the effect of these provisions.
We may invest in preferred securities or other securities the U.S. federal income tax treatment of which may be unclear or may be subject to recharacterization by
the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the expected tax treatment, it could affect the timing or
character of income recognized, requiring us to purchase or sell securities, or otherwise change our portfolio, in order to comply with the tax rules applicable to
RICs under the Code.
In September 2016, the IRS and U.S. Treasury Department issued proposed regulations that, if finalized, would provide that the income inclusions from a PFIC
with a QEF election or a CFC would not be good income for purposes of the 90% Income Test
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unless the Company receives a cash distribution from such entity in the same year attributable to the included income. If such income were not considered “good
income” for purposes of the 90% income test, the Company may fail to qualify as a RIC.
It is unclear whether or in what form these regulations will be adopted or, if adopted, whether such regulations would have a significant impact on the income that
could be generated by the Company. If adopted, the proposed regulations would apply to taxable years of the Company beginning on or after 90 days after the
regulations are published as final. The Company is monitoring the status of the proposed regulations and is assessing the potential impact of the proposed tax
regulation on its operations.
Taxation of U.S. Stockholders
Distributions by us generally are taxable to U.S. Stockholders as ordinary income or capital gains. Distributions of our “investment company taxable income”
(which is, generally, our ordinary income plus realized net short-term capital gains in excess of realized net long-term capital losses) will be taxable as ordinary
income to U.S. Stockholders to the extent of our current or accumulated earnings and profits, whether paid in cash or reinvested in additional common stock.
Provided that certain holding period and other requirements are met, such distributions (if reported by us) may qualify (i) for the dividends received deduction
available to corporations, but only to the extent that our income consists of dividend income from U.S. corporations and (ii) in the case of individual shareholders,
as qualified dividend income eligible to be taxed at long-term capital gain rates to the extent that we receive qualified dividend income (generally, dividend income
from taxable domestic corporations and certain qualified foreign corporations). There can be no assurance as to what portion, if any, of our distributions will
qualify for favorable treatment as qualified dividend income.
Distributions of our net capital gain (which is generally our realized net long-term capital gains in excess of realized net short-term capital losses) properly reported
by us as “capital gain dividends” will be taxable to a U.S. Stockholder as long-term capital gains, regardless of the U.S. Stockholder’s holding period for its
common stock and regardless of whether paid in cash or reinvested in additional common stock. Distributions in excess of our current and accumulated earnings
and profits first will reduce a U.S. Stockholder’s adjusted tax basis in such stockholder’s common stock and, after the adjusted basis is reduced to zero, will
constitute capital gains to such U.S. Stockholder.
Although we currently intend to distribute any long-term capital gains at least annually, we may in the future decide to retain some or all of our long-term capital
gains, and designate the retained amount as a “deemed distribution.” In that case, among other consequences, we will pay tax on the retained amount, each U.S.
Stockholder will be required to include his, her or its proportionate share of the deemed distribution in income as if it had been actually distributed to the U.S.
Stockholder, and the U.S. Stockholder will be entitled to claim a credit equal to its allocable share of the tax paid thereon by us. The amount of the deemed
distribution net of such tax will be added to the U.S. Stockholder’s tax basis for his, her or its common stock. Since we expect to pay tax on any retained capital
gains at our regular corporate tax rate, and since that rate is in excess of the maximum rate currently payable by individuals on long-term capital gains, the amount
of tax that individual stockholders will be treated as having paid and for which they will receive a credit will exceed the tax they owe on the retained net capital
gain. Such excess generally may be claimed as a credit against the U.S. Stockholder’s other U.S. federal income tax obligations or may be refunded to the extent it
exceeds a stockholder’s liability for U.S. federal income tax. A stockholder that is not subject to U.S. federal income tax or otherwise required to file a U.S. federal
income tax return would be required to file a U.S. federal income tax return on the appropriate form in order to claim a refund for the taxes we paid. In order to
utilize the deemed distribution approach, we must provide written notice to our stockholders prior to the expiration of 60 days after the close of the relevant taxable
year. We cannot treat any of our investment company taxable income as a “deemed distribution.”
For purposes of determining (1) whether the Annual Distribution Requirement is satisfied for any year and (2) the amount of capital gain dividends paid for that
year, we may, under certain circumstances, elect to treat a dividend that is paid during the following taxable year as if it had been paid during the taxable year in
question. If we make such an election, the U.S. Stockholder will still be treated as receiving the dividend in the taxable year in which the distribution is made.
However, any dividend declared by us in October, November or December of any calendar year, payable to stockholders of record on a specified date in any such
month and actually paid during January of the following year, will be treated as if it had been received by our U.S. Stockholders on December 31 of the year in
which the dividend was declared.
If a U.S. Stockholder purchases shares of our common stock shortly before the record date of a distribution, the price of the shares will include the value of the
distribution and the investor will be subject to tax on the distribution even though it represents a return of its investment.
A U.S. Stockholder generally will recognize taxable gain or loss if such U.S. Stockholder sells or otherwise disposes of its shares of our common stock. Any gain
or loss arising from such sale or taxable disposition generally will be treated as long-term capital gain or loss if the U.S. Stockholder has held his, her or its shares
for more than one year. Otherwise, it would be classified as short-term capital gain or loss. However, any capital loss arising from the sale or taxable disposition of
shares of our common stock
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held for six months or less will be treated as long-term capital loss to the extent of the amount of capital gain dividends received, or undistributed capital gain
deemed received, with respect to such shares. In addition, all or a portion of any loss recognized upon a taxable disposition of shares of our common stock may be
disallowed if other substantially identical shares are purchased (whether through reinvestment of distributions or otherwise) within 30 days before or after the
disposition. Capital losses are deductible only to the extent of capital gains (subject to an exception for individuals under which a limited amount of capital losses
may be offset against ordinary income).
In general, individual U.S. Stockholders currently are subject to a preferential rate on their net capital gain, or the excess of realized net long-term capital gain over
realized net short-term capital loss for a taxable year, including long-term capital gain derived from an investment in our shares. Such rate is lower than the
maximum rate on ordinary income currently payable by individuals. Corporate U.S. Stockholders currently are subject to U.S. federal income tax on net capital
gain at ordinary income rates.
Certain U.S. Stockholders who are individuals, estates or trusts and whose income exceeds certain thresholds will be required to pay a 3.8% Medicare tax on all or
a portion of their “net investment income,” which includes dividends received from us and capital gains from the sale or other disposition of our stock.
We will make available to each of our U.S. Stockholders, as promptly as possible after the end of each calendar year, a notice detailing, on a per share basis, the
amounts includible in such U.S. Stockholder’s taxable income for such year as ordinary income and as long-term capital gain on form 1099-DIV. In addition, the
amount and the U.S. federal tax status of each year’s distributions generally will be reported to the IRS. Distributions may also be subject to additional state, local
and foreign taxes depending on a U.S. Stockholder’s particular situation.
Payments of dividends, including deemed payments of constructive dividends, or the proceeds of the sale or other taxable disposition of our common stock
generally are subject to information reporting unless the U.S. Stockholder is an exempt recipient. Such payments may also be subject to U.S. federal backup
withholding at the applicable rate if the recipient of such payment fails to supply a taxpayer identification number and otherwise comply with the rules for
establishing an exemption from backup withholding. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules
generally will be allowed as a refund or credit against the holder’s U.S. federal income tax liability, provided that certain information is provided timely to the IRS.
Taxation of Non-U.S. Stockholders
Whether an investment in our common stock is appropriate for a Non-U.S. Stockholder will depend upon that person’s particular circumstances. An investment in
our common stock by a Non-U.S. Stockholder may have adverse tax consequences. Non-U.S. Stockholders should consult their tax advisers before investing in our
common stock.
Distributions of our “investment company taxable income” to Non-U.S. Stockholders that are not “effectively connected” with a U.S. trade or business conducted
by the Non-U.S. Stockholder, will generally be subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate) to the extent of
our current and accumulated earnings and profits.
Properly reported distributions to Non-U.S. Stockholders are generally exempt from U.S. federal withholding tax where they (i) are paid in respect of our
“qualified net interest income” (generally, our U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or
partnership in which we are at least a 10% shareholder, reduced by expenses that are allocable to such income) or (ii) are paid in respect of our “qualified short-
term capital gains” (generally, the excess of our net short-term capital gain over our long-term capital loss for such taxable year). However, depending on our
circumstances, we may report all, some or none of our potentially eligible dividends as such qualified net interest income or as qualified short-term capital gains,
and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. In order to qualify for this exemption from withholding, a Non-
U.S. Stockholder needs to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-
8BEN, W-8BEN-E or substitute form). In the case of shares held through an intermediary, the intermediary may withhold even if we report the payment as
qualified net interest income or qualified short-term capital gain. Non-U.S. Stockholders should contact their intermediaries with respect to the application of these
rules to their accounts. There can be no assurance as to what portion of our distributions will qualify for favorable treatment as qualified net interest income or
qualified short-term capital gains.
Actual or deemed distributions of our net capital gain to a Non-U.S. Stockholder, and gains recognized by a Non-U.S. Stockholder upon the sale of our common
stock, that are not effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder, will generally not be subject to U.S. federal
withholding tax and generally will not be subject to U.S. federal income tax unless the Non-U.S. Stockholder is a nonresident alien individual and is physically
present in the United States for 183 or more days during the taxable year and meets certain other requirements.
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Distributions of our “investment company taxable income” and net capital gain (including deemed distributions) to Non-U.S. Stockholders, and gains realized by
Non-U.S. Stockholders upon the sale of our common stock that are effectively connected with a U.S. trade or business conducted by the Non-U.S. Stockholder,
will be subject to U.S. federal income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. In addition, if such Non-U.S.
Stockholder is a foreign corporation, it may also be subject to a 30% (or lower applicable treaty rate) branch profits tax on its effectively connected earnings and
profits for the taxable year, subject to adjustments, if its investment in our common stock is effectively connected with its conduct of a U.S. trade or business.
If we distribute our net capital gain in the form of deemed rather than actual distributions (which we may do in the future), a Non-U.S. Stockholder will be entitled
to a U.S. federal income tax credit or tax refund equal to the stockholder’s allocable share of the tax we pay on the capital gains deemed to have been distributed.
In order to obtain the refund, the Non-U.S. Stockholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the Non-
U.S. Stockholder would not otherwise be required to obtain a U.S. taxpayer identification number or file a U.S. federal income tax return.
Foreign Account Tax Compliance Act
In addition, withholding at a rate of 30% will be required on dividends in respect of, and after December 31, 2018, withholding at a rate of 30% will be required on
gross proceeds from the sale of, shares of our stock held by or through certain foreign financial institutions (including investment funds), unless such institution
enters into an agreement with the Secretary of the Treasury to report, on an annual basis, information with respect to interests in, and accounts maintained by, the
institution to the extent such interests or accounts are held by certain U.S. persons or by certain non-U.S. entities that are wholly or partially owned by U.S. persons
and to withhold on certain payments. Accordingly, the entity through which our shares are held will affect the determination of whether such withholding is
required. Similarly, dividends in respect of, and, after December 31, 2018, gross proceeds from the sale of, our shares held by an investor that is a non-financial
non-U.S. entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity
does not have any “substantial United States owners” or (ii) provides certain information regarding the entity’s “substantial United States owners,” which we or the
applicable withholding agent will in turn provide to the IRS. An intergovernmental agreement between the United States and an applicable foreign country, or
future Treasury regulations or other guidance, may modify these requirements. We will not pay any additional amounts to stockholders in respect of any amounts
withheld. Non-U.S. Stockholders are encouraged to consult their tax advisors regarding the possible implications of the legislation on their investment in our
shares.
A Non-U.S. Stockholder generally will be required to comply with certain certification procedures to establish that such holder is not a U.S. person in order to
avoid backup withholding with respect to payments of dividends, including deemed payments of constructive dividends, or the proceeds of a disposition of our
common stock. In addition, we are required to annually report to the IRS and each Non-U.S. Stockholder the amount of any dividends or constructive dividends
treated as paid to such Non-U.S. Stockholder, regardless of whether any tax was actually withheld. Copies of the information returns reporting such dividend or
constructive dividend payments and the amount withheld may also be made available to the tax authorities in the country in which a Non-U.S. Stockholder resides
under the provisions of an applicable income tax treaty. Backup withholding is not an additional tax, and any amounts withheld under the backup withholding rules
generally will be allowed as a refund or credit against a Non-U.S. Stockholder’s U.S. federal income tax liability, if any, provided that certain required information
is provided timely to the IRS.
Non-U.S. persons should consult their tax advisors with respect to the U.S. federal income tax and withholding tax, and state, local and foreign tax consequences of
an investment in our common stock.
Failure to Obtain RIC Tax Treatment
If we were unable to obtain tax treatment as a RIC, we would be subject to tax on all of our taxable income at regular corporate rates. We would not be able to
deduct distributions to stockholders, nor would they be required to be made. Distributions would generally be taxable to our stockholders as ordinary dividend
income eligible for the reduced maximum rate applicable for qualified dividend income to the extent of our current and accumulated earnings and profits. Subject
to certain limitations under the Code, corporate distributees would be eligible for the dividends-received deduction.
Distributions in excess of our current and accumulated earnings and profits would be treated first as a return of capital to the extent of the stockholder’s tax basis,
and any remaining distributions would be treated as a capital gain.
The discussion set forth herein does not constitute tax advice, and potential investors should consult their own tax advisors concerning the tax considerations
relevant to their particular situation.
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Regulation as a Business Development Company
General
We are a closed-end, non-diversified investment company that has filed an election to be treated as a BDC under the 1940 Act and has elected to be treated as a
RIC under Subchapter M of the Code. The 1940 Act contains prohibitions and restrictions relating to transactions between business development companies and
their affiliates (including any investment advisers or sub-advisers), principal underwriters and affiliates of those affiliates or underwriters and requires that a
majority of the directors be persons other than “interested persons,” as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not
change the nature of our business so as to cease to be, or to withdraw our election as, a business development company unless approved by a majority of our
outstanding voting securities.
We may invest up to 100% of our assets in securities acquired directly from issuers in privately negotiated transactions. With respect to such securities, we may,
for the purpose of public resale, be deemed an “underwriter” as that term is defined in the Securities Act of 1933. Our intention is to not write (sell) or buy put or
call options to manage risks associated with the publicly traded securities of our portfolio companies, except that we may enter into hedging transactions to manage
the risks associated with interest rate, foreign currency and other market fluctuations. However, in connection with an investment or acquisition financing of a
portfolio company, we may purchase or otherwise receive warrants to purchase the common stock of the portfolio company. Similarly, in connection with an
acquisition, we may acquire rights to require the issuers of acquired securities or their affiliates to repurchase them under certain circumstances. We also do not
intend to acquire securities issued by any investment company that exceed the limits imposed by the 1940 Act. Under these limits, except with respect to money
market funds, we generally cannot acquire more than 3% of the voting stock of any regulated investment company, invest more than 5% of the value of our total
assets in the securities of one investment company or invest more than 10% of the value of our total assets in the securities of more than one investment company.
With regard to that portion of our portfolio invested in securities issued by investment companies, it should be noted that such investments subject our stockholders
indirectly to additional expenses. None of these policies are fundamental and may be changed without stockholder approval.
Qualifying Assets
Under the 1940 Act, a business development company may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which are
referred to as qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company’s total assets. The principal
categories of qualifying assets relevant to our business are the following:
1. Securities purchased in transactions not involving any public offering from the issuer of such securities, which issuer (subject to certain limited
exceptions) is an eligible portfolio company, or from any person who is, or has been during the preceding 13 months, an affiliated person of an eligible
portfolio company, or from any other person, subject to such rules as may be prescribed by the SEC. An “eligible portfolio company” is defined in the
1940 Act and rules adopted pursuant thereto as any issuer which:
a.
b.
is organized under the laws of, and has its principal place of business in, the United States;
is not an investment company (other than a small business investment company wholly owned by the business development company) or a company
that would be an investment company but for certain exclusions under the 1940 Act for certain financial companies such as banks, brokers,
commercial finance companies, mortgage companies and insurance companies; and
c.
satisfies any of the following:
i.
ii.
does not have any class of securities with respect to which a broker or dealer may extend margin credit;
is controlled by a business development company or a group of companies including a business development company and the business
development company has an affiliated person who is a director of the eligible portfolio company;
iii.
is a small and solvent company having total assets of not more than $4 million and capital and surplus of not less than $2 million;
iv. does not have any class of securities listed on a national securities exchange; or
v.
has a class of securities listed on a national securities exchange, but has an aggregate market value of outstanding voting and non-voting
common equity of less than $250 million.
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2. Securities in companies that were eligible portfolio companies when we made our initial investment if certain other requirements are satisfied.
3. Securities of any eligible portfolio company which we control.
4. Securities purchased in a private transaction from a U.S. issuer that is not an investment company or from an affiliated person of the issuer, or in
transactions incident thereto, if the issuer is in bankruptcy and subject to reorganization or if the issuer, immediately prior to the purchase of its securities
was unable to meet its obligations as they came due without material assistance other than conventional lending or financing agreements.
5. Securities of an eligible portfolio company purchased from any person in a private transaction if there is no ready market for such securities and we
already own 60% of the outstanding equity of the eligible portfolio company.
6. Securities received in exchange for or distributed on or with respect to securities described in (1) through (4) above, or pursuant to the exercise of
warrants or rights relating to such securities.
7. Cash, cash equivalents, U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment.
In addition, a business development company must have been organized and have its principal place of business in the United States and must be operated for the
purpose of making investments in the types of securities described in (1), (2), (3) or (4) above.
Managerial Assistance to Portfolio Companies
In order to count portfolio securities as qualifying assets for the purpose of the 70% test, a business development company must either control the issuer of the
securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance;
except that, where the business development company purchases such securities in conjunction with one or more other persons acting together, one of the other
persons in the group may make available such managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we
provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed
to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of
significant managerial assistance provided by us will vary according to the particular needs of each portfolio company. Examples of such activities include advice
on marketing, operations, fulfillment and overall strategy, capital budgeting, managing relationships with financing sources, recruiting management personnel,
evaluating acquisition and divestiture opportunities, participating in board and management meetings, consulting with and advising officers of portfolio companies,
and providing other organizational and financial guidance. We provide significant managerial assistance to all portfolio companies that we control, either by
ourselves or in conjunction with others. Prospect Administration provides such managerial assistance on our behalf to portfolio companies, including controlled
companies, when we are required to provide this assistance, utilizing personnel from Prospect Capital Management.
Temporary Investments
Pending investment in other types of “qualifying assets,” as described above, our investments may consist of cash, cash equivalents, including money market
funds, U.S. government securities or high quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as
temporary investments, so that 70% of our assets are qualifying assets. Typically, we will invest in money market funds, U.S. Treasury bills or in repurchase
agreements that are fully collateralized by cash or securities issued by the U.S. government or its agencies. A repurchase agreement involves the purchase by an
investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an agreed upon future date and at a price which is
greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our assets that may be
invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not
meet the Diversification Tests in order to qualify as a RIC for U.S. federal income tax purposes. Thus, we do not intend to enter into repurchase agreements with a
single counterparty in excess of this limit. The Investment Adviser will monitor the creditworthiness of the counterparties with which we enter into repurchase
agreement transactions.
Senior Securities
We are permitted, under specified conditions, to issue multiple classes of indebtedness and one class of stock senior to our common stock if our asset coverage, as
defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any preferred stock or public debt securities remain
outstanding, we must make provisions to prohibit any distribution to our stockholders or the repurchase of such securities or shares unless we meet the applicable
asset coverage ratios after giving
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effect to such distribution or repurchase. We may also borrow amounts up to 5% of the value of our total assets for temporary or emergency purposes without
regard to asset coverage. For a discussion of the risks associated with leverage, see “Risk Factors – Risks Relating to Our Securities.”
Code of Ethics
We, Prospect Capital Management and Prospect Administration have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes
procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal
investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements.
For information on how to obtain a copy of each code of ethics, see “Available Information.”
Compliance Policies and Procedures
We and the Investment Adviser have adopted and implemented written policies and procedures reasonably designed to prevent violation of the U.S. federal
securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation and
to designate a Chief Compliance Officer to be responsible for administering the policies and procedures. Brian H. Oswald serves as our Chief Compliance Officer.
Proxy Voting Policies and Procedures
We have delegated our proxy voting responsibility to Prospect Capital Management. The Proxy Voting Policies and Procedures of Prospect Capital Management
are set forth below. The guidelines are reviewed periodically by Prospect Capital Management and our independent directors, and, accordingly, are subject to
change.
Introduction.
As an investment adviser registered under the Advisers Act, Prospect Capital Management has a fiduciary duty to act solely in the best interests of its clients. As
part of this duty, Prospect Capital Management recognizes that it must vote client securities in a timely manner free of conflicts of interest and in the best interests
of its clients.
These policies and procedures for voting proxies for Prospect Capital Management’s Investment Advisory clients are intended to comply with Section 206 of, and
Rule 206(4)-6 under, the Advisers Act.
Proxy policies.
These policies are designed to be responsive to the wide range of subjects that may be the subject of a proxy vote. These policies are not exhaustive due to the
variety of proxy voting issues that Prospect Capital Management may be required to consider. In general, Prospect Capital Management will vote proxies in
accordance with these guidelines unless: (1) Prospect Capital Management has determined to consider the matter on a case-by-case basis (as is stated in these
guidelines), (2) the subject matter of the vote is not covered by these guidelines, (3) a material conflict of interest is present, or (4) Prospect Capital Management
might find it necessary to vote contrary to its general guidelines to maximize stockholder value and vote in its clients’ best interests. In such cases, a decision on
how to vote will be made by the Proxy Voting Committee (as described below). In reviewing proxy issues, Prospect Capital Management will apply the following
general policies:
Elections of directors.
In general, Prospect Capital Management will vote in favor of the management-proposed slate of directors. If there is a proxy fight for seats on the Board of
Directors or Prospect Capital Management determines that there are other compelling reasons for withholding votes for directors, the Proxy Voting Committee will
determine the appropriate vote on the matter. Prospect Capital Management believes that directors have a duty to respond to stockholder actions that have received
significant stockholder support. Prospect Capital Management may withhold votes for directors that fail to act on key issues such as failure to implement proposals
to declassify boards, failure to implement a majority vote requirement, failure to submit a rights plan to a stockholder vote and failure to act on tender offers where
a majority of stockholders have tendered their shares. Finally, Prospect Capital Management may withhold votes for directors of non-U.S. issuers where there is
insufficient information about the nominees disclosed in the proxy statement.
Appointment of auditors.
Our Audit Committee and Board of Directors believe that the company remains in the best position to choose the auditors and will generally support management’s
recommendation.
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Changes in capital structure.
Changes in a company’s charter, articles of incorporation or by-laws may be required by state or U.S. federal regulation. In general, Prospect Capital Management
will cast its votes in accordance with the company’s management on such proposal. However, the Proxy Voting Committee will review and analyze on a case-by-
case basis any proposals regarding changes in corporate structure that are not required by state or U.S. federal regulation.
Corporate restructurings, mergers and acquisitions.
Prospect Capital Management believes proxy votes dealing with corporate reorganizations are an extension of the investment decision. Accordingly, the Proxy
Voting Committee will analyze such proposals on a case-by-case basis.
Proposals affecting the rights of stockholders.
Prospect Capital Management will generally vote in favor of proposals that give stockholders a greater voice in the affairs of the company and oppose any measure
that seeks to limit those rights. However, when analyzing such proposals, Prospect Capital Management will weigh the financial impact of the proposal against the
impairment of the rights of stockholders.
Corporate governance.
Prospect Capital Management recognizes the importance of good corporate governance in ensuring that management and the Board of Directors fulfill their
obligations to the stockholders. Prospect Capital Management favors proposals promoting transparency and accountability within a company.
Anti-takeover measures.
The Proxy Voting Committee will evaluate, on a case-by-case basis, proposals regarding anti-takeover measures to determine the measure’s likely effect on
stockholder value dilution.
Stock splits.
Prospect Capital Management will generally vote with the management of the company on stock split matters.
Limited liability of directors.
Prospect Capital Management will generally vote with management on matters that would affect the limited liability of directors.
Social and corporate responsibility.
The Proxy Voting Committee may review and analyze on a case-by-case basis proposals relating to social, political and environmental issues to determine whether
they will have a financial impact on stockholder value. Prospect Capital Management may abstain from voting on social proposals that do not have a readily
determinable financial impact on stockholder value.
Proxy voting procedures.
Prospect Capital Management will generally vote proxies in accordance with these guidelines. In circumstances in which (1) Prospect Capital Management has
determined to consider the matter on a case-by-case basis (as is stated in these guidelines), (2) the subject matter of the vote is not covered by these guidelines,
(3) a material conflict of interest is present, or (4) Prospect Capital Management might find it necessary to vote contrary to its general guidelines to maximize
stockholder value and vote in its clients’ best interests, the Proxy Voting Committee will vote the proxy.
Proxy voting committee.
Prospect Capital Management has formed a proxy voting committee to establish general proxy policies and consider specific proxy voting matters as necessary. In
addition, members of the committee may contact the management of the company and interested stockholder groups as necessary to discuss proxy issues. Members
of the committee will include relevant senior personnel. The committee may also evaluate proxies where we face a potential conflict of interest (as discussed
below). Finally, the committee monitors adherence to guidelines, and reviews the policies contained in this statement from time to time.
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Conflicts of interest.
Prospect Capital Management recognizes that there may be a potential conflict of interest when it votes a proxy solicited by an issuer that is its advisory client or a
client or customer of one of our affiliates or with whom it has another business or personal relationship that may affect how it votes on the issuer’s proxy. Prospect
Capital Management believes that adherence to these policies and procedures ensures that proxies are voted with only its clients’ best interests in mind. To ensure
that its votes are not the product of a conflict of interests, Prospect Capital Management requires that: (i) anyone involved in the decision making process
(including members of the Proxy Voting Committee) disclose to the chairman of the Proxy Voting Committee any potential conflict that he or she is aware of and
any contact that he or she has had with any interested party regarding a proxy vote; and (ii) employees involved in the decision making process or vote
administration are prohibited from revealing how Prospect Capital Management intends to vote on a proposal in order to reduce any attempted influence from
interested parties.
Proxy voting.
Each account’s custodian will forward all relevant proxy materials to Prospect Capital Management, either electronically or in physical form to the address of
record that Prospect Capital Management has provided to the custodian.
Proxy recordkeeping.
Prospect Capital Management must retain the following documents pertaining to proxy voting:
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copies of its proxy voting policies and procedures;
copies of all proxy statements;
records of all votes cast by Prospect Capital Management;
copies of all documents created by Prospect Capital Management that were material to making a decision how to vote proxies or that memorializes the
basis for that decision; and
copies of all written client requests for information with regard to how Prospect Capital Management voted proxies on behalf of the client as well as any
written responses provided.
All of the above-referenced records will be maintained and preserved for a period of not less than five years from the end of the fiscal year during which the last
entry was made. The first two years of records must be maintained at our office.
Proxy voting records.
Clients may obtain information about how Prospect Capital Management voted proxies on their behalf by making a written request for proxy voting information to:
Compliance Officer, Prospect Capital Management LLC, 10 East 40th Street, 42nd Floor, New York, NY 10016.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 imposes a variety of regulatory requirements on publicly-held companies. In addition to our Chief Executive and Chief Financial
Officers’ required certifications as to the accuracy of our financial reporting, we are also required to disclose the effectiveness of our disclosure controls and
procedures as well as report on our assessment of our internal controls over financial reporting, the latter of which must be audited by our independent registered
public accounting firm.
The Sarbanes-Oxley Act of 2002 also requires us to continually review our policies and procedures to ensure that we remain in compliance with all rules
promulgated thereunder.
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Available Information
We file with or submit to the SEC annual, quarterly and current periodic reports, proxy statements and other information meeting the informational requirements of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information is available free of charge by contacting us at (212) 448-0702 or on our
website at www.prospectstreet.com . Information contained on our website is not incorporated into this Annual Report and you should not consider such
information to be part of this Annual Report. You also may inspect and copy these reports, proxy statements and other information, as well as the Annual Report
and related exhibits and schedules, at the Public Reference Room of the SEC at 100 F Street NE, Washington, D.C. 20549. Such information is also available from
the EDGAR database on the SEC’s website at http://www.sec.gov . You also can obtain copies of such information, after paying a duplicating fee, by sending a
request by e-mail to publicinfo@sec.gov or by writing the SEC’s Public Reference Branch, Office of Consumer Affairs and Information Services, Securities and
Exchange Commission, Washington, D.C. 20549. You may obtain information on the operation of the SEC’s Public Reference Room by calling the SEC at (202)
551-8090 or (800) SEC-0330.
Item 1A. Risk Factors
You should carefully consider the risks described below, together with all of the other information included in this Annual Report, before you decide whether to
make an investment in our securities. The risks set forth below are not the only risks we face. If any of the adverse events or conditions described below occurs, our
business, financial condition and results of operations could be materially adversely affected. In such case, our NAV, and the trading price of our common stock
could decline, or the value of our preferred stock, debt securities, and warrants, if any are outstanding, may decline, and you may lose all or part of your
investment.
Our $50.7 million of 5.375% convertible notes due 2017 are referred to as the 2017 Notes. Our $85.4 million of 5.75% convertible notes due 2018 are referred to
as the 2018 Notes. Our $200.0 million of 5.875% convertible notes due 2019 are referred to as the 2019 Notes. Our $392.0 million of 4.75% convertible notes due
2020 are referred to as the 2020 Notes. Our $225.0 million of 4.95% convertible notes due 2022 are referred to as the 2022 Notes, and collectively with the 2017
Notes, the 2018 Notes, the 2019 Notes and the 2020 Notes, are the Convertible Notes. Our $250.0 million of 5.875% unsecured notes due 2023 are referred to as
the 2023 Notes. Our $199.3 million of 6.25% unsecured notes due 2024 are referred to as the 2024 Notes. Our $300.0 million of 5.00% unsecured notes due 2019
are referred to as the 5.00% 2019 Notes, and collectively with the 2023 Notes, the 2024 Notes, are the Public Notes. Any corporate notes issued pursuant to our
medium term notes program with Incapital LLC are referred to as Prospect Capital InterNotes®. The Convertible Notes, Public Notes, and Prospect Capital
InterNotes® are collectively referred to as the Unsecured Notes.
Risks Relating to Our Business
Capital markets may experience periods of disruption and instability. Such market conditions may materially and adversely affect debt and equity capital
markets in the United States and abroad, which may have a negative impact on our business and operations.
From time to time, capital markets may experience periods of disruption and instability. For example, between 2007 and 2009, the global capital markets
experienced an extended period of disruption as evidenced by a lack of liquidity in the debt capital markets, write-offs in the financial services sector, the re-
pricing of credit risk and the failure of certain major financial institutions. Despite actions of the United States federal government and foreign governments, these
events contributed to worsening general economic conditions that materially and adversely impacted the broader financial and credit markets and reduced the
availability of debt and equity capital for the market as a whole and financial services firms in particular. While the adverse effects of these conditions have abated
to a degree, global financial markets experienced significant volatility following the downgrade by Standard & Poor’s on August 5, 2011 of the long-term credit
rating of U.S. Treasury debt from AAA to AA+. These market conditions have historically and could again have a material adverse effect on debt and equity
capital markets in the United States and Europe, which could have a materially negative impact on our business, financial condition and results of operations. We
and other companies in the financial services sector may have to access, if available, alternative markets for debt and equity capital. In such circumstances, equity
capital may be difficult to raise because subject to some limited exceptions, as a BDC, we are generally not able to issue additional shares of our common stock at
a price less than net asset value without general approval by our stockholders, which we currently have, and approval of the specific issuance by our Board of
Directors. In addition, our ability to incur indebtedness or issue preferred stock is limited by applicable regulations such that our asset coverage, as defined in the
1940 Act, must equal at least 200% immediately after each time we incur indebtedness or issue preferred stock. The debt capital that may be available, if at all,
may be at a higher cost and on less favorable terms and conditions in the future. Any inability to raise capital could have a negative effect on our business, financial
condition and results of operations.
Market conditions may in the future make it difficult to extend the maturity of or refinance our existing indebtedness, including the final maturity of our credit
facility in March 2019, and any failure to do so could have a material adverse effect on our business.
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The re-appearance of market conditions similar to those experienced from 2007 through 2009 for any substantial length of time could make it difficult to extend
the maturity of, or refinance our existing indebtedness, or obtain new indebtedness with similar terms and any failure to do so could have a material adverse effect
on our business. The debt capital that will be available to us in the future, if at all, may be at a higher cost and on less favorable terms and conditions than what we
currently experience. Further, if we are unable to raise or refinance debt, then our equity investors may not benefit from the potential for increased returns on
equity resulting from leverage and we may be limited in our ability to make new commitments or to fund existing commitments to our portfolio companies.
The illiquidity of our investments may make it difficult for us to sell such investments, if required. As a result, we may realize significantly less than the value at
which we have recorded our investments if forced to liquidate quickly.
Given the extreme volatility and dislocation that the capital markets have historically experienced, many BDCs have faced, and may in the future face, a
challenging environment in which to raise capital. We may in the future have difficulty accessing debt and equity capital, and a severe disruption in the global
financial markets or deterioration in credit and financing conditions could have a material adverse effect on our business, financial condition and results of
operations. In addition, significant changes in the capital markets, including the extreme volatility and disruption, have had, and may in the future have, a negative
effect on the valuations of our investments and on the potential for liquidity events involving our investments. An inability to raise capital, and any required sale of
our investments for liquidity purposes, could have a material adverse impact on our business, financial condition or results of operations.
The Investment Adviser does not know how long the financial markets will continue to be affected by these events and cannot predict the effects of these or similar
events in the future on the United States economy and securities markets or on our investments. The Investment Adviser monitors developments and seeks to
manage our investments in a manner consistent with achieving our investment objective, but there can be no assurance that it will be successful in doing so; and the
Investment Adviser may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments in
the current or future market environment.
We are required to record certain of our assets at fair value, as determined in good faith by our Board of Directors in accordance with our valuation policy. As a
result, volatility in the capital markets may have a material adverse effect on our investment valuations and our net asset value, even if we plan to hold investments
to maturity.
Uncertainty about the financial stability of the United States, the economic crisis in Europe and the new presidential administration could negatively impact
our business, financial condition and results of operations.
Although U.S. lawmakers passed legislation to raise the federal debt ceiling and Standard & Poor’s Ratings Services affirmed its AA+ long-term sovereign credit
rating on the United States and revised the outlook on the long-term rating from negative to stable in June of 2013, U.S. debt ceiling and budget deficit concerns
together with signs of deteriorating sovereign debt conditions in Europe continue to present the possibility of a credit-rating downgrade, economic slowdowns, or a
recession for the United States. The impact of any further downgrades to the U.S. government’s sovereign credit rating or downgraded sovereign credit ratings of
European countries or the Russian Federation, or their perceived creditworthiness could adversely affect the U.S. and global financial markets and economic
conditions. These developments, along with any further European sovereign debt issues, could cause interest rates and borrowing costs to rise, which may
negatively impact our ability to access the debt markets on favorable terms. Continued adverse economic conditions could have a material adverse effect on our
business, financial condition and results of operations.
In October 2014, the Federal Reserve announced that it was concluding its bond-buying program, or quantitative easing, which was designed to stimulate the
economy and expand the Federal Reserve's holdings of long-term securities, suggesting that key economic indicators, such as the unemployment rate, had showed
signs of improvement since the inception of the program. In June 2017, the Federal Reserve raised the target range for the federal funds rate, which was the fourth
such interest rate hike in nearly a decade. To the extent the Federal Reserve continues to raise rates, and without quantitative easing by the Federal Reserve, there is
a risk that the debt markets may experience increased volatility and that the liquidity of certain of our investments may be reduced. These developments, along
with the corresponding potential rise in interest rates and borrowing costs, the United States government's credit and deficit concerns and the European sovereign
debt crisis, may negatively impact our ability to access the debt markets on favorable terms.
In November 2016, the U.S. held its Federal election and the Republican Party nominee was elected. The Republican Party now controls both the executive and
legislative branches of government. Although it remains too early to accurately predict the forthcoming regulatory environment, a number of recent regulatory
reforms, as well as proposals for future regulatory reform, may be blocked, repealed, modified or otherwise invalidated, including those that are in the process of
being implemented. Potential
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reform initiatives or regulatory changes, including those arising out of or in connection with the presidential executive order dated February 3, 2017, that may
directly or indirectly impact our business or operating activities include:
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•
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a repeal or modification of portions of the Dodd-Frank Act, including the Volcker Rule;
changes to the regulatory landscape of public companies, financial institutions and trading, advisory and asset management firms;
alterations to the SEC’s enforcement authority; and
the changing leadership at key financial regulatory agencies, including the SEC, the Office of the Comptroller of the Currency, the Commodity Futures
Trading Commission, the Federal Reserve and the Financial Stability Oversight Council.
Legislative or other actions relating to taxes could have a negative effect on us.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S.
Treasury Department. According to publicly released statements, a top legislative priority of the new Congress and administration may be to enact significant
reform of the Code, including significant changes to taxation of business entities and the deductibility of interest expense and capital investment. There is a
substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on us or an investment in our
securities. We cannot predict how any changes in the tax laws might affect our investors or us. New legislation, U.S. Treasury regulations, administrative
interpretations or court decisions, with or without retroactive application, could significantly and negatively affect our ability to qualify as a RIC or the U.S. federal
income tax consequences to our investors and us of such qualification, or could have other adverse consequences. You are urged to consult with your tax advisor
with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our securities.
Rising interest rates may adversely affect the value of our portfolio investments which could have an adverse effect on our business, financial condition and
results of operations.
Our debt investments may be based on floating rates, such as London Interbank Offer Rate (“LIBOR”), EURIBOR, the Federal Funds Rate or the Prime Rate.
General interest rate fluctuations may have a substantial negative impact on our investments, the value of our common stock and our rate of return on invested
capital. A reduction in the interest rates on new investments relative to interest rates on current investments could also have an adverse impact on our net interest
income. An increase in interest rates could decrease the value of any investments we hold which earn fixed interest rates, including subordinated loans, senior and
junior secured and unsecured debt securities and loans and high yield bonds, and also could increase our interest expense, thereby decreasing our net income. Also,
an increase in interest rates available to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which
could reduce the value of our common stock.
Because we have borrowed money, and may issue preferred stock to finance investments, our net investment income depends, in part, upon the difference between
the rate at which we borrow funds or pay distributions on preferred stock and the rate that our investments yield. As a result, we can offer no assurance that a
significant change in market interest rates will not have a material adverse effect on our net investment income. In periods of rising interest rates, our cost of funds
would increase except to the extent we have issued fixed rate debt or preferred stock, which could reduce our net investment income.
You should also be aware that a change in the general level of interest rates can be expected to lead to a change in the interest rate we receive on many of our debt
investments. Accordingly, a change in the interest rate could make it easier for us to meet or exceed the performance threshold and may result in a substantial
increase in the amount of incentive fees payable to our Investment Adviser with respect to the portion of the Incentive Fee based on income.
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Changes relating to the LIBOR calculation process may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio.
In the recent past, concerns have been publicized that some of the member banks surveyed by the British Bankers’ Association (“BBA”) in connection with the
calculation of LIBOR across a range of maturities and currencies may have been under-reporting or otherwise manipulating the inter-bank lending rate applicable
to them in order to profit on their derivatives positions or to avoid an appearance of capital insufficiency or adverse reputational or other consequences that may
have resulted from reporting inter-bank lending rates higher than those they actually submitted. A number of BBA member banks entered into settlements with
their regulators and law enforcement agencies with respect to alleged manipulation of LIBOR, and investigations by regulators and governmental authorities in
various jurisdictions are ongoing.
Actions by the BBA, regulators or law enforcement agencies as a result of these or future events, may result in changes to the manner in which LIBOR is
determined. Potential changes, or uncertainty related to such potential changes may adversely affect the market for LIBOR-based securities, including our portfolio
of LIBOR-indexed, floating-rate debt securities. In addition, any further changes or reforms to the determination or supervision of LIBOR may result in a sudden
or prolonged increase or decrease in reported LIBOR, which could have an adverse impact on the market for LIBOR-based securities or the value of our portfolio
of LIBOR-indexed, floating-rate debt securities.
Volatility in the global financial markets resulting from relapse of the Eurozone crisis, geopolitical developments in Eastern Europe, turbulence in the Chinese
stock markets and global commodity markets, the United Kingdom’s vote to leave the European Union or otherwise could have a material adverse effect on our
business, financial condition and results of operations.
Volatility in the global financial markets could have an adverse effect on the economic recovery in the United States and could result from a number of causes,
including a relapse in the Eurozone crisis, geopolitical developments in Eastern Europe, turbulence in the Chinese stock markets and global commodity markets or
otherwise. In 2010, a financial crisis emerged in Europe, triggered by high budget deficits and rising direct and contingent sovereign debt in Greece, Ireland, Italy,
Portugal and Spain, which created concerns about the ability of these nations to continue to service their sovereign debt obligations. While the financial stability of
many of such countries has improved significantly, risks resulting from any future debt crisis in Europe or any similar crisis could have a detrimental impact on the
global economic recovery, sovereign and non-sovereign debt in these countries and the financial condition of European financial institutions. Market and economic
disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence and default on
consumer debt and home prices, among other factors. We cannot assure you that market disruptions in Europe, including the increased cost of funding for certain
governments and financial institutions, will not impact the global economy, and we cannot assure you that assistance packages will be available, or if available, be
sufficient to stabilize countries and markets in Europe or elsewhere affected by a financial crisis. To the extent uncertainty regarding any economic recovery in
Europe negatively impacts consumer confidence and consumer credit factors, our business, financial condition and results of operations could be significantly and
adversely affected.
In the second quarter of 2015, stock prices in China experienced a significant drop, resulting primarily from continued sell-off of shares trading in Chinese
markets. In addition, in August 2015, Chinese authorities sharply devalued China's currency. Since then, the Chinese capital markets have continued to experience
periods of instability. These market and economic disruptions have affected, and may in the future affect, the financial markets, including the U.S. capital markets,
which could adversely affect our business, financial condition or results of operations.
In June 2016, the United Kingdom held a referendum (the “Referendum”) in which voters approved an exit from the European Union, commonly referred to as
“Brexit,” which resulted in significant volatility in several international markets. The timing and the outcome of the negotiations between the United Kingdom and
the European Union in connection with Brexit are highly uncertain and information regarding the long-term consequences of the vote is expected to become clearer
over time. Brexit has led to significant uncertainty in the business, legal and political environment. Risks associated with the outcome of the Referendum include
short and long term market volatility and currency volatility (including volatility of the value of the British pound sterling relative to the United States dollar and
other currencies and volatility in global currency markets generally), macroeconomic risk to the United Kingdom and European economies, impetus for further
disintegration of the European Union and related political stresses (including those related to sentiment against cross border capital movements and activities of
investors like us), prejudice to financial services businesses that are conducting business in the European Union and which are based in the United Kingdom, legal
uncertainty regarding achievement of compliance with applicable financial and commercial laws and regulations in view of the expected steps to be taken pursuant
to or in contemplation of Article 50 of the Treaty on European Union and negotiations undertaken under Article 218 of the Treaty on the Functioning of the
European Union, and the unavailability of timely information as to expected legal, tax and other regimes. We will continue to monitor the potential impact of
Brexit on its results of operations and financial condition.
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Should the economic recovery in the United States be adversely impacted by increased volatility in the global financial markets caused by continued contagion
from the Eurozone crisis, further turbulence in Chinese stock markets and global commodity markets, Brexit or for any other reason, loan and asset growth and
liquidity conditions at U.S. financial institutions, including us, may deteriorate.
We may suffer credit losses.
Investment in small and middle-market companies is highly speculative and involves a high degree of risk of credit loss. These risks are likely to increase during
volatile economic periods. See “Risks Related to Our Investments.”
Our financial condition and results of operations will depend on our ability to manage our future growth effectively.
Prospect Capital Management has been registered as an investment adviser since March 31, 2004, and we have been organized as a closed-end investment
company since April 13, 2004. Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on the Investment Adviser’s
ability to continue to identify, analyze, invest in and monitor companies that meet our investment criteria. Accomplishing this result on a cost-effective basis is
largely a function of the Investment Adviser’s structuring of investments, its ability to provide competent, attentive and efficient services to us and our access to
financing on acceptable terms. As we continue to grow, Prospect Capital Management will need to continue to hire, train, supervise and manage new employees.
Failure to manage our future growth effectively could have a materially adverse effect on our business, financial condition and results of operations.
We are dependent upon Prospect Capital Management’s key management personnel for our future success.
We depend on the diligence, skill and network of business contacts of the senior management of the Investment Adviser. We also depend, to a significant extent,
on the Investment Adviser’s access to the investment professionals and the information and deal flow generated by these investment professionals in the course of
their investment and portfolio management activities. The senior management team of the Investment Adviser evaluates, negotiates, structures, closes, monitors
and services our investments. Our success depends to a significant extent on the continued service of the senior management team, particularly John F. Barry III
and M. Grier Eliasek. The departure of any of the senior management team could have a materially adverse effect on our ability to achieve our investment
objective. In addition, we can offer no assurance that Prospect Capital Management will remain the Investment Adviser or that we will continue to have access to
its investment professionals or its information and deal flow.
We operate in a highly competitive market for investment opportunities.
A number of entities compete with us to make the types of investments that we make in middle-market companies. We compete with other BDCs, public and
private funds, commercial and investment banks, commercial financing companies, insurance companies, hedge funds, and, to the extent they provide an
alternative form of financing, private equity funds. Many of our competitors are substantially larger and have considerably greater financial, technical and
marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of
our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish
more relationships than us. Furthermore, many of our competitors are not subject to the regulatory restrictions that the 1940 Act imposes on us as a BDC and that
the Code imposes on us as a RIC. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial
condition and results of operations. Also, as a result of this competition, we may not be able to pursue attractive investment opportunities from time to time.
We do not seek to compete primarily based on the interest rates we offer and we believe that some of our competitors may make loans with interest rates that are
comparable to or lower than the rates we offer. Rather, we compete with our competitors based on our existing investment platform, seasoned investment
professionals, experience and focus on middle-market companies, disciplined investment philosophy, extensive industry focus and flexible transaction structuring.
We may lose investment opportunities if we do not match our competitors’ pricing, terms and structure. If we match our competitors’ pricing, terms and structure,
we may experience decreased net interest income and increased risk of credit loss. As a result of operating in such a competitive environment, we may make
investments that are on less favorable terms than what we may have originally anticipated, which may impact our return on these investments.
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We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of
investing in us.
Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and, therefore, increase the risks
associated with investing in our securities. Our lenders have fixed dollar claims on our assets that are superior to the claims of our common stockholders or any
preferred stockholders. If the value of our assets increases, then leveraging would cause the net asset value to increase more sharply than it would have had we not
leveraged. Conversely, if the value of our assets decreases, leveraging would cause net asset value to decline more sharply than it otherwise would have had we not
leveraged. Similarly, any increase in our income in excess of consolidated interest payable on the borrowed funds would cause our net income to increase more
than it would without the leverage, while any decrease in our income would cause net income to decline more sharply than it would have had we not borrowed.
Such a decline could negatively affect our ability to make common stock dividend payments. Leverage is generally considered a speculative investment technique.
Changes in interest rates may affect our cost of capital and net investment income.
A portion of the debt investments we make bears interest at fixed rates and other debt investments bear interest at variable rates with floors and the value of these
investments could be negatively affected by increases in market interest rates. In addition, as the interest rate on our revolving credit facility is at a variable rate
based on an index, an increase in interest rates would make it more expensive to use debt to finance our investments. As a result, an increase in market interest
rates could both reduce the value of our portfolio investments and increase our cost of capital, which could reduce our net investment income or net increase in net
assets resulting from operations.
We need to raise additional capital to grow because we must distribute most of our income.
We need additional capital to fund growth in our investments. A reduction in the availability of new capital could limit our ability to grow. We must distribute at
least 90% of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, to our stockholders to maintain
our status as a regulated investment company, or RIC, for U.S. federal income tax purposes. As a result, such earnings are not available to fund investment
originations. We have sought additional capital by borrowing from financial institutions and may issue debt securities or additional equity securities. If we fail to
obtain funds from such sources or from other sources to fund our investments, we could be limited in our ability to grow, which may have an adverse effect on the
value of our common stock. In addition, as a business development company, we generally may not borrow money or issue debt securities or issue preferred stock
unless immediately thereafter our ratio of total assets to total borrowings and other senior securities is at least 200%. This may restrict our ability to obtain
additional leverage in certain circumstances.
We may experience fluctuations in our quarterly results.
We could experience fluctuations in our quarterly operating results due to a number of factors, including the level of structuring fees received, the interest or
dividend rates payable on the debt or equity securities we hold, the default rate on debt securities, the level of our expenses, variations in and the timing of the
recognition of realized and unrealized gains or losses, the degree to which we encounter competition in our markets, and general economic conditions. As a result
of these factors, results for any period should not be relied upon as being indicative of performance in future periods.
Our most recent NAV was calculated on June 30, 2017 and our NAV when calculated effective September 30, 2017 and thereafter may be higher or lower.
Our NAV per share is $9.32 as of June 30, 2017. NAV per share as of September 30, 2017 may be higher or lower than $9.32 based on potential changes in
valuations, issuances of securities, repurchases of securities, dividends paid and earnings for the quarter then ended. Our Board of Directors has not yet determined
the fair value of portfolio investments at any date subsequent to June 30, 2017. Our Board of Directors determines the fair value of our portfolio investments on a
quarterly basis in connection with the preparation of quarterly financial statements and based on input from independent valuation firms, the Investment Adviser,
the Administrator and the Audit Committee of our Board of Directors.
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Our business model depends upon the development and maintenance of strong referral relationships with other asset managers and investment banking firms.
We are substantially dependent on our informal relationships, which we use to help identify and gain access to investment opportunities. If we fail to maintain our
relationships with key firms, or if we fail to establish strong referral relationships with other firms or other sources of investment opportunities, we will not be able
to grow our portfolio of equity investments and achieve our investment objective. In addition, persons with whom we have informal relationships are not obligated
to inform us of investment opportunities, and therefore such relationships may not lead to the origination of equity or other investments. Any loss or diminishment
of such relationships could effectively reduce our ability to identify attractive portfolio companies that meet our investment criteria, either for direct equity
investments or for investments through private secondary market transactions or other secondary transactions.
The Investment Adviser’s liability is limited under the Investment Advisory Agreement, and we are required to indemnify the Investment Adviser against
certain liabilities, which may lead the Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account.
The Investment Adviser has not assumed any responsibility to us other than to render the services described in the Investment Advisory Agreement, and it will not
be responsible for any action of our Board of Directors in declining to follow the Investment Adviser’s advice or recommendations. Pursuant to the Investment
Advisory Agreement, the Investment Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and
members and any other person or entity affiliated with it will not be liable to us for their acts under the Investment Advisory Agreement, absent willful
misfeasance, bad faith, gross negligence or reckless disregard in the performance of their duties. We have agreed to indemnify, defend and protect the Investment
Adviser and its members and their respective officers, managers, partners, agents, employees, controlling persons and members and any other person or entity
affiliated with it with respect to all damages, liabilities, costs and expenses resulting from acts of the Investment Adviser not arising out of willful misfeasance, bad
faith, gross negligence or reckless disregard in the performance of their duties under the Investment Advisory Agreement. These protections may lead the
Investment Adviser to act in a riskier manner when acting on our behalf than it would when acting for its own account.
Potential conflicts of interest could impact our investment returns.
Our executive officers and directors, and the executive officers of the Investment Adviser, may serve as officers, directors or principals of entities that operate in
the same or related lines of business as we do or of investment funds managed by our affiliates. Accordingly, they may have obligations to investors in those
entities, the fulfillment of which might not be in our best interests or those of our stockholders. Nevertheless, it is possible that new investment opportunities that
meet our investment objective may come to the attention of one of these entities in connection with another investment advisory client or program, and, if so, such
opportunity might not be offered, or otherwise made available, to us. However, as an investment adviser, Prospect Capital Management has a fiduciary obligation
to act in the best interests of its clients, including us. To that end, if Prospect Capital Management or its affiliates manage any additional investment vehicles or
client accounts in the future, Prospect Capital Management will endeavor to allocate investment opportunities in a fair and equitable manner over time so as not to
discriminate unfairly against any client. If Prospect Capital Management chooses to establish another investment fund in the future, when the investment
professionals of Prospect Capital Management identify an investment, they will have to choose which investment fund should make the investment.
In the course of our investing activities, under the Investment Advisory Agreement we pay base management and incentive fees to Prospect Capital Management
and reimburse Prospect Capital Management for certain expenses it incurs. As a result of the Investment Advisory Agreement, there may be times when the senior
management team of Prospect Capital Management has interests that differ from those of our stockholders, giving rise to a conflict.
The Investment Adviser receives a quarterly income incentive fee based, in part, on our pre-incentive fee net investment income, if any, for the immediately
preceding calendar quarter. This income incentive fee is subject to a fixed quarterly hurdle rate before providing an income incentive fee return to Prospect Capital
Management. This fixed hurdle rate was determined when then current interest rates were relatively low on a historical basis. Thus, if interest rates rise, it would
become easier for our investment income to exceed the hurdle rate and, as a result, more likely that Prospect Capital Management will receive an income incentive
fee than if interest rates on our investments remained constant or decreased. Subject to the receipt of any requisite stockholder approval under the 1940 Act, our
Board of Directors may adjust the hurdle rate by amending the Investment Advisory Agreement.
The income incentive fee payable by us is computed and paid on income that may include interest that has been accrued but not yet received in cash. If a portfolio
company defaults on a loan that has a deferred interest feature, it is possible that interest accrued under such loan that has previously been included in the
calculation of the income incentive fee will become uncollectible. If this happens, we will reverse the interest that was recorded but Prospect Capital Management
is not required to reimburse us for any
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such income incentive fee payments that were received in the past but would reduce the current period incentive fee for the effects of the reversal, if any. If we do
not have sufficient liquid assets to pay this incentive fee or distributions to stockholders on such accrued income, we may be required to liquidate assets in order to
do so. This fee structure could give rise to a conflict of interest for Prospect Capital Management to the extent that it may encourage Prospect Capital Management
to favor debt financings that provide for deferred interest, rather than current cash payments of interest.
We have entered into a royalty-free license agreement with Prospect Capital Management. Under this agreement, Prospect Capital Management agrees to grant us
a non-exclusive license to use the name “Prospect Capital.” Under the license agreement, we have the right to use the “Prospect Capital” name for so long as
Prospect Capital Management or one of its affiliates remains our investment adviser. In addition, we rent office space from Prospect Administration, an affiliate of
Prospect Capital Management, and pay Prospect Administration our allocable portion of overhead and other expenses incurred by Prospect Administration in
performing its obligations as Administrator under the Administration Agreement, including rent and our allocable portion of the costs of our Chief Financial
Officer and Chief Compliance Officer and their respective staffs. This may create conflicts of interest that our Board of Directors monitors.
Our incentive fee could induce Prospect Capital Management to make speculative investments.
The incentive fee payable by us to Prospect Capital Management may create an incentive for the Investment Adviser to make investments on our behalf that are
more speculative or involve more risk than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable is
determined (calculated as a percentage of the return on invested capital) may encourage the Investment Adviser to use leverage to increase the return on our
investments. Increased use of leverage and this increased risk of replacement of that leverage at maturity would increase the likelihood of default, which would
disfavor holders of our common stock. Similarly, because the Investment Adviser will receive an incentive fee based, in part, upon net capital gains realized on our
investments, the Investment Adviser may invest more than would otherwise be appropriate in companies whose securities are likely to yield capital gains, as
compared to income producing securities. Such a practice could result in our investing in more speculative securities than would otherwise be the case, which
could result in higher investment losses, particularly during economic downturns.
The incentive fee payable by us to Prospect Capital Management could create an incentive for the Investment Adviser to invest on our behalf in instruments, such
as zero coupon bonds, that have a deferred interest feature. Under these investments, we would accrue interest income over the life of the investment but would not
receive payments in cash on the investment until the end of the term. Our net investment income used to calculate the income incentive fee, however, includes
accrued interest. For example, accrued interest, if any, on our investments in zero coupon bonds will be included in the calculation of our incentive fee, even
though we will not receive any cash interest payments in respect of payment on the bond until its maturity date. Thus, a portion of this incentive fee would be
based on income that we may not have yet received in cash in the event of default may never receive.
We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss.
The Investment Adviser is entitled to incentive compensation for each fiscal quarter based, in part, on our pre-incentive fee net investment income if any, for the
immediately preceding calendar quarter above a performance threshold for that quarter. Accordingly, since the performance threshold is based on a percentage of
our net asset value, decreases in our net asset value make it easier to achieve the performance threshold. Our pre-incentive fee net investment income for incentive
compensation purposes excludes realized and unrealized capital losses or depreciation that we may incur in the fiscal quarter, even if such capital losses or
depreciation result in a net loss on our statement of operations for that quarter. Thus, we may be required to pay the Investment Adviser incentive compensation for
a fiscal quarter even if there is a decline in the value of our portfolio or we incur a net loss for that quarter.
The Investment Adviser and Administrator have the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time,
resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations.
The Investment Adviser and Administrator have the right, under the Investment Advisory Agreement and Administration Agreement, respectively, to resign at any
time upon not less than 60 days’ written notice, whether we have found a replacement or not. If the Investment Adviser or Administrator resigns, we may not be
able to find a replacement or hire internal management or administration with similar expertise and ability to provide the same or equivalent services on acceptable
terms within 60 days, or at all. If we are unable to do so quickly, our operations are likely to experience a disruption, our business, financial condition and results of
operations as well as our ability to pay distributions are likely to be adversely affected and the market price of our shares may decline. In addition, the coordination
of our internal management and investment activities or our internal administration activities, as applicable, is likely to suffer if we are unable to identify and reach
an agreement with a single institution or group of executives having the expertise possessed by the Investment Adviser and its affiliates or the Administrator and its
affiliates.
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Even if we are able to retain comparable management or administration, whether internal or external, the integration of such management or administration and
their lack of familiarity with our investment objective may result in additional costs and time delays that may adversely affect our business, financial condition and
results of operations.
Changes in the laws or regulations governing our business or the businesses of our portfolio companies and any failure by us or our portfolio companies to
comply with these laws or regulations could negatively affect the profitability of our operations or the profitability of our portfolio companies.
We are subject to changing rules and regulations of federal and state governments, as well as the stock exchange on which our common stock is listed. These
entities, including the Public Company Accounting Oversight Board, the SEC and the NASDAQ Global Select Market, have issued a significant number of new
and increasingly complex requirements and regulations over the course of the last several years and continue to develop additional regulations. In particular,
changes in the laws or regulations or the interpretations of the laws and regulations that govern BDCs, RICs or non-depository commercial lenders could
significantly affect our operations and our cost of doing business. We are subject to federal, state and local laws and regulations and are subject to judicial and
administrative decisions that affect our operations, including our loan originations, maximum interest rates, fees and other charges, disclosures to portfolio
companies, the terms of secured transactions, collection and foreclosure procedures and other trade practices. If these laws, regulations or decisions change, or if
we expand our business into jurisdictions that have adopted more stringent requirements than those in which we currently conduct business, we may have to incur
significant expenses in order to comply, or we might have to restrict our operations. In addition, if we do not comply with applicable laws, regulations and
decisions, we may lose licenses needed for the conduct of our business and be subject to civil fines and criminal penalties, any of which could have a material
adverse effect upon our business, financial condition and results of operations.
Foreign and domestic political risk may adversely affect our business.
We are exposed to political risk to the extent that Prospect Capital Management, on its behalf and subject to its investment guidelines, transacts in securities in the
U.S. and foreign markets. The governments in any of these jurisdictions could impose restrictions, regulations or other measures, which may have a material
adverse impact on our strategy.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent
fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our
common stock.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and
procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could
cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or the
subsequent testing by our independent registered public accounting firm (when undertaken, as noted below), may reveal deficiencies in our internal controls over
financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our consolidated financial statements or
identify other areas for further attention or improvement. Inferior internal controls could also cause investors and lenders to lose confidence in our reported
financial information, which could have a negative effect on the trading price of our common stock.
We may experience cyber-security incidents and are subject to cyber-security risks. The failure in cyber-security systems, as well as the occurrence of events
unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively.
Our business operations rely upon secure information technology systems for data processing, storage and reporting. Despite careful security and controls design,
implementation and updating, our information technology systems could become subject to cyber-attacks and unauthorized access, such as physical and electronic
break-ins or unauthorized tampering. Cyberattacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through "hacking" or
malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber-attacks may
also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make
network services unavailable to intended users). Network, system, application and data breaches could result in operational disruptions or information
misappropriation, which could have a material adverse effect on our business, results of operations and financial condition. Like other companies, we may
experience threats to our data and systems, including malware and computer virus attacks, unauthorized access, system failures and disruptions. If one or more of
these events occurs, it could potentially jeopardize the confidential, proprietary and other information processed and stored in, and transmitted through, our
computer systems and networks, or otherwise cause interruptions or malfunctions in our operations, which could result in damage to our reputation, financial
losses, litigation, increased costs, regulatory penalties and/or customer dissatisfaction or loss.
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The occurrence of a disaster such as a cyber-attack, a natural catastrophe, an industrial accident, a terrorist attack or war, events unanticipated in our disaster
recovery systems, or a support failure from external providers, could have an adverse effect on our ability to conduct business and on our results of operations and
financial condition, particularly if those events affect our computer-based data processing, transmission, storage, and retrieval systems or destroy data. If a
significant number of our managers were unavailable in the event of a disaster, our ability to effectively conduct our business could be severely compromised.
Cyber-security failures or breaches by the Investment Adviser, any future sub-adviser(s), the Administrator and other service providers (including, but not limited
to, accountants, custodians, transfer agents and administrators), and the issuers of securities in which we invest, have the ability to cause disruptions and impact
business operations, potentially resulting in financial losses, interference with our ability to calculate our net asset value, impediments to trading, the inability of
our stockholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While we
have established a business continuity plan in the event of, and risk management systems to prevent, such cyberattacks, there are inherent limitations in such plans
and systems including the possibility that certain risks have not been identified. Furthermore, we cannot control the cyber security plans and systems put in place
by our service providers and issuers in which we invest. We and our stockholders could be negatively impacted as a result.
We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price
of our common stock and our ability to pay dividends.
Our business is dependent on our and third parties’ communications and information systems. Any failure or interruption of those systems, including as a result of
the termination of an agreement with any third-party service providers, could cause delays or other problems in our activities. Our financial, accounting, data
processing, backup or other operating systems and facilities may fail to operate properly or become disabled or damaged as a result of a number of factors
including events that are wholly or partially beyond our control and adversely affect our business. There could be:
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sudden electrical or telecommunications outages;
natural disasters such as earthquakes, tornadoes and hurricanes;
disease pandemics;
events arising from local or larger scale political or social matters, including terrorist acts; and
cyber-attacks.
These events, in turn, could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to
pay dividends to our stockholders.
Risks Relating to Our Operation as a Business Development Company
If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our
current business strategy.
As a BDC, we may not acquire any assets other than “qualifying assets” unless, at the time of and after giving effect to such acquisition, at least 70% of our total
assets are qualifying assets. We may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets for
purposes of the 1940 Act. If we do not invest a sufficient portion of our assets in qualifying assets, we could be found to be in violation of the 1940 Act provisions
applicable to BDCs, which would have a material adverse effect on our business, financial condition and results of operations. Similarly, these rules could prevent
us from making follow-on investments in existing portfolio companies (which could result in the dilution of our position) or could require us to dispose of
investments at inappropriate times in order to come into compliance with the 1940 Act. Because most of our investments will be in private companies, and
therefore will be relatively illiquid, any such dispositions could be made at disadvantageous prices and could result in substantial losses.
If we fail to qualify as a RIC, we will have to pay corporate-level taxes on our income, and our income available for distribution would be reduced.
To maintain our qualification for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and obtain RIC tax treatment, we must meet certain
source of income, annual distribution and asset diversification requirements.
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The source of income requirement is satisfied if we derive at least 90% of our annual gross income from interest, dividends, payments with respect to certain
securities loans, gains from the sale or other disposition of securities or options thereon or foreign currencies, or other income derived with respect to our business
of investing in such securities or currencies, and net income from interests in “qualified publicly traded partnerships,” as defined in the Code.
The annual distribution requirement for a RIC is satisfied if we distribute at least 90% of our ordinary income and net short-term capital gains in excess of net
long-term capital losses, if any, to our stockholders on an annual basis. Because we use debt financing, we are subject to certain asset coverage ratio requirements
under the 1940 Act and financial covenants that could, under certain circumstances, restrict us from making distributions necessary to qualify for RIC tax
treatment. If we are unable to obtain cash from other sources, we may fail to qualify for RIC tax treatment and, thus, may be subject to corporate-level income tax
on all of our taxable income.
To maintain our qualification as a RIC, we must also meet certain asset diversification requirements at the end of each quarter of our taxable year. Failure to meet
these tests may result in our having to dispose of certain investments quickly in order to prevent the loss of RIC status. Because most of our investments are in
private companies, any such dispositions could be made at disadvantageous prices and may result in substantial losses.
If we fail to qualify as a RIC for any reason or become subject to corporate income tax, the resulting corporate taxes would substantially reduce our net assets, the
amount of income available for distribution, and the actual amount of our distributions. Such a failure would have a materially adverse effect on us and our
stockholders. For additional information regarding asset coverage ratio and RIC requirements, see “Business – Material U.S. Federal Income Tax Considerations”
and “Business – Regulation as a Business Development Company.”
We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income.
For U.S. federal income tax purposes, we include in income certain amounts that we have not yet received in cash, such as original issue discount or payment-in-
kind interest, which represents contractual interest added to the loan balance and due at the end of the loan term. Such amounts could be significant relative to our
overall investment activities. We also may be required to include in taxable income certain other amounts that we do not receive in cash. While we focus primarily
on investments that will generate a current cash return, our investment portfolio currently includes, and we may continue to invest in, securities that do not pay
some or all of their return in periodic current cash distributions.
Since in some cases we may recognize taxable income before or without receiving cash representing such income, we may have difficulty distributing at least 90%
of our ordinary income and realized net short-term capital gains in excess of realized net long-term capital losses, if any, as required to maintain RIC tax treatment.
Accordingly, we may have to sell some of our investments at times we would not consider advantageous, raise additional debt or equity capital or reduce new
investment originations to meet these distribution requirements. If we are not able to obtain cash from other sources, we may fail to qualify for RIC treatment and
thus become subject to corporate-level income tax. See “Business – Material U.S. Federal Income Tax Considerations” and “Business – Regulation as a Business
Development Company.”
Regulations governing our operation as a business development company affect our ability to raise, and the way in which we raise, additional capital.
We have incurred indebtedness under our revolving credit facility and through the issuance of the Unsecured Notes and, in the future, may issue preferred stock or
debt securities and/or borrow additional money from banks or other financial institutions, which we refer to collectively as “senior securities,” up to the maximum
amount permitted by the 1940 Act. Under the provisions of the 1940 Act, we are permitted, as a BDC, to incur indebtedness or issue senior securities only in
amounts such that our asset coverage, as defined in the 1940 Act, equals at least 200% after each issuance of senior securities. If the value of our assets declines,
we may be unable to satisfy this test, which would prohibit us from paying dividends in cash or other property and could prohibit us from qualifying as a RIC. If
we cannot satisfy this test, we may be required to sell a portion of our investments or sell additional shares of common stock at a time when such sales may be
disadvantageous in order to repay a portion of our indebtedness or otherwise increase our net assets. In addition, issuance of additional common stock could dilute
the percentage ownership of our current stockholders in us.
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As a BDC regulated under provisions of the 1940 Act, we are not generally able to issue and sell our common stock at a price below the current net asset value per
share without stockholder approval. If our common stock trades at a discount to net asset value, this restriction could adversely affect our ability to raise capital.
We may, however, sell our common stock, or warrants, options or rights to acquire our common stock, at a price below the current net asset value of our common
stock in certain circumstances, including if (i)(1) the holders of a majority of our shares (or, if less, at least 67% of a quorum consisting of a majority of our shares)
and a similar majority of the holders of our shares who are not affiliated persons of us approve the sale of our common stock at a price that is less than the current
net asset value, and (2) a majority of our Directors who have no financial interest in the transaction and a majority of our independent Directors (a) determine that
such sale is in our and our stockholders’ best interests and (b) in consultation with any underwriter or underwriters of the offering, make a good faith determination
as of a time either immediately prior to the first solicitation by us or on our behalf of firm commitments to purchase such shares, or immediately prior to the
issuance of such shares, that the price at which such shares are to be sold is not less than a price which closely approximates the market value of such shares, less
any distributing commission or discount or if (ii) a majority of the number of the beneficial holders of our common stock entitled to vote at our annual meeting,
without regard to whether a majority of such shares are voted in favor of the proposal, approve the sale of our common stock at a price that is less than the current
net asset value per share.
To generate cash for funding new investments, we pledged a substantial portion of our portfolio investments under our revolving credit facility. These assets are
not available to secure other sources of funding or for securitization. Our ability to obtain additional secured or unsecured financing on attractive terms in the
future is uncertain.
Alternatively, we may securitize our future loans to generate cash for funding new investments. See “Securitization of our assets subjects us to various risks.”
Securitization of our assets subjects us to various risks.
We may securitize assets to generate cash for funding new investments. We refer to the term securitize to describe a form of leverage under which a company such
as us (sometimes referred to as an “originator” or “sponsor”) transfers income producing assets to a single-purpose, bankruptcy-remote subsidiary (also referred to
as a “special purpose entity” or “SPE”), which is established solely for the purpose of holding such assets and entering into a structured finance transaction. The
SPE then issues notes secured by such assets. The special purpose entity may issue the notes in the capital markets either publicly or privately to a variety of
investors, including banks, non-bank financial institutions and other investors. There may be a single class of notes or multiple classes of notes, the most senior of
which carries less credit risk and the most junior of which may carry substantially the same credit risk as the equity of the SPE.
An important aspect of most debt securitization transactions is that the sale and/or contribution of assets into the SPE be considered a true sale and/or contribution
for accounting purposes and that a reviewing court would not consolidate the SPE with the operations of the originator in the event of the originator’s bankruptcy
based on equitable principles. Viewed as a whole, a debt securitization seeks to lower risk to the note purchasers by isolating the assets collateralizing the
securitization in an SPE that is not subject to the credit and bankruptcy risks of the originator. As a result of this perceived reduction of risk, debt securitization
transactions frequently achieve lower overall leverage costs for originators as compared to traditional secured lending transactions.
In accordance with the above description, to securitize loans, we may create a wholly-owned subsidiary and contribute a pool of our assets to such subsidiary. The
SPE may be funded with, among other things, whole loans or interests from other pools and such loans may or may not be rated. The SPE would then sell its notes
to purchasers who we would expect to be willing to accept a lower interest rate and the absence of any recourse against us to invest in a pool of income producing
assets to which none of our creditors would have access. We would retain all or a portion of the equity in the SPE. An inability to successfully securitize portions
of our portfolio or otherwise leverage our portfolio through secured and unsecured borrowings could limit our ability to grow our business and fully execute our
business strategy, and could decrease our earnings. However, the successful securitization of portions of our portfolio exposes us to a risk of loss for the equity we
retain in the SPE and might expose us to greater risk on our remaining portfolio because the assets we retain may tend to be those that are riskier and more likely to
generate losses. A successful securitization may also impose financial and operating covenants that restrict our business activities and may include limitations that
could hinder our ability to finance additional loans and investments or to make the distributions required to maintain our status as a RIC under Subchapter M of the
Code. The 1940 Act may also impose restrictions on the structure of any securitizations.
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Interests we hold in the SPE, if any, will be subordinated to the other interests issued by the SPE. As such, we will only receive cash distributions on such interests
if the SPE has made all cash interest and other required payments on all other interests it has issued. In addition, our subordinated interests will likely be unsecured
and rank behind all of the secured creditors, known or unknown, of the SPE, including the holders of the senior interests it has issued. Consequently, to the extent
that the value of the SPEs portfolio of assets has been reduced as a result of conditions in the credit markets, or as a result of defaults, the value of the subordinated
interests we retain would be reduced. Securitization imposes on us the same risks as borrowing except that our risk in a securitization is limited to the amount of
subordinated interests we retain, whereas in a borrowing or debt issuance by us directly we would be at risk for the entire amount of the borrowing or debt
issuance.
If the SPE is not consolidated with us, our only interest will be the value of our retained subordinated interest and the income allocated to us, which may be more
or less than the cash we receive from the SPE, and none of the SPEs liabilities will be reflected as our liabilities. If the assets of the SPE are not consolidated with
our assets and liabilities, then our interest in the SPE may be deemed not to be a qualifying asset for purposes of determining whether 70% of our assets are
qualifying assets and the leverage incurred by such SPE may or may not be treated as borrowings by us for purposes of the requirement that we not issue senior
securities in an amount in excess of our net assets.
We may also engage in transactions utilizing SPEs and securitization techniques where the assets sold or contributed to the SPE remain on our balance sheet for
accounting purposes. If, for example, we sell the assets to the SPE with recourse or provide a guarantee or other credit support to the SPE, its assets will remain on
our balance sheet. Consolidation would also generally result if we, in consultation with the SEC, determine that consolidation would result in a more accurate
reflection of our assets, liabilities and results of operations. In these structures, the risks will be essentially the same as in other securitization transactions but the
assets will remain our assets for purposes of the limitations described above on investing in assets that are not qualifying assets and the leverage incurred by the
SPE will be treated as borrowings incurred by us for purposes of our limitation on the issuance of senior securities.
The Investment Adviser may have conflicts of interest with respect to potential securitizations in as much as securitizations that are not consolidated may reduce
our assets for purposes of determining its investment advisory fee although in some circumstances the Investment Adviser may be paid certain fees for managing
the assets of the SPE so as to reduce or eliminate any potential bias against securitizations.
Our ability to invest in public companies may be limited in certain circumstances.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our
total assets are qualifying assets (with certain limited exceptions). Subject to certain exceptions for follow-on investments and distressed companies, an investment
in an issuer that has outstanding securities listed on a national securities exchange may be treated as qualifying assets only if such issuer has a market capitalization
that is less than $250 million at the time of such investment.
Risks Relating to Our Investments
We may not realize gains or income from our investments.
We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate and, in fact, may decline in value, and
the issuers of debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains from our
investments, and any gains that we do realize may not be sufficient to offset any losses we experience. See “Business – Our Investment Objective and Policies.”
Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is
uncertainty as to the value of our portfolio investments.
A large percentage of our portfolio investments consist of securities of privately held companies. Hence, market quotations are generally not readily available for
determining the fair values of such investments. The determination of fair value, and thus the amount of unrealized losses we may incur in any year, is to a degree
subjective, and the Investment Adviser has a conflict of interest in making the determination. We value these securities quarterly at fair value as determined in
good faith by our Board of Directors based on input from the Investment Adviser, our Administrator, a third party independent valuation firm and our Audit
Committee. Our Board of Directors utilizes the services of an independent valuation firm to aid it in determining the fair value of any securities. The types of
factors that may be considered in determining the fair values of our investments include the nature and realizable value of any collateral, the portfolio company’s
ability to make payments and its earnings, the markets in which the portfolio company does business, comparison to publicly traded companies, discounted cash
flow, current market interest rates and other relevant factors.
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Because such valuations, and particularly valuations of private securities and private companies, are inherently uncertain, the valuations may fluctuate significantly
over short periods of time due to changes in current market conditions. The determinations of fair value by our Board of Directors may differ materially from the
values that would have been used if an active market and market quotations existed for these investments. Our net asset value could be adversely affected if the
determinations regarding the fair value of our investments were materially higher than the values that we ultimately realize upon the disposal of such securities.
In addition, decreases in the market values or fair values of our investments are recorded as unrealized depreciation. Declines in prices and liquidity in the
corporate debt markets experienced during a financial crisis will result in significant net unrealized depreciation in our portfolio. The effect of all of these factors
increases the net unrealized depreciation in our portfolio and reduces our NAV. Depending on market conditions, we could incur substantial realized losses which
could have a material adverse impact on our business, financial condition and results of operations. We have no policy regarding holding a minimum level of liquid
assets. As such, a high percentage of our portfolio generally is not liquid at any given point in time. See “The lack of liquidity may adversely affect our business.”
Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio
investments, reducing our net asset value through increased net unrealized depreciation.
As a BDC, we are required to carry our investments at market value or, if no market value is ascertainable, at fair value as determined in good faith by or under the
direction of our Board of Directors. As part of the valuation process, the types of factors that we may take into account in determining the fair value of our
investments include, as relevant and among other factors: available current market data, including relevant and applicable market trading and transaction
comparables, applicable market yields and multiples, security covenants, call protection provisions, information rights, the nature and realizable value of any
collateral, the portfolio company’s ability to make payments, its earnings and discounted cash flows, the markets in which the portfolio company does business,
comparisons of financial ratios of peer companies that are public, merger and acquisition comparables, our principal market (as the reporting entity) and enterprise
values of our portfolio companies. Decreases in the market values or fair values of our investments are recorded as unrealized depreciation. The effect of all of
these factors on our portfolio can reduce our net asset value by increasing net unrealized depreciation in our portfolio. Depending on market conditions, we could
incur substantial realized losses and may suffer additional unrealized losses in future periods, which could have a material adverse impact on our business,
financial condition and results of operations.
Our investments in prospective portfolio companies may be risky and we could lose all or part of our investment.
Some of our portfolio companies have relatively short or no operating histories. These companies are and will be subject to all of the business risk and
uncertainties associated with any new business enterprise, including the risk that these companies may not reach their investment objective, and the value of our
investment in them may decline substantially or fall to zero. In addition, investment in the middle market companies that we are targeting involves a number of
other significant risks, including:
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These companies may have limited financial resources and may be unable to meet their obligations under their securities that we hold, which may be
accompanied by a deterioration in the value of their securities or of any collateral with respect to any securities, and a reduction in the likelihood of our
realizing on any guarantees we may have obtained in connection with our investment.
They may have shorter operating histories, narrower product lines and smaller market shares than larger businesses, which tend to render them more
vulnerable to competitors’ actions and market conditions as well as general economic downturns.
Because many of these companies are privately held companies, public information is generally not available about these companies. As a result, we will
depend on the ability of the Investment Adviser to obtain adequate information to evaluate these companies in making investment decisions. If the
Investment Adviser is unable to uncover all material information about these companies, it may not make a fully informed investment decision, and we
may lose money on our investments.
They are more likely to depend on the management talents and efforts of a small group of persons; therefore, the death, disability, resignation or
termination of one or more of these persons could have a materially adverse impact on our portfolio company and, in turn, on us.
They may have less predictable operating results, may from time to time be parties to litigation, may be engaged in changing businesses with products
subject to a risk of obsolescence and may require substantial additional capital to support their operations, finance expansion or maintain their competitive
position.
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They may have difficulty accessing the capital markets to meet future capital needs.
Changes in laws and regulations, as well as their interpretations, may adversely affect their business, financial structure or prospects.
Increased taxes, regulatory expense or the costs of changes to the way they conduct business due to the effects of climate change may adversely affect
their business, financial structure or prospects.
We acquire majority interests in operating companies engaged in a variety of industries. When we acquire these companies we generally seek to apply financial
leverage to them in the form of debt. In most cases all or a portion of this debt is held by us, with the obligor being either the operating company itself, a holding
company through which we own our majority interest or both. The level of debt leverage utilized by these companies makes them susceptible to the risks identified
above.
In addition, our executive officers, directors and the Investment Adviser could, in the ordinary course of business, be named as defendants in litigation arising from
proposed investments or from our investments in the portfolio companies.
The lack of liquidity in our investments may adversely affect our business.
We make investments in private companies. A portion of these investments may be subject to legal and other restrictions on resale, transfer, pledge or other
disposition or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if
the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we
have previously recorded our investments. In addition, we face other restrictions on our ability to liquidate an investment in a business entity to the extent that we
or the Investment Adviser has or could be deemed to have material non-public information regarding such business entity.
Economic recessions or downturns could impair our portfolio companies and harm our operating results.
Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our loans or meet other obligations during
these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these periods. Adverse
economic conditions also may decrease the value of collateral securing some of our loans and the value of our equity investments. Economic slowdowns or
recessions could lead to financial losses in our portfolio and a decrease in revenues, net income and assets. Unfavorable economic conditions also could increase
our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us. These events could prevent us from increasing
investments and harm our operating results.
A portfolio company’s failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and, potentially, termination of its
loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company’s ability to meet its
obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new
terms, which may include the waiver of certain financial covenants, with a defaulting portfolio company. In addition, if one of our portfolio companies were to go
bankrupt, even though we may have structured our interest as senior debt or preferred equity, depending on the facts and circumstances, including the extent to
which we actually provided managerial assistance to that portfolio company, a bankruptcy court might re-characterize our debt or equity holding and subordinate
all or a portion of our claim to those of other creditors.
Investments in equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk.
We may purchase common and other equity securities. Although common stock has historically generated higher average total returns than fixed income securities
over the long-term, common stock has significantly more volatility in those returns and may significantly underperform relative to fixed income securities. The
equity securities we acquire may fail to appreciate and may decline in value or become worthless and our ability to recover our investment will depend on our
portfolio company’s success. Investments in equity securities involve a number of significant risks, including:
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Any equity investment we make in a portfolio company could be subject to further dilution as a result of the issuance of additional equity interests and to
serious risks as a junior security that will be subordinate to all indebtedness (including trade creditors) or senior securities in the event that the issuer is
unable to meet its obligations or becomes subject to a bankruptcy process.
To the extent that the portfolio company requires additional capital and is unable to obtain it, we may not recover our investment.
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In some cases, equity securities in which we invest will not pay current dividends, and our ability to realize a return on our investment, as well as to
recover our investment, will be dependent on the success of the portfolio company. Even if the portfolio company is successful, our ability to realize the
value of our investment may be dependent on the occurrence of a liquidity event, such as a public offering or the sale of the portfolio company. It is likely
to take a significant amount of time before a liquidity event occurs or we can otherwise sell our investment. In addition, the equity securities we receive or
invest in may be subject to restrictions on resale during periods in which it could be advantageous to sell them.
There are special risks associated with investing in preferred securities, including:
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Preferred securities may include provisions that permit the issuer, at its discretion, to defer distributions for a stated period without any adverse
consequences to the issuer. If we own a preferred security that is deferring its distributions, we may be required to report income for tax purposes before
we receive such distributions.
Preferred securities are subordinated to debt in terms of priority to income and liquidation payments, and therefore will be subject to greater credit risk
than debt.
Preferred securities may be substantially less liquid than many other securities, such as common stock or U.S. government securities.
Generally, preferred security holders have no voting rights with respect to the issuing company, subject to limited exceptions.
Additionally, when we invest in first lien senior secured loans (including unitranche loans), second lien senior secured loans or unsecured debt, we may acquire
warrants or other equity securities as well. Our goal is ultimately to dispose of such equity interests and realize gains upon our disposition of such interests.
However, the equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our
equity interests and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience.
We may invest, to the extent permitted by law, in the equity securities of investment funds that are operating pursuant to certain exceptions to the 1940 Act and in
advisers to similar investment funds and, to the extent we so invest, will bear our ratable share of any such company’s expenses, including management and
performance fees. We will also remain obligated to pay management and incentive fees to Prospect Capital Management with respect to the assets invested in the
securities and instruments of such companies. With respect to each of these investments, each of our common stockholders will bear his or her share of the
management and incentive fee of Prospect Capital Management as well as indirectly bearing the management and performance fees and other expenses of any such
investment funds or advisers.
There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims.
If one of our portfolio companies were to go bankrupt, even though we may have structured our interest as senior debt, depending on the facts and circumstances, a
bankruptcy court might recharacterize our debt holding as an equity investment and subordinate all or a portion of our claim to that of other creditors. In addition,
lenders can be subject to lender liability claims for actions taken by them where they become too involved in the borrower’s business or exercise control over the
borrower. For example, we could become subject to a lender’s liability claim, if, among other things, we actually render significant managerial assistance.
Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies.
Our portfolio companies may have, or may be permitted to incur, other debt or issue other equity securities that rank equally with or senior to our investments. By
their terms, such instruments may provide that the holders are entitled to receive payment of dividends, interest or principal on or before the dates on which we are
entitled to receive payments in respect of our investments. These debt instruments would usually prohibit the portfolio companies from paying interest on or
repaying our investments in the event and during the continuance of a default under such debt. Also, in the event of insolvency, liquidation, dissolution,
reorganization or bankruptcy of a portfolio company, holders of securities ranking senior to our investment in that portfolio company typically are entitled to
receive payment in full before we receive any distribution in respect of our investment. After repaying such holders, the portfolio company may not have any
remaining assets to use for repaying its obligation to us. In the case of securities ranking equally with our investments, we would have to share on an equal basis
any distributions with other security holders in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.
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The rights we may have with respect to the collateral securing any junior priority loans we make to our portfolio companies may also be limited pursuant to the
terms of one or more intercreditor agreements (including agreements governing “first out” and “last out” structures) that we enter into with the holders of senior
debt. Under such an intercreditor agreement, at any time that senior obligations are outstanding, we may forfeit certain rights with respect to the collateral to the
holders of the senior obligations. These rights may include the right to commence enforcement proceedings against the collateral, the right to control the conduct of
such enforcement proceedings, the right to approve amendments to collateral documents, the right to release liens on the collateral and the right to waive past
defaults under collateral documents. We may not have the ability to control or direct such actions, even if as a result our rights as junior lenders are adversely
affected.
This risk is characteristic of many of the majority-owned operating companies in our portfolio in that any debt to us from a holding company and the holding
company’s substantial equity investments in the related operating company are subordinated to any creditors of the operating company.
When we are a debt or minority equity investor in a portfolio company, we are often not in a position to exert influence on the entity, and other debt holders,
other equity holders and/or portfolio company management may make decisions that could decrease the value of our portfolio holdings.
When we make debt or minority equity investments, we are subject to the risk that a portfolio company may make business decisions with which we disagree and
the other equity holders and management of such company may take risks or otherwise act in ways that do not serve our interests. As a result, a portfolio company
may make decisions that could decrease the value of our investment. In addition, when we hold a subordinate debt position, other more senior debt holders may
make decisions that could decrease the value of our investment.
Our portfolio companies may be highly leveraged.
Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an investor. These companies
may be subject to restrictive financial and operating covenants and the leverage may impair these companies’ ability to finance their future operations and capital
needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be
limited. Further, a leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.
Our portfolio contains a limited number of portfolio companies, some of which comprise a substantial percentage of our portfolio, which subjects us to a
greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities.
A consequence of the limited number of investments in our portfolio is that the aggregate returns we realize may be significantly adversely affected if one or more
of our significant portfolio company investments perform poorly or if we need to write down the value of any one significant investment. Beyond our income tax
diversification requirements, we do not have fixed guidelines for diversification, and our portfolio could contain relatively few portfolio companies.
Our failure to make follow-on investments in our existing portfolio companies could impair the value of our portfolio.
Following an initial investment in a portfolio company, we may make additional investments in that portfolio company as “follow-on” investments, in order to:
(1) increase or maintain in whole or in part our equity ownership percentage; (2) exercise warrants, options or convertible securities that were acquired in the
original or subsequent financing or (3) attempt to preserve or enhance the value of our investment.
We may elect not to make follow-on investments, may be constrained in our ability to employ available funds, or otherwise may lack sufficient funds to make
those investments. We have the discretion to make any follow-on investments, subject to the availability of capital resources. The failure to make follow-on
investments may, in some circumstances, jeopardize the continued viability of a portfolio company and our initial investment, or may result in a missed
opportunity for us to increase our participation in a successful operation. Even if we have sufficient capital to make a desired follow-on investment, we may elect
not to make a follow-on investment because we may not want to increase our concentration of risk, because we prefer other opportunities, or because we are
inhibited by compliance with BDC requirements or the desire to maintain our tax status.
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We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial
condition and operating results.
Until we identify new investment opportunities, we intend to either invest the net proceeds of future offerings and repayments from investments in interest-bearing
deposits or other short-term instruments or use the net proceeds from such offerings to reduce then-outstanding obligations under our credit facility. We cannot
assure you that we will be able to find enough appropriate investments that meet our investment criteria or that any investment we complete using the proceeds
from an offering or repayments will produce a sufficient return.
We may have limited access to information about privately-held companies in which we invest.
We invest primarily in privately-held companies. Generally, little public information exists about these companies, and we are required to rely on the ability of the
Investment Adviser’s investment professionals to obtain adequate information to evaluate the potential returns from investing in these companies. These
companies and their financial information are not subject to the Sarbanes-Oxley Act of 2002 and other rules that govern public companies. If we are unable to
uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investment.
We may not be able to fully realize the value of the collateral securing our debt investments.
Although a substantial amount of our debt investments are protected by holding security interests in the assets or equity interests of the portfolio companies, we
may not be able to fully realize the value of the collateral securing our investments due to one or more of the following factors:
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Our debt investments may be in the form of unsecured loans, therefore our liens on the collateral, if any, are subordinated to those of the senior secured
debt of the portfolio companies, if any. As a result, we may not be able to control remedies with respect to the collateral.
The collateral may not be valuable enough to satisfy all of the obligations under our secured loan, particularly after giving effect to the repayment of
secured debt of the portfolio company that ranks senior to our loan.
Bankruptcy laws may limit our ability to realize value from the collateral and may delay the realization process.
Our rights in the collateral may be adversely affected by the failure to perfect security interests in the collateral.
The need to obtain regulatory and contractual consents could impair or impede how effectively the collateral would be liquidated and could affect the
value received.
Some or all of the collateral may be illiquid and may have no readily ascertainable market value. The liquidity and value of the collateral could be
impaired as a result of changing economic conditions, competition, and other factors, including the availability of suitable buyers.
Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our investment strategy contemplates potential investments in securities of foreign companies, including those located in emerging market countries. Investing in
foreign companies may expose us to additional risks not typically associated with investing in U.S. companies. These risks include changes in exchange control
regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid markets and less available information than is generally the case
in the United States, higher transaction costs, less government supervision of exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in
enforcing contractual obligations, lack of uniform accounting and auditing standards and greater price volatility. Such risks are more pronounced in emerging
market countries.
Although currently substantially all of our investments are, and we expect that most of our investments will be, U.S. dollar-denominated, investments that are
denominated in a foreign currency will be subject to the risk that the value of a particular currency will change in relation to one or more other currencies. Among
the factors that may affect currency values are trade balances, the level of short-term interest rates, differences in relative values of similar assets in different
currencies, long-term opportunities for investment and capital appreciation, and political developments.
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We may expose ourselves to risks if we engage in hedging transactions.
We may employ hedging techniques to minimize certain investment risks, such as fluctuations in interest and currency exchange rates, but we can offer no
assurance that such strategies will be effective. If we engage in hedging transactions, we may expose ourselves to risks associated with such transactions. We may
utilize instruments such as forward contracts, currency options and interest rate swaps, caps, collars and floors to seek to hedge against fluctuations in the relative
values of our portfolio positions from changes in currency exchange rates and market interest rates. Hedging against a decline in the values of our portfolio
positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such
hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such
hedging transactions may also limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge
against an exchange rate or interest rate fluctuation that is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.
Furthermore, our ability to engage in hedging transactions may also be adversely affected by rules adopted by the U.S. Commodity Futures Trading Commission.
The success of our hedging transactions depends on our ability to correctly predict movements, currencies and interest rates. Therefore, while we may enter into
such transactions to seek to reduce currency exchange rate and interest rate risks, unanticipated changes in currency exchange rates or interest rates may result in
poorer overall investment performance than if we had not engaged in any such hedging transactions. The degree of correlation between price movements of the
instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek
to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from
achieving the intended hedge and expose us to risk of loss. In addition, it may not be possible to hedge fully or perfectly against currency fluctuations affecting the
value of securities denominated in non-U.S. currencies. We have no current intention of engaging in any of the hedging transaction described above, although it
reserves the right to do so in the future.
Our Board of Directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to
us and could impair the value of our stockholders’ investment.
Our Board of Directors has the authority to modify or waive our current operating policies and our strategies without prior notice and without stockholder
approval. We cannot predict the effect any changes to our current operating policies and strategies would have on our business, financial condition, and value of
our common stock. However, the effects might be adverse, which could negatively impact our ability to pay dividends and cause stockholders to lose all or part of
their investment.
Investments in the energy sector are subject to many risks.
We have made certain investments in and relating to the energy sector. The operations of energy companies are subject to many risks inherent in the transporting,
processing, storing, distributing, mining or marketing of natural gas, natural gas liquids, crude oil, coal, refined petroleum products or other hydrocarbons, or in the
exploring, managing or producing of such commodities, including, without limitation: damage to pipelines, storage tanks or related equipment and surrounding
properties caused by hurricanes, tornadoes, floods, fires and other natural disasters or by acts of terrorism, inadvertent damage from construction and farm
equipment, leaks of natural gas, natural gas liquids, crude oil, refined petroleum products or other hydrocarbons, and fires and explosions. These risks could result
in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other environmental
damage, and may result in the curtailment or suspension of their related operations, any and all of which could adversely affect our portfolio companies in the
energy sector. In addition, the energy sector commodity prices have experienced significant volatility at times, which may occur in the future, and which could
negatively affect the returns on any investment made by us in this sector. In addition, valuation of certain investments includes the probability weighting of future
events which are outside of management’s control. The final outcome of such events could increase or decrease the fair value of the investment in a future period.
Our investments in CLOs may be riskier and less transparent to us and our stockholders than direct investments in the underlying companies.
We invest in CLOs. Generally, there may be less information available to us regarding the underlying debt investments held by CLOs than if we had invested
directly in the debt of the underlying companies. As a result, our stockholders will not know the details of the underlying securities of the CLOs in which we will
invest. Our CLO investments are subject to the risk of leverage associated with the debt issued by such CLOs and the repayment priority of senior debt holders in
such CLOs. Our investments in portfolio companies may be risky, and we could lose all or part of our investment.
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CLOs typically will have no significant assets other than their underlying senior secured loans; payments on CLO investments are and will be payable solely
from the cash flows from such senior secured loans.
CLOs typically will have no significant assets other than their underlying senior secured loans. Accordingly, payments on CLO investments are and will be
payable solely from the cash flows from such senior secured loans, net of all management fees and other expenses. Payments to us as a holder of CLO junior
securities are and will be made only after payments due on the senior secured notes, and, where appropriate, the junior secured notes, have been made in full. This
means that relatively small numbers of defaults of senior secured loans may adversely impact our returns.
Our CLO investments are exposed to leveraged credit risk.
Generally, we are in a subordinated position with respect to realized losses on the senior secured loans underlying our investments in CLOs. The leveraged nature
of CLOs, in particular, magnifies the adverse impact of senior secured loan defaults. CLO investments represent a leveraged investment with respect to the
underlying senior secured loans. Therefore, changes in the market value of the CLO investments could be greater than the change in the market value of the
underlying senior secured loans, which are subject to credit, liquidity and interest rate risk.
There is the potential for interruption and deferral of cash flow from CLO investments.
If certain minimum collateral value ratios and/or interest coverage ratios are not met by a CLO, primarily due to senior secured loan defaults, then cash flow that
otherwise would have been available to pay distributions to us on our CLO investments may instead be used to redeem any senior notes or to purchase additional
senior secured loans, until the ratios again exceed the minimum required levels or any senior notes are repaid in full. This could result in an elimination, reduction
or deferral in the distribution and/or principal paid to the holders of the CLO investments, which would adversely impact our returns.
Investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments.
Our CLO investment strategy allows investments in foreign CLOs. Investing in foreign entities may expose us to additional risks not typically associated with
investing in U.S. issuers. These risks include changes in exchange control regulations, political and social instability, expropriation, imposition of foreign taxes,
less liquid markets and less available information than is generally the case in the United States, higher transaction costs, less government supervision of
exchanges, brokers and issuers, less developed bankruptcy laws, difficulty in enforcing contractual obligations, lack of uniform accounting and auditing standards
and greater price volatility. Further, we, and the CLOs in which we invest, may have difficulty enforcing creditor’s rights in foreign jurisdictions. In addition, the
underlying companies of the CLOs in which we invest may be foreign, which may create greater exposure for us to foreign economic developments.
The payment of underlying portfolio manager fees and other charges on CLO investments could adversely impact our returns.
We may invest in CLO investments where the underlying portfolio securities may be subject to management, administration and incentive or performance fees, in
addition to those payable by us. Payment of such additional fees could adversely impact the returns we achieve.
The inability of a CLO collateral manager to reinvest the proceeds of the prepayment of senior secured loans at equivalent rates may adversely affect us.
There can be no assurance that for any CLO investment, in the event that any of the senior secured loans of a CLO underlying such investment are prepaid, the
CLO collateral manager will be able to reinvest such proceeds in new senior secured loans with equivalent investment returns. If the CLO collateral manager
cannot reinvest in new senior secured loans with equivalent investment returns, the interest proceeds available to pay interest on the rated liabilities and
investments may be adversely affected.
Our CLO investments are subject to prepayments and calls, increasing re-investment risk.
Our CLO investments and/or the underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on our value.
Prepayment rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond our control and consequently cannot
be predicted with certainty. In addition, for a CLO collateral manager there is often a strong incentive to refinance well performing portfolios once the senior
tranches amortize. The yield to maturity of the investments will depend on the amount and timing of payments of principal on the loans and the price paid for the
investments. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments of the debt.
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Furthermore, our CLO investments generally do not contain optional call provisions, other than a call at the option of the holders of the equity tranches for the
senior notes and the junior secured notes to be paid in full after the expiration of an initial period in the deal (referred to as the “non-call period”).
The exercise of the call option is by the relevant percentage (usually a majority) of the holders of the equity tranches and, therefore, where we do not hold the
relevant percentage we will not be able to control the timing of the exercise of the call option. The equity tranches also generally have a call at any time based on
certain tax event triggers. In any event, the call can only be exercised by the holders of equity tranches if they can demonstrate (in accordance with the detailed
provisions in the transaction) that the senior notes and junior secured notes will be paid in full if the call is exercised.
Early prepayments and/or the exercise of a call option otherwise than at our request may also give rise to increased re-investment risk with respect to certain
investments, as we may realize excess cash earlier than expected. If we are unable to reinvest such cash in a new investment with an expected rate of return at least
equal to that of the investment repaid, this may reduce our net income and, consequently, could have an adverse impact on our ability to pay dividends.
We have limited control of the administration and amendment of senior secured loans owned by the CLOs in which we invest.
We are not able to directly enforce any rights and remedies in the event of a default of a senior secured loan held by a CLO vehicle. In addition, the terms and
conditions of the senior secured loans underlying our CLO investments may be amended, modified or waived only by the agreement of the underlying lenders.
Generally, any such agreement must include a majority or a super majority (measured by outstanding loans or commitments) or, in certain circumstances, a
unanimous vote of the lenders. Consequently, the terms and conditions of the payment obligations arising from senior secured loans could be modified, amended or
waived in a manner contrary to our preferences.
We have limited control of the administration and amendment of any CLO in which we invest.
The terms and conditions of target securities may be amended, modified or waived only by the agreement of the underlying security holders. Generally, any such
agreement must include a majority or a super majority (measured by outstanding amounts) or, in certain circumstances, a unanimous vote of the security holders.
Consequently, the terms and conditions of the payment obligation arising from the CLOs in which we invest be modified, amended or waived in a manner contrary
to our preferences.
Senior secured loans of CLOs may be sold and replaced resulting in a loss to us.
The senior secured loans underlying our CLO investments may be sold and replacement collateral purchased within the parameters set out in the relevant CLO
indenture between the CLO and the CLO trustee and those parameters may typically only be amended, modified or waived by the agreement of a majority of the
holders of the senior notes and/or the junior secured notes and/or the equity tranche once the CLO has been established. If these transactions result in a net loss, the
magnitude of the loss from the perspective of the equity tranche would be increased by the leveraged nature of the investment.
Our financial results may be affected adversely if one or more of our significant equity or junior debt investments in a CLO vehicle defaults on its payment
obligations or fails to perform as we expect.
We expect that a majority of our portfolio will consist of equity and junior debt investments in CLOs, which involve a number of significant risks. CLOs are
typically highly levered up to approximately 10 times, and therefore the junior debt and equity tranches that we will invest in are subject to a higher risk of total
loss. In particular, investors in CLOs indirectly bear risks of the underlying debt investments held by such CLOs. We will generally have the right to receive
payments only from the CLOs, and will generally not have direct rights against the underlying borrowers or the entities that sponsored the CLOs. Although it is
difficult to predict whether the prices of indices and securities underlying CLOs will rise or fall, these prices, and, therefore, the prices of the CLOs will be
influenced by the same types of political and economic events that affect issuers of securities and capital markets generally.
The investments we make in CLOs are thinly traded or have only a limited trading market. CLO investments are typically privately offered and sold, in the primary
and secondary markets. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in
debt securities, CLOs carry additional risks, including, but not limited to: (i) the possibility that distributions from the underlying senior secured loans will not be
adequate to make interest or other payments; (ii) the quality of the underlying senior secured loans may decline in value or default; and (iii) the complex structure
of the security may not be fully understood at the time of investment and may produce disputes with the CLO or unexpected investment results. Further, our
investments in equity and junior debt tranches of CLOs are subordinate to the senior debt tranches thereof.
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Investments in structured vehicles, including equity and junior debt instruments issued by CLOs, involve risks, including credit risk and market risk. Changes in
interest rates and credit quality may cause significant price fluctuations. Additionally, changes in the underlying senior secured loans held by a CLO may cause
payments on the instruments we hold to be reduced, either temporarily or permanently. Structured investments, particularly the subordinated interests in which we
invest, are less liquid than many other types of securities and may be more volatile than the senior secured loans underlying the CLOs in which we invest.
Non-investment grade debt involves a greater risk of default and higher price volatility than investment grade debt.
The senior secured loans underlying our CLO investments typically are BB or B rated (non-investment grade) and in limited circumstances, unrated, senior secured
loans. Non-investment grade securities are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and
therefore involve a greater risk of default and higher price volatility than investment grade debt.
We will have no influence on management of underlying investments managed by non-affiliated third party CLO collateral managers.
We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold as those portfolios are
managed by non-affiliated third party CLO collateral managers. Similarly, we are not responsible for and have no influence over the day-to-day management,
administration or any other aspect of the issuers of the individual securities. As a result, the values of the portfolios underlying our CLO investments could
decrease as a result of decisions made by third party CLO collateral managers.
The effects of compliance with the Volcker Rule may affect the CLO market in ways that we cannot currently anticipate.
Section 619 of the Dodd-Frank Act added a provision, commonly referred to as the “Volcker Rule,” to federal banking laws to prohibit covered banking entities
from engaging in proprietary trading or acquiring or retaining an ownership interest in, sponsoring or having certain relationships with “covered funds.” Generally,
a covered fund would include a hedge fund or a private equity fund; however, the definition is sufficiently broad that it may include certain CLOs. The Volcker
Rule provides that certain loan securitization vehicles are not considered “covered funds” for purposes of the prohibitions. In order to meet the definition of a loan
securitization, the assets or holdings of the fund must, among other things, consist solely of loans and cannot include securities, such as bonds. In an effort to
qualify for this “loan securitization” exclusion, many current CLOs are undertaking amendments to their related transaction documents that restrict the ability of
the issuer to acquire bonds and certain other securities. Such an amendment may have the effect of reducing the return available to holders of CLO equity securities
because bonds are generally higher yielding assets than are loans. In addition, the costs associated with such an amendment are typically paid out of the cash flow
of the CLO, which could impact the return on our investment in any CLO equity securities. In addition, as a result of the uncertainty regarding the implementation
and interpretation of the Volcker Rule, it is likely that many future CLOs will contain similar restrictions on the acquisition of bonds and certain other securities,
which may have the effect of lowering returns on CLO equity securities. Our CLO equity portfolio is comprised principally of non-Volcker Rule compliant CLOs.
Generally, due to the lack of clarity as to the application of the Volcker Rule and the availability of certain exemptions, certain investors that are subject to the
Volcker Rule may not be as interested in CLO investments in the future. Any decline in interest may adversely affect the market value or liquidity of any or all of
the CLO investments we hold. Similarly, it is possible that uncertainty regarding the treatment of CLOs may adversely affect the volume of CLO issuance.
With respect to our online consumer lending initiative, we are dependent on the business performance and competitiveness of marketplace lending facilitators
and our ability to assess loan underwriting performance and, if the marketplace lending facilitators from which we currently purchase consumer loans are
unable to maintain or increase consumer loan originations, or if such marketplace lending facilitators do not continue to sell consumer loans to us, or we are
unable to otherwise purchase additional loans, our business and results of operations will be adversely affected.
With respect to our online consumer lending initiative, we invest primarily in marketplace loans through marketplace lending facilitators. We do not conduct loan
origination activities ourselves. Therefore, our ability to purchase consumer loans, and our ability to grow our portfolio of consumer loans, is directly influenced by
the business performance and competitiveness of the marketplace loan origination business of the marketplace lending facilitators from which we purchase
consumer loans.
In addition, our ability to analyze the risk-return profile of consumer loans is significantly dependent on the marketplace facilitators’ ability to effectively evaluate
a borrower's credit profile and likelihood of default. The platforms from which we purchase such loans utilize credit decisioning and scoring models that assign
each such loan offered a corresponding interest rate and origination fee. Our returns are a function of the assigned interest rate for each such particular loan
purchased less any defaults over the term of the applicable loan. We evaluate the credit decisioning and scoring models implemented by each platform on a regular
basis
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and leverage the additional data on loan history experience, borrower behavior, economic factors and prepayment trends that we accumulate to continually improve
our own decisioning model. If we are unable to effectively evaluate borrowers' credit profiles or the credit decisioning and scoring models implemented by each
platform, we may incur unanticipated losses which could adversely impact our operating results. Further, if the interest rates for consumer loans available through
marketplace lending platforms are set too high or too low, it may adversely impact our ability to receive returns on our investment that are commensurate with the
risks we incur in purchasing the loans.
With respect to our online consumer lending initiative, we rely on the marketplace lending facilitators to service loans including pursuing collections against
borrowers. Personal loans facilitated through the marketplace lending facilitators are not secured by any collateral, are not guaranteed or insured by any third-party
and are not backed by any governmental authority in any way. Marketplace lending facilitators are therefore limited in their ability to collect on the loans if a
borrower is unwilling or unable to repay. A borrower's ability to repay can be negatively impacted by increases in their payment obligations to other lenders under
mortgage, credit card and other loans, including student loans and home equity lines of credit. These changes can result from increases in base lending rates or
structured increases in payment obligations and could reduce the ability of the borrowers to meet their payment obligations to other lenders and under the loans
purchased by us. If a borrower defaults on a loan, the marketplace lending facilitators may outsource subsequent servicing efforts to third-party collection agencies,
which may be unsuccessful in their efforts to collect the amount of the loan. Marketplace lending facilitators make payments ratably on an investor's investment
only if they receive the borrower's payments on the corresponding loan. If they do not receive payments on the corresponding loan related to an investment, we are
not entitled to any payments under the terms of the investment.
As servicers of the loans we purchase as part of our online consumer lending initiative, the marketplace lending facilitators have the authority to waive or modify
the terms of a consumer loan without our consent or allow the postponement of strict compliance with any such term or in any manner grant any other indulgence
to any borrower. If the marketplace lending facilitators approve a modification to the terms of any consumer loan it may adversely impact our revenues.
To continue to grow our online consumer lending initiative business, we rely on marketplace lending facilitators from which we purchase loans to maintain or
increase their consumer loan originations and to agree to sell their consumer loans to us. However, we do not have any exclusive arrangements with any of the
marketplace lending facilitators and have no agreements with them to provide us with a guaranteed source of supply. There can be no assurance that such
marketplace lending facilitators will be able to maintain or increase consumer loan originations or will continue to sell their consumer loans to us, or that we will
be able to otherwise purchase additional loans and, consequently, there can be no assurance that we will be able to grow our business through investment in
additional loans. The consumer marketplace lending facilitators could elect to become investors in their own marketplace loans which would limit the amount of
supply available for our own investments. An inability to expand our business through investments in additional consumer loans would reduce the return on
investment that we might otherwise be able to realize from an increased portfolio of such investments. If we are unable to expand our business relating to our
online consumer lending initiative, this may have a material adverse effect on our business, financial condition, results of operations and prospects.
Additionally, if marketplace lending facilitators are unable to attract qualified borrowers and sufficient investor commitments or borrowers and investors do not
continue to participate in marketplace lending at current rates, the growth of loan originations will slow or loan originations will decrease. As a result of any of
these factors, we may be unable to increase our consumer loan investments and our revenue may grow more slowly than expected or decline, which could have a
material adverse effect on our business, financial condition and results of operations.
Marketplace lending facilitators on which we rely as part of the online consumer lending initiative by NPRC depend on issuing banks to originate all loans
and to comply with various federal, state and other laws.
Typically, the contracts between marketplace lending facilitators and their loan issuing banks are non-exclusive and do not prohibit the issuing banks from working
with other marketplace lending facilitators or from offering competing services. Issuing banks could decide that working with marketplace lending facilitators is
not in their interests, could make working with marketplace lending facilitators cost prohibitive or could decide to enter into exclusive or more favorable
relationships with other marketplace lending facilitators that do not provide consumer loans to us. In addition, issuing banks may not perform as expected under
their agreements. Marketplace lending facilitators could in the future have disagreements or disputes with their issuing banks. Any of these factors could negatively
impact or threaten our ability to obtain consumer loans and consequently could have a material adverse effect on our business, financial condition, results of
operations and prospects.
Issuing banks are subject to oversight by the FDIC and the states where they are organized and operate and must comply with complex rules and regulations, as
well as licensing and examination requirements, including requirements to maintain a certain amount of regulatory capital relative to their outstanding loans. If
issuing banks were to suspend, limit or cease their operations or the relationship between the marketplace lending facilitators and the issuing bank were to
otherwise terminate, the marketplace
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lending facilitators would need to implement a substantially similar arrangement with another issuing bank, obtain additional state licenses or curtail their
operations. If the marketplace lending facilitators are required to enter into alternative arrangements with a different issuing bank to replace their existing
arrangements, they may not be able to negotiate a comparable alternative arrangement. This may result in their inability to facilitate loans through their platform
and accordingly our inability to operate the business of our online consumer lending initiative. If the marketplace lending facilitators were unable to enter into an
alternative arrangement with a different issuing bank, they would need to obtain a state license in each state in which they operate in order to enable them to
originate loans, as well as comply with other state and federal laws, which would be costly and time-consuming and could have a material adverse effect on our
business, financial condition, results of operations and prospects. If the marketplace lending facilitators are unsuccessful in maintaining their relationships with the
issuing banks, their ability to provide loan products could be materially impaired and our operating results could suffer.
Credit and other information that is received about a borrower may be inaccurate or may not accurately reflect the borrower's creditworthiness, which may
cause the loans to be inaccurately priced and affect the value of our portfolio.
The marketplace lending facilitators obtain borrower credit information from consumer reporting agencies, such as TransUnion, Experian or Equifax, and assign
loan grades to loan requests based on credit decisioning and scoring models that take into account reported credit scores and the requested loan amount, in addition
to a variety of other factors. A credit score or loan grade assigned to a borrower may not reflect that borrower's actual creditworthiness because the credit score
may be based on incomplete or inaccurate consumer reporting data, and typically, the marketplace lending facilitators do not verify the information obtained from
the borrower's credit report. Additionally, there is a risk that, following the date of the credit report that the models are based on, a borrower may have:
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become delinquent in the payment of an outstanding obligation;
defaulted on a pre-existing debt obligation;
taken on additional debt; or
sustained other adverse financial events.
Borrowers supply a variety of information to the marketplace lending facilitators based on which the facilitators price the loans. In a number of cases, marketplace
lending facilitators do not verify all of this information, and it may be inaccurate or incomplete. For example, marketplace lending facilitators do not always verify
a borrower's stated tenure, job title, home ownership status or intention for the use of loan proceeds. Moreover, we do not, and will not, have access to financial
statements of borrowers or to other detailed financial information about the borrowers. If we invest in loans through the marketplace provided by the marketplace
lending facilitators based on information supplied by borrowers or third parties that is inaccurate, misleading or incomplete, we may not receive expected returns
on our investments and this could have a material adverse impact on our business, financial condition, results of operations and prospects and our reputation may
be harmed.
Marketplace lending is a relatively new lending method and the platforms of marketplace lending facilitators have a limited operating history relative to
established consumer banks. Borrowers may not view or treat their obligations under any such loans we purchase as having the same significance as loans
from traditional lending sources, such as bank loans.
The return on our investment in consumer loans depends on borrowers fulfilling their payment obligations in a timely and complete manner under the
corresponding consumer loan. Borrowers may not view their obligations originated on the lending platforms that the marketplace lending facilitators provide as
having the same significance as other credit obligations arising under more traditional circumstances, such as loans from banks or other commercial financial
institutions. If a borrower neglects his or her payment obligations on a consumer loan or chooses not to repay his or her consumer loan entirely, we may not be able
to recover any portion of our investment in the consumer loans. This will adversely impact our business, financial condition, results of operations and prospects.
Risks affecting investments in real estate.
NPRC invests in commercial multi-family residential and student-housing real estate. A number of factors may prevent each of NPRC’s properties and assets from
generating sufficient net cash flow or may adversely affect their value, or both, resulting in less cash available for distribution, or a loss, to us. These factors
include:
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national economic conditions;
regional and local economic conditions (which may be adversely impacted by plant closings, business layoffs, industry slow-downs, weather conditions,
natural disasters, and other factors);
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local real estate conditions (such as over-supply of or insufficient demand for office space);
changing demographics;
perceptions by prospective tenants of the convenience, services, safety, and attractiveness of a property;
the ability of property managers to provide capable management and adequate maintenance;
the quality of a property’s construction and design;
increases in costs of maintenance, insurance, and operations (including energy costs and real estate taxes);
changes in applicable laws or regulations (including tax laws, zoning laws, or building codes);
potential environmental and other legal liabilities;
the level of financing used by NPRC in respect of its properties, increases in interest rate levels on such financings and the risk that NPRC will default on
such financings, each of which increases the risk of loss to us;
the availability and cost of refinancing;
the ability to find suitable tenants for a property and to replace any departing tenants with new tenants;
potential instability, default or bankruptcy of tenants in the properties owned by NPRC;
potential limited number of prospective buyers interested in purchasing a property that NPRC wishes to sell; and
the relative illiquidity of real estate investments in general, which may make it difficult to sell a property at an attractive price or within a reasonable time
frame.
To the extent OID and PIK interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be
included in taxable and accounting income prior to receipt of cash representing such income.
Our investments may include original issue discount, or OID, instruments and payment in kind, or PIK, interest arrangements, which represents contractual interest
added to a loan balance and due at the end of such loan’s term. To the extent OID or PIK interest constitute a portion of our income, we are exposed to typical risks
associated with such income being required to be included in taxable and accounting income prior to receipt of cash, including the following:
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The higher interest rates of OID and PIK instruments reflect the payment deferral and increased credit risk associated with these instruments, and OID
and PIK instruments generally represent a significantly higher credit risk than coupon loans.
Even if the accounting conditions for income accrual are met, the borrower could still default when our actual collection is supposed to occur at the
maturity of the obligation.
OID and PIK instruments may have unreliable valuations because their continuing accruals require continuing judgments about the collectibility of the
deferred payments and the value of any associated collateral. OID and PIK income may also create uncertainty about the source of our cash distributions.
For accounting purposes, any cash distributions to shareholders representing OID and PIK income are not treated as coming from paid-in capital, even if the cash
to pay them comes from offering proceeds. As a result, despite the fact that a distribution representing OID and PIK income could be paid out of amounts invested
by our stockholders, the 1940 Act does not require that stockholders be given notice of this fact by reporting it as a return of capital.
Risks Relating to Our Securities
Our credit ratings may not reflect all risks of an investment in our debt securities.
Our credit ratings are an assessment by third parties of our ability to pay our obligations. Consequently, real or anticipated changes in our credit ratings will
generally affect the market value of our debt securities. Our credit ratings, however, may not reflect the potential impact of risks related to market conditions
generally or other factors discussed above on the market value of or trading market for the publicly issued debt securities.
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Senior securities, including debt, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business,
financial condition and results of operations.
We currently use our revolving credit facility to leverage our portfolio and we expect in the future to borrow from and issue senior debt securities to banks and
other lenders and may securitize certain of our portfolio investments. We also have the Unsecured Notes outstanding, which are a form of leverage and are senior
in payment rights to our common stock.
With certain limited exceptions, as a BDC, we are only allowed to borrow amounts or otherwise issue senior securities such that our asset coverage, as defined in
the 1940 Act, is at least 200% after such borrowing or other issuance. The amount of leverage that we employ will depend on the Investment Adviser’s and our
Board of Directors’ assessment of market conditions and other factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will
be successful. Leverage involves risks and special considerations for stockholders, any of which could adversely affect our business, financial condition and results
of operations, including the following:
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A likelihood of greater volatility in the net asset value and market price of our common stock;
Diminished operating flexibility as a result of asset coverage or investment portfolio composition requirements required by lenders or investors that are
more stringent than those imposed by the 1940 Act;
The possibility that investments will have to be liquidated at less than full value or at inopportune times to comply with debt covenants or to pay interest
or dividends on the leverage;
Increased operating expenses due to the cost of leverage, including issuance and servicing costs;
Convertible or exchangeable securities, such as the Convertible Notes outstanding or those issued in the future may have rights, preferences and privileges
more favorable than those of our common stock;
Subordination to lenders’ superior claims on our assets as a result of which lenders will be able to receive proceeds available in the case of our liquidation
before any proceeds will be distributed to our stockholders;
Difficulty meeting our payment and other obligations under the Unsecured Notes and our other outstanding debt;
The occurrence of an event of default if we fail to comply with the financial and/or other restrictive covenants contained in our debt agreements, including
the credit agreement and each indenture governing the Unsecured Notes, which event of default could result in all or some of our debt becoming
immediately due and payable;
Reduced availability of our cash flow to fund investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional
financing for these purposes;
The risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our amended senior
credit facility; and
Reduced flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the
general economy.
For example, the amount we may borrow under our revolving credit facility is determined, in part, by the fair value of our investments. If the fair value of our
investments declines, we may be forced to sell investments at a loss to maintain compliance with our borrowing limits. Other debt facilities we may enter into in
the future may contain similar provisions. Any such forced sales would reduce our net asset value and also make it difficult for the net asset value to recover. The
Investment Adviser and our Board of Directors in their best judgment nevertheless may determine to use leverage if they expect that the benefits to our
stockholders of maintaining the leveraged position will outweigh the risks.
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In addition, our ability to meet our payment and other obligations of the Unsecured Notes and our credit facility depends on our ability to generate
significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as
other factors that are beyond our control. We cannot provide assurance that our business will generate cash flow from operations, or that future
borrowings will be available to us under our existing credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations
under the Unsecured Notes and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt
obligations, we may need to refinance or restructure our debt, including the Unsecured Notes, sell assets, reduce or delay capital investments, or seek to
raise additional capital. If we are unable to implement one or
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more of these alternatives, we may not be able to meet our payment obligations under the Unsecured Notes and our other debt.
Illustration. The following table illustrates the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of
interest expense. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation
assumes (i) $6.2 billion in total assets, (ii) an average cost of funds of 5.32%, (iii) $2.7 billion in debt outstanding and (iv) $3.5 billion of shareholders’ equity.
Assumed Return on Our Portfolio (net of expenses)
Corresponding Return to Stockholder
(10)%
(21.8)%
(5)%
(13.0)%
0 %
(4.1)%
5%
4.8%
10%
13.6%
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance. Actual
returns may be greater or less than those appearing in the table.
The Convertible Notes and the Public Notes present other risks to holders of our common stock, including the possibility that such notes could discourage an
acquisition of us by a third party and accounting uncertainty.
Certain provisions of the Convertible Notes and the Public Notes could make it more difficult or more expensive for a third party to acquire us. Upon the
occurrence of certain transactions constituting a fundamental change, holders of the Convertible Notes and the Public Notes will have the right, at their option, to
require us to repurchase all of their notes or any portion of the principal amount of such notes in integral multiples of $1,000. We may also be required to increase
the conversion rate or provide for conversion into the acquirer’s capital stock in the event of certain fundamental changes with respect to the Convertible Notes.
These provisions could discourage an acquisition of us by a third party.
The accounting for convertible debt securities is subject to frequent scrutiny by the accounting regulatory bodies and is subject to change. We cannot predict if or
when any such change could be made and any such change could have an adverse impact on our reported or future financial results. Any such impacts could
adversely affect the market price of our common stock.
We may in the future determine to fund a portion of our investments with preferred stock, which would magnify the potential for gain or loss and the risks of
investing in us in the same way as our borrowings.
Preferred stock, which is another form of leverage, has the same risks to our common stockholders as borrowings because the dividends on any preferred stock we
issue must be cumulative. Payment of such dividends and repayment of the liquidation preference of such preferred stock must take preference over any dividends
or other payments to our common stockholders, and preferred stockholders are not subject to any of our expenses or losses and are not entitled to participate in any
income or appreciation in excess of their stated preference.
Holders of any preferred stock we might issue would have the right to elect members of the board of directors and class voting rights on certain matters.
Holders of any preferred stock we might issue, voting separately as a single class, would have the right to elect two members of the board of directors at all times
and in the event dividends become two full years in arrears, would have the right to elect a majority of the directors until such arrearage is completely eliminated.
In addition, preferred stockholders have class voting rights on certain matters, including changes in fundamental investment restrictions and conversion to open-
end status, and accordingly can veto any such changes. Restrictions imposed on the declarations and payment of dividends or other distributions to the holders of
our common stock and preferred stock, both by the 1940 Act and by requirements imposed by rating agencies or the terms of our credit facilities, might impair our
ability to maintain our qualification as a RIC for federal income tax purposes. While we would intend to redeem our preferred stock to the extent necessary to
enable us to distribute our income as required to maintain our qualification as a RIC, there can be no assurance that such actions could be effected in time to meet
the tax requirements.
In addition to regulatory restrictions that restrict our ability to raise capital, our credit facility contains various covenants which, if not complied with, could
accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations.
The agreement governing our credit facility requires us to comply with certain financial and operational covenants. These covenants include:
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Restrictions on the level of indebtedness that we are permitted to incur in relation to the value of our assets;
Restrictions on our ability to incur liens; and
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• Maintenance of a minimum level of stockholders’ equity.
As of June 30, 2017 , we were in compliance with these covenants. However, our continued compliance with these covenants depends on many factors, some of
which are beyond our control. Accordingly, there are no assurances that we will continue to comply with the covenants in our credit facility. Failure to comply
with these covenants would result in a default under this facility which, if we were unable to obtain a waiver from the lenders thereunder, could result in an
acceleration of repayments under the facility and thereby have a material adverse impact on our business, financial condition and results of operations.
Failure to extend our existing credit facility, the revolving period of which is currently scheduled to expire on March 27, 2019, could have a material adverse
effect on our results of operations and financial position and our ability to pay expenses and make distributions.
The revolving period for our credit facility with a syndicate of lenders is currently scheduled to terminate on March 27, 2019, with an additional one year
amortization period (with distributions allowed) after the completion of the revolving period. During such one year amortization period, all principal payments on
the pledged assets will be applied to reduce the balance. At the end of the one year amortization period, the remaining balance will become due, if required by the
lenders. If the credit facility is not renewed or extended by the participant banks by March 27, 2019, we will not be able to make further borrowings under the
facility after such date and the outstanding principal balance on that date will be due and payable on March 27, 2020. As of June 30, 2017 , we did not have any
outstanding borrowings under our credit facility. Interest on borrowings under the credit facility is one-month LIBOR plus 225 basis points with no minimum
LIBOR floor. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 50 basis points if at least 35% of the credit facility is
drawn or 100 basis points otherwise.
The credit facility requires us to pledge assets as collateral in order to borrow under the credit facility. If we are unable to extend our facility or find a new source
of borrowing on acceptable terms, we will be required to pay down the amounts outstanding under the facility during the two-year term-out period through one or
more of the following: (1) principal collections on our securities pledged under the facility, (2) at our option, interest collections on our securities pledged under the
facility and cash collections on our securities not pledged under the facility, or (3) possible liquidation of some or all of our loans and other assets, any of which
could have a material adverse effect on our results of operations and financial position and may force us to decrease or stop paying certain expenses and making
distributions until the facility is repaid. In addition, our stock price could decline significantly, we would be restricted in our ability to acquire new investments
and, in connection with our year-end audit, and our independent registered accounting firm could raise an issue as to our ability to continue as a going concern.
Failure to refinance our existing Unsecured Notes could have a material adverse effect on our results of operations and financial position.
The Unsecured Notes mature at various dates from October 15, 2017 to October 15, 2043. If we are unable to refinance the Unsecured Notes or find a new source
of borrowing on acceptable terms, we will be required to pay down the amounts outstanding at maturity under the facility during the two-year term-out period
through one or more of the following: (1) borrowing additional funds under our then current credit facility, (2) issuance of additional common stock or (3) possible
liquidation of some or all of our loans and other assets, any of which could have a material adverse effect on our results of operations and financial position. In
addition, our stock price could decline significantly; we would be restricted in our ability to acquire new investments and, in connection with our year-end audit,
our independent registered accounting firm could raise an issue as to our ability to continue as a going concern.
The trading market or market value of our publicly issued debt securities may fluctuate.
Our publicly issued debt securities may or may not have an established trading market. We cannot assure our noteholders that a trading market for our publicly
issued debt securities will ever develop or be maintained if developed. In addition to our creditworthiness, many factors may materially adversely affect the trading
market for, and market value of, our publicly issued debt securities. These factors include, but are not limited to, the following:
•
•
•
•
•
the time remaining to the maturity of these debt securities;
the outstanding principal amount of debt securities with terms identical to these debt securities;
the ratings assigned by national statistical ratings agencies;
the general economic environment;
the supply of debt securities trading in the secondary market, if any;
53
•
•
the redemption or repayment features, if any, of these debt securities;
the level, direction and volatility of market interest rates generally; and
• market rates of interest higher or lower than rates borne by the debt securities.
Our noteholders should also be aware that there may be a limited number of buyers when they decide to sell their debt securities. This too may materially adversely
affect the market value of the debt securities or the trading market for the debt securities.
Terms relating to redemption may materially adversely affect our noteholders return on any debt securities that we may issue.
If our noteholders’ debt securities are redeemable at our option, we may choose to redeem their debt securities at times when prevailing interest rates are lower
than the interest rate paid on their debt securities. In addition, if our noteholders’ debt securities are subject to mandatory redemption, we may be required to
redeem their debt securities also at times when prevailing interest rates are lower than the interest rate paid on their debt securities. In this circumstance, our
noteholders may not be able to reinvest the redemption proceeds in a comparable security at an effective interest rate as high as their debt securities being
redeemed.
Our shares of common stock currently trade at a discount from net asset value and may continue to do so in the future, which could limit our ability to raise
additional equity capital.
Shares of closed-end investment companies frequently trade at a market price that is less than the net asset value that is attributable to those shares. This
characteristic of closed-end investment companies is separate and distinct from the risk that our net asset value per share may decline. It is not possible to predict
whether any shares of our common stock will trade at, above, or below net asset value. The stocks of BDCs as an industry, including shares of our common stock,
currently trade below net asset value as a result of concerns over liquidity, interest rate changes, leverage restrictions and distribution requirements. When our
common stock is trading below its net asset value per share, we will not be able to issue additional shares of our common stock at its market price without first
obtaining approval for such issuance from our stockholders and our independent directors. At our 2016 annual meeting of stockholders held on December 2, 2016,
our stockholders approved our ability, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any
particular offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, to sell shares
of our common stock at any level of discount from net asset value per share during the 12 month period following December 2, 2016. We do not intend to seek
stockholder approval at our 2017 annual meeting to continue for an additional 12 month period our ability to sell shares of common stock at any level of discount
from net asset value per share, subject to the condition that the maximum number of shares salable below net asset value pursuant to this authority in any particular
offering that could result in such dilution is limited to 25% of our then outstanding common stock immediately prior to each such offering, but may seek
stockholder approval to do so in the future.
There is a risk that investors in our common stock may not receive dividends or that our dividends may not grow over time and investors in our debt securities
may not receive all of the interest income to which they are entitled.
We intend to make distributions on a quarterly basis to our stockholders out of assets legally available for distribution. We cannot assure you that we will achieve
investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions. If we declare a dividend and if
more stockholders opt to receive cash distributions rather than participate in our dividend reinvestment plan, we may be forced to sell some of our investments in
order to make cash dividend payments.
In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount
of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution.
The above-referenced restrictions on distributions may also inhibit our ability to make required interest payments to holders of our debt, which may cause a default
under the terms of our debt agreements. Such a default could materially increase our cost of raising capital, as well as cause us to incur penalties under the terms of
our debt agreements.
Investing in our securities may involve a high degree of risk and is highly speculative.
The investments we make in accordance with our investment objective may result in a higher amount of risk than alternative investment options and volatility or
loss of principal. Our investments in portfolio companies may be speculative and aggressive, and therefore, an investment in our shares may not be suitable for
someone with low risk tolerance.
54
Our stockholders will experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan.
All dividends declared in cash payable to stockholders that are participants in our dividend reinvestment plan are automatically reinvested in shares of our common
stock. As a result, our stockholders that opt out of our dividend reinvestment plan will experience dilution in their ownership percentage of our common stock over
time.
Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock.
Sales of substantial amounts of our common stock, or the availability of such common stock for sale (including as a result of the conversion of the Convertible
Notes into common stock), could adversely affect the prevailing market prices for our common stock. If this occurs and continues, it could impair our ability to
raise additional capital through the sale of securities should we desire to do so.
If we sell shares of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to our net asset value per
share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may be material.
At our 2016 annual meeting of stockholders held on December 2, 2016, our stockholders approved our ability, subject to the condition that the maximum number
of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then
outstanding common stock immediately prior to each such offering, to sell shares of our common stock at any level of discount from net asset value per share
during the 12 month period following December 2, 2016. We do not intend to seek stockholder approval at our 2017 annual meeting to continue for an additional
12 month period our ability to sell shares of common stock at any level of discount from net asset value per share, subject to the condition that the maximum
number of shares salable below net asset value pursuant to this authority in any particular offering that could result in such dilution is limited to 25% of our then
outstanding common stock immediately prior to each such offering, but may seek stockholder approval to do so in the future. The issuance or sale by us of shares
of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to net asset value poses a risk of dilution to our
stockholders. In particular, stockholders who do not purchase additional shares of common stock at or below the discounted price in proportion to their current
ownership will experience an immediate decrease in net asset value per share (as well as in the aggregate net asset value of their shares of common stock if they do
not participate at all). These stockholders will also experience a disproportionately greater decrease in their participation in our earnings and assets and their voting
power than the increase we experience in our assets, potential earning power and voting interests from such issuance or sale. In addition, such sales may adversely
affect the price at which our common stock trades. We have sold shares of our common stock at prices below net asset value per share in the past and may do so to
the future. We have not sold any shares of our common stock at prices below net asset value per share since December 3, 2014.
Our ability to enter into transactions with our affiliates is restricted.
We are prohibited under the 1940 Act from knowingly participating in certain transactions with our affiliates without the prior approval of our independent
directors. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities is our affiliate for purposes of the 1940 Act and we are
generally prohibited from buying or selling any security or other property from or to such affiliate, absent the prior approval of our independent directors. The 1940
Act also prohibits “joint” transactions with an affiliate, which could include investments in the same portfolio company (whether at the same or different times),
without prior approval of our independent directors. Subject to certain limited exceptions, we are prohibited from buying or selling any security or other property
from or to the Investment Adviser and its affiliates and persons with whom we are in a control relationship, or entering into joint transactions with any such person,
absent the prior approval of the SEC.
On February 10, 2014, we received an exemptive order from the SEC (the “Order”) that gave us the ability to negotiate terms other than price and quantity of co-
investment transactions with other funds managed by the Investment Adviser or certain affiliates, including Priority Income Fund, Inc. and Pathway Energy
Infrastructure Fund, Inc., subject to the conditions included therein. Under the terms of the relief permitting us to co-invest with other funds managed by our
Investment Adviser or its affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions
in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and
fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent
with the interests of our stockholders and is consistent with our investment objective and strategies. In certain situations where co-investment with one or more
funds managed by the Investment Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the
same issuer, the personnel of the Investment Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make
these determinations based on policies and procedures, which are designed to reasonably ensure that investment
55
opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations.
Moreover, except in certain circumstances, when relying on the Order, we will be unable to invest in any issuer in which one or more funds managed by the
Investment Adviser or its affiliates has previously invested.
The market price of our securities may fluctuate significantly.
The market price and liquidity of the market for our securities may be significantly affected by numerous factors, some of which are beyond our control and may
not be directly related to our operating performance. These factors include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
significant volatility in the market price and trading volume of securities of business development companies or other companies in the energy industry,
which are not necessarily related to the operating performance of these companies;
price and volume fluctuations in the overall stock market from time to time;
changes in regulatory policies or tax guidelines, particularly with respect to RICs or business development companies;
loss of RIC qualification;
changes in earnings or variations in operating results;
changes in the value of our portfolio of investments;
any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
departure of one or more of Prospect Capital Management’s key personnel;
operating performance of companies comparable to us;
short-selling pressure with respect to shares of our common stock or BDCs generally;
future sales of our securities convertible into or exchangeable or exercisable for our common stock or the conversion of such securities, including the
Convertible Notes;
uncertainty surrounding the strength of the U.S. economic recovery;
concerns regarding European sovereign debt;
changes in prevailing interest rates;
litigation matters;
general economic trends and other external factors; and
loss of a major funding source.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has, from time to time, been brought
against that company.
If our stock price fluctuates significantly, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert
management’s attention and resources from our business.
There is a risk that you may not receive distributions or that our distributions may not grow over time.
We have made and intend to continue to make distributions on a monthly basis to our stockholders out of assets legally available for distribution. We cannot assure
you that we will achieve investment results or maintain a tax status that will allow or require any specified level of cash distributions or year-to-year increases in
cash distributions. In addition, due to the asset coverage test applicable to us as a business development company, we may be limited in our ability to make
distributions.
Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of
our common stock.
Our charter and bylaws and the Maryland General Corporation Law contain provisions that may have the effect of delaying, deferring or preventing a transaction
or a change in control that might involve a premium price for our stockholders or otherwise
56
be in their best interest. These provisions may prevent stockholders from being able to sell shares of our common stock at a premium over the current of prevailing
market prices.
Our charter provides for the classification of our Board of Directors into three classes of directors, serving staggered three-year terms, which may render a change
of control or removal of our incumbent management more difficult. Furthermore, any and all vacancies on our Board of Directors will be filled generally only by
the affirmative vote of a majority of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a
vacancy will serve for the remainder of the full term until a successor is elected and qualifies.
Our Board of Directors is authorized to create and issue new series of shares, to classify or reclassify any unissued shares of stock into one or more classes or
series, including preferred stock and, without stockholder approval, to amend our charter to increase or decrease the number of shares of common stock that we
have authority to issue, which could have the effect of diluting a stockholder’s ownership interest. Prior to the issuance of shares of common stock of each class or
series, including any reclassified series, our Board of Directors is required by our governing documents to set the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each class or series of shares
of stock.
Our charter and bylaws also provide that our Board of Directors has the exclusive power to adopt, alter or repeal any provision of our bylaws, and to make new
bylaws. The Maryland General Corporation Law also contains certain provisions that may limit the ability of a third party to acquire control of us, such as:
•
•
The Maryland Business Combination Act, which, subject to certain limitations, prohibits certain business combinations between us and an “interested
stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of the common stock or an affiliate thereof) for
five years after the most recent date on which the stockholder becomes an interested stockholder and, thereafter, imposes special minimum price
provisions and special stockholder voting requirements on these combinations.
The Maryland Control Share Acquisition Act, which provides that “control shares” of a Maryland corporation (defined as shares of common stock which,
when aggregated with other shares of common stock controlled by the stockholder, entitles the stockholder to exercise one of three increasing ranges of
voting power in electing directors, as described more fully below) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of
ownership or control of “control shares”) have no voting rights except to the extent approved by stockholders by the affirmative vote of at least two-thirds
of all the votes entitled to be cast on the matter, excluding all interested shares of common stock.
The provisions of the Maryland Business Combination Act will not apply, however, if our Board of Directors adopts a resolution that any business combination
between us and any other person will be exempt from the provisions of the Maryland Business Combination Act. Our Board of Directors has adopted a resolution
that any business combination between us and any other person is exempted from the provisions of the Maryland Business Combination Act, provided that the
business combination is first approved by the Board of Directors, including a majority of the directors who are not interested persons as defined in the 1940 Act.
There can be no assurance that this resolution will not be altered or repealed in whole or in part at any time. If the resolution is altered or repealed, the provisions of
the Maryland Business Combination Act may discourage others from trying to acquire control of us.
As permitted by Maryland law, our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions by any person
of our common stock. Although our bylaws include such a provision, such a provision may also be amended or eliminated by our Board of Directors at any time in
the future, provided that we will notify the Division of Investment Management at the SEC prior to amending or eliminating this provision. However, as noted
above, the SEC has recently taken the position that the Maryland Control Share Acquisition Act is inconsistent with the 1940 Act and may not be invoked by a
BDC. It is the view of the staff of the SEC that opting into the Maryland Control Share Acquisition Act would be acting in a manner inconsistent with section 18(i)
of the 1940 Act.
Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than
our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares.
In the event we issue subscription rights, stockholders who do not fully exercise their subscription rights should expect that they will, at the completion of a rights
offering pursuant to this prospectus, own a smaller proportional interest in us than would otherwise be the case if they fully exercised their rights. We cannot state
precisely the amount of any such dilution in share ownership because we do not know at this time what proportion of the shares will be purchased as a result of
such rights offering.
57
In addition, if the subscription price is less than the net asset value per share of our common stock, then our stockholders would experience an immediate dilution
of the aggregate net asset value of their shares as a result of the offering. The amount of any decrease in net asset value is not predictable because it is not known at
this time what the subscription price and net asset value per share will be on the expiration date of a rights offering or what proportion of the shares will be
purchased as a result of such rights offering. Such dilution could be substantial.
We may in the future choose to pay dividends in our own stock, in which case our stockholders may be required to pay tax in excess of the cash they receive.
We may distribute taxable dividends that are payable in part in our stock. In accordance with guidance issued by the Internal Revenue Service, a publicly traded
RIC should generally be eligible to treat a distribution of its own stock as fulfilling its RIC distribution requirements if each stockholder is permitted to elect to
receive his or her distribution in either cash or stock of the RIC (even where there is a limitation on the percentage of the distribution payable in cash, provided that
the limitation is at least 20%), subject to the satisfaction of certain guidelines. If too many stockholders elect to receive cash, each stockholder electing to receive
cash generally must receive a portion of his or her distribution in cash (with the balance of the distribution paid in stock). If these and certain other requirements
are met, for U.S. federal income tax purposes, the amount of the distribution paid in stock generally will be a taxable distribution in an amount equal to the amount
of cash that could have been received instead of stock. Taxable stockholders receiving such dividends would be required to include the full amount of the dividend
as ordinary income (or as long-term capital gain to the extent such distribution is properly designated as a capital gain dividend) to the extent of our current and
accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. Stockholder (as defined in “Material U.S. Federal Income Tax
Considerations”) may be required to pay tax with respect to such dividends in excess of any cash received. If a U.S. Stockholder sells the stock it receives as a
dividend in order to pay this tax, it may be subject to transaction fees (e.g., broker fees or transfer agent fees) and the sales proceeds may be less than the amount
included in income with respect to the dividend, depending on the market price of its stock at the time of the sale. Furthermore, with respect to Non-U.S.
Stockholders (as defined in “Material U.S. Federal Income Tax Considerations”), we may be required to withhold U.S. tax with respect to such dividends,
including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of
our stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our stock. It is unclear whether and to what extent we will
be pay dividends in cash and our stock.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We do not own any real estate or other physical properties materially important to our operation. Our principal executive offices are located at 10 East 40th Street,
New York, New York 10016, where we occupy our office space pursuant to our Administration Agreement with Prospect Administration. The office facilities,
which are shared with the Investment Adviser and Administrator, consist of approximately 31,700 square feet, with various leases expiring up to and through 2023.
We believe that our office facilities are suitable and adequate for our business as currently conducted.
Item 3. Legal Proceedings
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters
may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such matters as may arise will be subject to various
uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any
material legal proceedings as of June 30, 2017 . Our Investment Adviser and Administrator were named as defendants in a lawsuit filed on April 21, 2016 by a
purported shareholder of Prospect in the United States District Court for the Southern District of New York under the caption Paskowitz v. Prospect Capital
Management and Prospect Administration. The complaint alleged that the defendants received purportedly excessive management and administrative services fees
from us in violation of Section 36(b) of the 1940 Act. The plaintiff sought to recover on behalf of us damages in an amount not specified in the complaint. On June
30, 2016, the Investment Adviser and the Administrator filed a motion to dismiss the complaint in its entirety. On January 24, 2017, the court granted the motion to
dismiss, finding that the shareholder’s complaint failed to state a cause of action and entering judgment dismissing the action. On February 21, 2017, the
shareholder filed a notice of appeal to the United States Court of Appeals for the Second Circuit of the district court’s judgment dismissing the action. On May 15,
2017, the United States Court of Appeals for the Second Circuit entered an order dismissing the shareholder’s appeal with prejudice, in accordance with the
parties’ stipulation filed May 12, 2017.
58
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is traded on the NASDAQ Global Select Market under the symbol “PSEC.”
PART II
The following table sets forth, for the quarterly reporting periods indicated, the net asset value per share of our common stock and the high and low sales prices for
our common stock, as reported on the NASDAQ Global Select Market. Our common stock historically has traded at prices both above and below its net asset
value. There can be no assurance, however, that such premium or discount, as applicable, to net asset value will be maintained. See also “Item 1A. Risk Factors” in
Part I of this report for additional information about the risks and uncertainties we face.
Net Asset Value
Per Share(1)
Sales Price
High
Low
Premium (Discount)
of High Sales Price to
Net Asset Value
Premium (Discount) of
Low Sales Price to Net
Asset Value
Year Ended
June 30, 2016
First quarter
$
10.17 $
7.99 $
Second quarter
Third quarter
Fourth quarter
June 30, 2017
9.65
9.61
9.62
7.63
7.48
7.86
First quarter
$
9.60 $
8.65 $
Second quarter
Third quarter
Fourth quarter
9.62
9.43
9.32
8.50
9.53
9.40
6.98
6.20
5.26
7.15
7.80
7.46
8.42
7.95
(21.4%)
(20.9%)
(22.2%)
(18.3%)
(9.9%)
(11.6%)
1.1%
0.9%
(31.4%)
(35.8%)
(45.3%)
(25.7%)
(18.8%)
(22.5%)
(10.7%)
(14.7%)
(1) Net asset value per share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per share on the date of the high and low
sales prices. The net asset values shown are based on outstanding shares at the end of the relevant quarter.
As of August 28, 2017 , there were 156 shareholders of record of our common stock. This figure does not include a substantially greater number of beneficial
holders of our common stock, whose shares are held in the names of brokers, dealers and clearing agencies.
Distribution Policy
Through March 2010, we made quarterly distributions to our stockholders out of assets legally available for distribution. In June 2010, we changed our distribution
policy from a quarterly payment to a monthly payment. To the extent prudent and practicable, we currently intend to continue making distributions on a monthly
basis. Our ability to pay distributions could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan
covenants. Our distributions, if any, will be determined by our Board of Directors. Certain amounts of the monthly distributions may from time to time be paid out
of our capital rather than from earnings for the quarter as a result of our deliberate planning or by accounting reclassifications.
As a RIC, we generally are not subject to U.S. federal income tax on income and gains we distribute each taxable year to our stockholders, provided that in such
taxable year, we distribute an amount equal to at least 90% of our investment company taxable income (as defined by the Code) to our stockholders. Any
undistributed taxable income is subject to U.S. federal income tax. In addition, we will be subject to a 4% non-deductible U.S. federal excise tax on certain
undistributed income unless we distribute in a timely manner an amount at least equal to the sum of (i) 98% of our ordinary income recognized during the calendar
year, (ii) 98.2% of our capital gain net income, as defined by the Code, recognized for the one year period ending October 31 in that calendar year and (iii) any
income recognized, but not distributed, in preceding years.
We did not have an excise tax liability for the calendar year ended December 31, 2016. As of June 30, 2017, we do not expect to have any excise tax due for the
2017 calendar year. Tax characteristics of all distributions will be reported to stockholders, as appropriate, on Form 1099-DIV after the end of the calendar year.
59
In addition, although we currently intend to distribute realized net capital gains (which we define as net long-term capital gains in excess of short-term capital
losses), if any, at least annually out of the assets legally available for such distributions, we may decide in the future to retain such capital gains for investment. In
such event, the consequences of our retention of net capital gains are described under “Material U.S. Federal Income Tax Considerations.” We can offer no
assurance that we will achieve results that will permit the payment of any cash distributions and, if we issue senior securities, we may be prohibited from making
distributions if doing so causes us to fail to maintain the asset coverage ratios stipulated by the 1940 Act or if distributions are limited by the terms of any of our
borrowings.
During the years ended June 30, 2017 and June 30, 2016 , we distributed approximately $359.0 million and $356.1 million , respectively, to our stockholders. The
following table summarizes our distributions declared and payable for the years ended June 30, 2016 and June 30, 2017 .
Declaration Date
Record Date
Payment Date
Amount Per Share
Amount Distributed (in
thousands)
5/6/2015
5/6/2015
8/24/2015
8/24/2015
11/4/2015
11/4/2015
11/4/2015
2/9/2016
2/9/2016
2/9/2016
5/9/2016
5/9/2016
5/9/2016
5/9/2016
8/25/2016
8/25/2016
11/8/2016
11/8/2016
11/8/2016
2/7/2017
2/7/2017
2/7/2017
5/9/2017
5/9/2017
7/31/2015
8/31/2015
9/30/2015
10/30/2015
11/30/2015
12/31/2015
1/29/2016
2/29/2016
3/31/2016
4/29/2016
5/31/2016
6/30/2016
8/20/2015 $
0.083330 $
9/17/2015
10/22/2015
11/19/2015
12/24/2015
1/21/2016
2/18/2016
3/24/2016
4/21/2016
5/19/2016
6/23/2016
7/21/2016
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
29,909
29,605
29,601
29,600
29,611
29,616
29,641
29,663
29,674
29,702
29,730
29,758
Total declared and payable for the year ended June 30, 2016 $
356,110
7/29/2016
8/31/2016
9/30/2016
10/31/2016
11/30/2016
12/30/2016
1/31/2017
2/28/2017
3/31/2017
4/28/2017
5/31/2017
6/30/2017
8/18/2016 $
0.083330 $
9/22/2016
10/20/2016
11/17/2016
12/22/2016
1/19/2017
2/16/2017
3/23/2017
4/20/2017
5/18/2017
6/22/2017
7/20/2017
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
29,783
29,809
29,837
29,863
29,890
29,915
29,940
29,963
29,989
29,994
29,999
30,005
Total declared and payable for the year ended June 30, 2017 $
358,987
Dividends and distributions to common stockholders are recorded on the ex-dividend date. As such, the table above includes distributions with record dates during
the years ended June 30, 2017 and June 30, 2016 . It does not include distributions previously declared to stockholders of record on any future dates, as those
amounts are not yet determinable. The following dividends were previously declared and will be recorded and payable subsequent to June 30, 2017 :
•
•
$0.08333 per share for July 2017 to holders of record on July 31, 2017 with a payment date of August 24, 2017.
$0.08333 per share for August 2017 to holders of record on August 31, 2017 with a payment date of September 21, 2017.
60
Dividend Reinvestment Plan
We maintain an “opt out” dividend reinvestment plan for our common stockholders. As a result, if we declare a distribution (as discussed above), stockholders’
cash distributions will be automatically reinvested in additional shares of our common stock, unless they specifically opt out of the dividend reinvestment plan so
as to receive cash distributions. Stockholders who receive distributions in the form of stock are subject to the same U.S. federal, state and local tax consequences as
are stockholders who elect to receive their distributions in cash. Stockholders are advised to consult with their brokers or financial institutions, as appropriate, with
respect to the administration of their dividends and related instructions. See also “Dividend Reinvestment Plan” in Part I of this report for additional information.
We primarily use newly-issued shares to implement the plan, whether our shares are trading at a premium or at a discount to net asset value. However, we reserve
the right to purchase shares in the open market in connection with the implementation of the plan. Our Board of Directors determines how the stock to be
distributed as part of the plan is made available.
During the years ended June 30, 2017 and June 30, 2016 , we distributed 2,969,702 and 2,725,222 shares of our common stock, respectively, in connection with the
dividend reinvestment plan. All of the shares distributed were new issues. The following table summarizes the shares issued through the reinvestment of dividends
in the years ended June 30, 2016 and June 30, 2017 .
Record Date
Payment Date
Shares Issued
Value of Shares
(in thousands)
% of Distribution
6/30/2015
7/31/2015
8/31/2015
9/30/2015
10/30/2015
11/30/2015
12/31/2015
1/29/2016
2/29/2016
3/31/2016
4/29/2016
5/31/2016
7/23/2015
8/20/2015
9/17/2015
10/22/2015
11/19/2015
12/24/2015
1/21/2016
2/18/2016
3/24/2016
4/21/2016
5/19/2016
6/23/2016
193,892
$
152,896
143,685
189,172
182,331
167,727
299,423
255,743
146,899
324,060
338,027
331,367
$
$
Total issued in the year ended June 30, 2016
2,725,222
6/30/2016
7/29/2016
8/31/2016
9/30/2016
10/31/2016
11/30/2016
12/31/2016
1/31/2017
2/28/2017
3/31/2017
4/28/2017
5/31/2017
7/21/2016
8/18/2016
9/22/2016
10/20/2016
11/17/2016
12/22/2016
1/19/2017
2/16/2017
3/23/2017
4/20/2017
5/18/2017
6/22/2017
307,564
310,101
317,262
326,945
327,506
303,671
295,904
274,043
315,476
53,517
65,054
72,659
1,425
1,115
1,142
1,402
1,349
1,211
1,749
1,685
1,027
2,430
2,522
2,581
19,638
2,537
2,614
2,602
2,645
2,564
2,566
2,557
2,571
2,846
496
531
587
4.8%
3.7%
3.9%
4.7%
4.6%
4.1%
5.9%
5.7%
3.5%
8.2%
8.5%
8.7%
8.5%
8.8%
8.7%
8.9%
8.6%
8.6%
8.5%
8.6%
9.5%
1.7%
1.8%
2.0%
Total issued in the year ended June 30, 2017
2,969,702
$
25,116
Registered stockholders who opt out of the dividend reinvestment plan must notify the plan administrator prior to the payment date in order for that distribution to
be paid in cash. As such, the table above includes distributions with payment dates during the years ended June 30, 2017 and June 30, 2016 . It does not include
distributions previously declared and recorded as payable to stockholders on any future dates, as those amounts are not yet determinable.
61
On February 9, 2016, we amended our dividend reinvestment plan that provided for reinvestment of our dividends or distributions on behalf of our stockholders,
unless a stockholder elects to receive cash, to add the ability of stockholders to purchase additional shares by making optional cash investments. Under the revised
dividend reinvestment and direct stock repurchase plan, stockholders may elect to purchase additional shares through our transfer agent in the open market or in
negotiated transactions.
Purchases of equity securities by the issuer and affiliated purchasers
On August 24, 2011, our Board of Directors approved a share repurchase plan (the “Repurchase Program”) under which we may repurchase up to $100,000 of our
common stock at prices below our net asset value per share. Prior to any repurchase, we are required to notify shareholders of our intention to purchase our
common stock. Our last notice was delivered with our annual proxy mailing on September 21, 2016 and our most recent notice was delivered with a shareholder
letter mailing on August 2, 2017. This notice extends for six months after the date that notice is delivered.
We did not repurchase any shares of our common stock for the year ended June 30, 2017 .
During the year ended June 30, 2016 , we repurchased 4,708,750 shares of our common stock pursuant to the Repurchase Program. Our NAV per share was
increased by approximately $0.02 for the year ended June 30, 2016 as a result of the share repurchases.
The following table summarizes our share repurchases under our Repurchase Program for the year ended June 30, 2016 .
Repurchases of Common Stock
Year Ended June 30, 2016
Dollar amount repurchased
Shares Repurchased
Weighted average price per share
Weighted average discount to June 30, 2015 Net Asset Value
$
34,140
4,708,750
7.25
30%
There were no repurchases made for the years ended June 30, 2017 and 2015 under our Repurchase Program.
As of June 30, 2017 , the approximate dollar value of shares that may yet be purchased under the plan is $65,860 .
During the year ended June 30, 2017 , Prospect officers purchased 2,104,740 shares of our stock, or 0.6% of total outstanding shares as of June 30, 2017 , both
through the open market transactions and shares issued in connection with our dividend reinvestment plan.
The following table summarizes the shares purchased by Prospect officers during the year ended June 30, 2017 .
Period
July 1, 2016 - July 31, 2016
August 1, 2016 - August 31, 2016
September 1, 2016 - September 30, 2016
October 1, 2016 - October 31, 2016
November 1, 2016 - November 30, 2016
December 31, 2016 - December 31, 2016
January 1, 2017 - January 31, 2017
February 1, 2017 - February 28, 2017
March 1, 2017 - March 31, 2017
April 1, 2017 - April 30, 2017
May 1, 2017 - May 30, 2017
June 1, 2017 - June 30, 2017
Total Number of Shares
Purchased in Open Market
Average price paid per
share
Total Number of Shares
Purchased Through Dividend
Reinvestment Plan
— $
—
7,000
—
1,000
5,000
—
—
26,000
—
22,000
—
61,000
—
—
8.01
7.65
8.18
—
—
9.30
—
8.11
—
222,466
219,916
228,298
233,762
244,008
228,531
225,714
209,912
220,207
3,280
3,752
3,894
2,043,740
Total
62
Stock Performance Graph
The following graph compares a shareholder’s cumulative total return for the last five fiscal years as if such amounts had been invested in: (i) our common stock;
(ii) the stocks included in the S&P 500 Index; (iii) the stocks included in the S&P 500 Financials Sector Index; and (iv) a customized BDC Peer Group composed
of Apollo Investment Corporation, Ares Capital Corporation, BlackRock Capital Investment Corporation, Gladstone Capital Corporation, and MVC Capital, Inc.
The graph is based on historical stock prices and measures total shareholder return, which takes into account both changes in stock price and dividends. The total
return assumes that dividends were reinvested daily and is based on a $100 investment on June 30, 2012.
SOURCE: S&P Capital IQ
The graph and other information furnished under this Part II, Item 5 of this Annual Report on Form 10-K shall not be deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act. The stock price performance included in the
above graph is not necessarily indicative of future stock performance.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and consolidated financial statements and notes thereto contained in “Item 8. Financial Statements and Supplementary Data” of this report. All
amounts are in thousands except per share data and number of portfolio companies at year end.
63
Summary of Operations
Total investment income
$
701,046
$
2017
2016
2015
2014
2013
Year Ended June 30,
394,964
306,082
791,973
420,845
371,128
$
791,084
$
712,291
$
576,336
428,337
362,747
355,068
357,223
251,412
324,924
(46,165)
(267,990)
(12,458)
(38,203)
(104,068)
(7,011)
224
(3,950)
—
—
252,906
103,362
346,339
319,020
220,856
Total operating expenses
Net investment income
Net Realized and Change in
Unrealized (Losses) from
Investments
Net realized (losses) gains on
extinguishment of debt
Net increase in net assets resulting
from operations
Per Share Data
Net investment income(1)
$
0.85
$
1.04
$
1.03
$
1.19
$
1.57
Net increase in net assets resulting
from operations(1)
Dividends to shareholders
Net asset value at end of year
0.70
(1.00)
9.32
0.29
(1.00)
9.62
0.98
(1.19)
10.31
1.06
(1.32)
10.56
1.07
(1.28)
10.72
Balance Sheet Data
Total assets(4)
Total debt outstanding(4)
Net assets
Other Data
$ 6,172,789
$
6,236,181
$ 6,753,914
$ 6,420,259
$ 4,410,610
2,642,195
3,354,952
2,666,939
3,435,917
2,939,596
3,703,049
2,716,041
3,618,182
1,645,395
2,656,494
Investment purchases for the year $ 1,489,470
$
979,102
$ 1,867,477
$ 2,933,365
$ 3,103,217
Investment sales and repayments
for the year
Number of portfolio companies at
year end
Total return based on market
value(2)
Total return based on net asset
value(2)
Weighted average yield on debt
portfolio at year end(3)
$ 1,413,882
$
1,338,875
$ 1,411,562
$
767,978
$
931,534
121
125
131
142
124
16.8%
21.8%
(20.8%)
10.9%
6.2%
9.0%
7.2%
11.5%
11.0%
10.9%
12.2%
13.2%
12.7%
12.1%
13.6%
(1) Per share data is based on the weighted average number of common shares outstanding for the years presented (except for dividends to shareholders which is based on
actual rate per share).
(2) Total return based on market value is based on the change in market price per share between the opening and ending market prices per share in each year and assumes that
dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share
between the opening and ending net asset values per share in each year and assumes that dividends are reinvested in accordance with our dividend reinvestment plan.
(3) Excludes equity investments and non-performing loans.
(4) We have changed our method of presentation relating to debt issuance costs in accordance with ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30).
Unamortized deferred financing costs of $40,526, $44,140, $57,010, and $37,607 previously reported as an asset on the Consolidated Statements of Assets and Liabilities as
of June 30, 2016, 2015, 2014, and 2013 respectively have been reclassified as a direct deduction to the respective Unsecured Notes. See Critical Accounting Policies and
Estimates for further discussion.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All figures in this item are in thousands except share, per share and other data.)
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing
elsewhere in this Annual Report. In addition to historical information, the following discussion and other parts of this Annual Report contain forward-looking
information that involves risks and uncertainties. Our actual results may differ significantly from any results expressed or implied by these forward-looking
statements due to the factors discussed in Part I, “Item 1A. Risk Factors” and “Forward-Looking Statements” appearing elsewhere herein.
64
Overview
The terms “Prospect,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise.
Prospect is a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company
incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940
Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the
“Code”). We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004.
On May 15, 2007, we formed a wholly-owned subsidiary Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote
special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Our wholly-owned
subsidiary Prospect Small Business Lending, LLC (“PSBL”) was formed on January 27, 2014 and purchases small business whole loans on a recurring basis from
online small business loan originators, including On Deck Capital, Inc. (“OnDeck”). On September 30, 2014, we formed a wholly-owned subsidiary Prospect
Yield Corporation, LLC (“PYC”) and effective October 23, 2014, PYC holds our investments in collateralized loan obligations (“CLOs”). Each of these
subsidiaries have been consolidated since operations commenced.
We consolidate certain of our wholly-owned and substantially wholly-owned holding companies formed by us in order to facilitate our investment strategy. The
following companies are included in our consolidated financial statements: AMU Holdings Inc. ; APH Property Holdings, LLC (“APH”); Arctic Oilfield
Equipment USA, Inc.; CCPI Holdings Inc.; CP Holdings of Delaware LLC (“CP Holdings”); Credit Central Holdings of Delaware, LLC; Energy Solutions
Holdings Inc.; First Tower Holdings of Delaware LLC (“First Tower Delaware”); Harbortouch Holdings of Delaware Inc.; MITY Holdings of Delaware Inc.;
Nationwide Acceptance Holdings LLC; NMMB Holdings, Inc. (“NMMB Holdings”); NPH Property Holdings, LLC (“NPH”); STI Holding, Inc.; UPH Property
Holdings, LLC (“UPH”); Valley Electric Holdings I, Inc.; Valley Electric Holdings II, Inc.; and Wolf Energy Holdings Inc. (“Wolf Energy Holdings”). On
October 10, 2014, concurrent with the sale of the operating company, our ownership increased to 100% of the outstanding equity of ARRM Services, Inc. which
was renamed SB Forging Company, Inc. (“SB Forging”). As such, we began consolidating SB Forging on October 11, 2014. Effective May 23, 2016, in
connection with the merger of American Property REIT Corp. (“APRC”) and United Property REIT Corp. (“UPRC”) with and into National Property REIT Corp.
(“NPRC”), APH and UPH merged with and into NPH, and were dissolved. We collectively refer to these entities as the “Consolidated Holding Companies.”
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect
Administration LLC (“Prospect Administration” ), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary
for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior
and subordinated debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes.
We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows.
We currently have nine strategies that guide our origination of investment opportunities: (1) lending to companies controlled by private equity sponsors, (2)
lending to companies not controlled by private equity sponsors, (3) purchasing controlling equity positions and lending to operating companies, (4) purchasing
controlling equity positions and lending to financial services companies, (5) purchasing controlling equity positions and lending to real estate companies, (6)
purchasing controlling equity positions and lending to aircraft leasing companies (7) investing in structured credit (8) investing in syndicated debt and (9) investing
in online loans. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination
strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy.
Lending to Companies Controlled by Private Equity Sponsors - We make agented loans to companies which are controlled by private equity sponsors. This
debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. Historically,
this strategy has comprised approximately 40%-60% of our portfolio.
65
Lending to Companies not Controlled by Private Equity Sponsors - We make loans to companies which are not controlled by private equity sponsors, such as
companies that are controlled by the management team, the founder, a family or public shareholders. This origination strategy may have less competition to
provide debt financing than the private-equity-sponsor origination strategy because such company financing needs are not easily addressed by banks and often
require more diligence preparation. This origination strategy can result in investments with higher returns or lower leverage than the private-equity-sponsor
origination strategy. Historically, this strategy has comprised up to approximately 15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Operating Companies - This strategy involves purchasing yield-producing debt and controlling equity
positions in non-financial-services operating companies. We believe that we can provide enhanced certainty of closure and liquidity to sellers and we look for
management to continue on in their current roles. This strategy has comprised approximately 5%-15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Financial Services Companies - This strategy involves purchasing yield-producing debt and control
equity investments in financial services companies, including consumer direct lending, sub-prime auto lending and other strategies. These investments are
often structured in tax-efficient partnerships, enhancing returns. This strategy has comprised approximately 5%-15% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate
investment trusts (“REIT” or “REITs”) . NPRC’s, an operating company and the surviving entity of the May 23, 2016 merger with APRC and UPRC, real
estate investments are in various classes of developed and occupied real estate properties that generate current yields, including multi-family properties,
student housing, and self-storage. NPRC seeks to identify properties that have historically significant occupancy rates and recurring cash flow generation.
NPRC generally co-invests with established and experienced property management teams that manage such properties after acquisition. Additionally, NPRC
purchases loans originated by certain consumer loan facilitators. It generally purchases each loan in its entirety (i.e., a “whole loan”). The borrowers are
consumers, and the loans are typically serviced by the facilitators of the loans. This investment strategy has comprised approximately 5%-10% of our business.
Purchasing Controlling Equity Positions and Lending to Aircraft Leasing Companies - We invest in debt as well as equity in companies with aircraft assets
subject to commercial leases to airlines across the globe. We believe that these investments can present attractive return opportunities due to cash flow
consistency from long-term leases coupled with hard asset residual value. We believe that these investment companies seek to deliver risk-adjusted returns
with strong downside protection by analyzing relative value characteristics across a variety of aircraft types and vintages. This strategy historically has
comprised less than 5% of our portfolio.
Investing in Structured Credit - We make investments in CLOs, often taking a significant position in the subordinated interests (equity) of the CLOs. The
underlying portfolio of each CLO investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real
estate, mortgages, or consumer-based credit assets. The CLOs in which we invest are managed by established collateral management teams with many years
of experience in the industry. This strategy has comprised approximately 10%-20% of our portfolio.
Investing in Syndicated Debt - On a primary or secondary basis, we purchase primarily senior and secured loans and high yield bonds that have been sold to a
club or syndicate of buyers. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to
the transaction by providing anchoring orders. This strategy has comprised approximately 5%-10% of our portfolio.
Investing in Online Loans - We purchase loans originated by certain small-and-medium-sized business (“SME”) loan facilitators. We generally purchase each
loan in its entirety (i.e., a “whole loan”). The borrowers are SMEs and the loans are typically serviced by the facilitators of the loans. This investment strategy
has comprised up to approximately 1% of our portfolio.
We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured
loans generally are senior debt instruments that rank ahead of unsecured debt of a given portfolio company. These loans also have the benefit of security interests
on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Our investments in CLOs are subordinated to senior loans
and are generally unsecured. We invest in debt and equity positions of CLOs which are a form of securitization in which the cash flows of a portfolio of loans are
pooled and passed on to different classes of owners in various tranches. Our CLO investments are derived from portfolios of corporate debt securities which are
generally risk rated from BB to B.
66
We hold many of our control investments in a two-tier structure consisting of a holding company and one or more related operating companies for tax purposes.
These holding companies serve various business purposes including concentration of management teams, optimization of third party borrowing costs, improvement
of supplier, customer, and insurance terms, and enhancement of co-investments by the management teams. In these cases, our investment, which is generally equity
in the holding company, the holding company’s equity investment in the operating company and any debt from us directly to the operating company structure
represents our total exposure for the investment. As of June 30, 2017 , as shown in our Consolidated Schedule of Investments , the cost basis and fair value of our
investments in controlled companies was $1,840,731 and $1,911,775 , respectively. This structure gives rise to several of the risks described in our public
documents and highlighted elsewhere in this Annual Report. We consolidate all wholly-owned and substantially wholly-owned holding companies formed by us
for the purpose of holding our controlled investments in operating companies. There is no significant effect of consolidating these holding companies as they hold
minimal assets other than their investments in the controlled operating companies. Investment company accounting prohibits the consolidation of any operating
companies.
Fourth Quarter Highlights
Investment Transactions
We seek to be a long-term investor with our portfolio companies. During the three months ended June 30, 2017 , we acquired $201,206 of new investments,
completed follow-on investments in existing portfolio companies totaling approximately $12,550 , funded $5,938 of revolver advances, and recorded paid in kind
(“PIK”) interest of $3,482 , resulting in gross investment originations of $223,176 . During the three months ended June 30, 2017 , we received full repayments on
five investments, sold three investments and received several partial prepayments and amortization payments totaling $352,043 .
Debt Issuances and Redemptions
During the three months ended June 30, 2017 , we redeemed $49,497 aggregate principal amount of our Prospect Capital InterNotes® at par with a weighted
average interest rate of 4.87%, and issued $29,661 aggregate principal amount of Prospect Capital InterNotes® with a stated and weighted average interest rate of
4.82% , to extend our borrowing base. The newly issued notes mature between April 15, 2022 and June 15, 2022 and generated net proceeds of $29,290 .
During the three months ended June 30, 2017 , we repaid $2,420 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the
Survivor’s Option, as defined in the InterNotes® Offering prospectus. As a result of these transactions, we recorded a loss in the amount of the unamortized debt
issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the three months ended June 30, 2017 was $320.
In April, 2017 we repurchased $78,766 aggregate principal amount of the 2017 Notes at a price of 102.0% of face value, including commissions. As a result of
these transactions, we recorded a loss in the amount of the difference between the reacquisition price and the net carrying amount of the 2017 Notes, net of the
proportionate amount of unamortized debt issuance costs. The net loss on extinguishment of debt we recorded in the three months ending June 30, 2017 was
$1,786.
In April, 2017 we repurchased $114,581 aggregate principal amount of the 2018 Notes at a price of 103.5% of face value, including commissions. As a result of
these transactions, we recorded a loss in the amount of the difference between the reacquisition price and the net carrying amount of the 2018 Notes, net of the
proportionate amount of unamortized debt issuance costs. The net loss on extinguishment of debt we recorded in the three months ending June 30, 2017 was
$4,700.
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “2022 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July
15 each year, beginning July 15, 2017. Total proceeds from the issuance of the 2022 Notes, net of underwriting discounts and offering costs, were $218,010.
Equity Issuances
On April 20, 2017 , May 18, 2017 , and June 22, 2017 , we issued 53,517 , 65,054 , and 72,659 shares of our common stock in connection with the dividend
reinvestment plan, respectively.
Investment Holdings
As of June 30, 2017 , we continue to pursue our investment strategy. At June 30, 2017 , approximately $5,838,305 , or 174.0% , of our net assets are invested in
121 long-term portfolio investments and CLOs.
67
During the year ended June 30, 2017 , we originated $1,489,470 of new investments, primarily composed of $985,844 of debt and equity financing to non-
controlled portfolio investments, $325,174 of debt and equity financing to controlled investments, and $178,452 of subordinated notes in CLOs. Our origination
efforts are focused primarily on secured lending to non-control investments to reduce the risk in the portfolio by investing primarily in first lien loans, though we
also continue to close select junior debt and equity investments. Our annualized current yield was 12.2% and 13.2% as of June 30, 2017 and June 30, 2016 ,
respectively, across all performing interest bearing investments. The decline is primarily due to a decrease in cash-on-cash yields in our CLO investment portfolio.
Monetization of equity positions that we hold and loans on non-accrual status are not included in this yield calculation. In many of our portfolio companies we hold
equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns. Some of these equity
positions include features such as contractual minimum internal rates of returns, preferred distributions, flip structures and other features expected to generate
additional investment returns, as well as contractual protections and preferences over junior equity, in addition to the yield and security offered by our cash flow
and collateral debt protections.
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in
the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a
company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of
25% or more of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are
deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting
securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As of June 30, 2017 , we own controlling interests in the following portfolio companies: Arctic Energy Services, LLC (“Arctic Energy”); CCPI Inc. (“CCPI”); CP
Energy Services Inc. (“CP Energy”); Credit Central Loan Company, LLC (“Credit Central”); Echelon Aviation LLC (“Echelon”); Edmentum Ultimate Holdings,
LLC; First Tower Finance Company LLC (“First Tower Finance”); Freedom Marine Solutions, LLC (“Freedom Marine”); MITY, Inc. (“MITY”); NPRC;
Nationwide Loan Company LLC (f/k/a Nationwide Acceptance LLC) (“Nationwide”); NMMB, Inc. (“NMMB”); R-V Industries, Inc.; SB Forging Company II,
Inc. (f/k/a Gulf Coast Machine & Supply Company) (“Gulfco”); USES Corp. (“USES”); Valley Electric Company, Inc. (“Valley Electric”); and Wolf Energy,
LLC. We also own affiliated interests in Nixon, Inc. and Targus International, LLC (“Targus”).
The following shows the composition of our investment portfolio by level of control as of June 30, 2017 and June 30, 2016 :
Level of Control
Cost
Portfolio Fair Value
June 30, 2017
% of
% of
Portfolio
June 30, 2016
% of
Cost
Portfolio Fair Value
% of
Portfolio
Control Investments
Affiliate Investments
Non-Control/Non-Affiliate
Investments
$ 1,840,731
30.8% $ 1,911,775
32.7% $ 1,768,220
29.0% $ 1,752,449
29.7%
22,957
0.4%
11,429
0.2%
10,758
0.2%
11,320
0.2%
4,117,868
68.8% 3,915,101
67.1%
4,312,122
70.8% 4,133,939
70.1%
Total Investments
$ 5,981,556
100.0% $ 5,838,305
100.0% $ 6,091,100
100.0% $ 5,897,708
100.0%
68
The following shows the composition of our investment portfolio by type of investment as of June 30, 2017 and June 30, 2016 :
Type of Investment
Cost
Portfolio Fair Value
June 30, 2017
% of
% of
Portfolio
June 30, 2016
% of
Cost
Portfolio Fair Value
Revolving Line of Credit
$
27,409
0.5% $
27,409
0.5% $
13,274
0.2% $
13,274
Senior Secured Debt
2,940,163
49.2% 2,798,796
Subordinated Secured Debt
1,160,019
19.4% 1,107,040
37,934
8,434
0.6%
0.1%
44,434
7,964
47.9%
19.0%
0.8%
0.1%
3,072,839
50.5% 2,941,722
1,228,598
20.2% 1,209,604
75,878
14,603
1.2%
0.2%
68,358
14,215
% of
Portfolio
0.2%
49.9%
20.5%
1.2%
0.2%
Subordinated Unsecured Debt
Small Business Loans
CLO Residual Interest
Preferred Stock
Common Stock
Membership Interest
Participating Interest(1)
Escrow Receivable
Warrants
1,150,006
19.2% 1,079,712
18.5%
1,083,540
17.8% 1,009,696
17.1%
112,394
295,200
249,997
—
—
—
1.9%
4.9%
4.2%
—%
—%
—%
83,209
391,374
206,012
91,491
864
—
1.4%
6.7%
3.5%
1.6%
—%
—
140,902
229,389
226,479
—
3,916
1,682
2.3%
3.8%
3.7%
—%
0.1%
—%
81,470
258,498
221,949
70,590
6,116
2,216
1.4%
4.4%
3.8%
1.2%
0.1%
—%
Total Investments
$ 5,981,556
100.0% $ 5,838,305
100.0% $ 6,091,100
100.0% $ 5,897,708
100.0%
(1) Participating Interest includes our participating equity investments, such as net profits interests, net operating income interests, net revenue interests, and overriding royalty
interests.
The following shows our investments in interest bearing securities by type of investment as of June 30, 2017 and June 30, 2016 :
% of
Portfolio
56.1%
23.1%
1.3%
0.3%
Type of Investment
Cost
Portfolio Fair Value
June 30, 2017
% of
% of
Portfolio
June 30, 2016
% of
Cost
Portfolio Fair Value
First Lien
Second Lien
Unsecured
Small Business Loans
CLO Residual Interest
$ 2,959,738
55.6% $ 2,818,371
55.6% $ 3,079,689
56.1% $ 2,948,572
1,167,853
21.9% 1,114,874
22.0%
1,235,022
22.5% 1,216,028
37,934
8,434
0.7%
0.2%
44,434
7,964
0.9%
0.2%
75,878
14,603
1.4%
0.3%
68,358
14,215
1,150,006
21.6% 1,079,712
21.3%
1,083,540
19.7% 1,009,696
19.2%
Total Debt Investments
$ 5,323,965
100.0% $ 5,065,355
100.0% $ 5,488,732
100.0% $ 5,256,869
100.0%
The following shows the composition of our investment portfolio by geographic location as of June 30, 2017 and June 30, 2016 :
Geographic Location
Cost
Portfolio Fair Value
June 30, 2017
% of
% of
Portfolio
June 30, 2016
% of
Cost
Portfolio Fair Value
% of
Portfolio
Canada
Cayman Islands
France
Midwest US
Northeast US
Northwest US
Puerto Rico
Southeast US
Southwest US
Western US
$
9,831
0.2% $
10,000
0.2% $
15,000
0.2% $
8,081
0.1%
1,150,006
19.2% 1,079,712
18.5%
1,083,540
17.8% 1,009,696
17.1%
9,755
605,417
786,552
281,336
83,410
0.2%
10.1%
13.1%
4.7%
1.4%
8,794
678,766
823,616
207,962
83,410
0.2%
11.6%
14.1%
3.6%
1.4%
9,756
804,515
838,331
242,540
40,516
0.2%
13.2%
13.8%
4.0%
0.7%
9,015
849,029
824,408
189,464
40,516
1,367,606
22.9% 1,412,351
24.2%
1,498,976
24.6% 1,531,943
616,008
1,071,635
10.3%
17.9%
558,368
975,326
9.5%
16.7%
770,441
787,485
12.6%
12.9%
675,745
759,811
0.2%
14.4%
13.9%
3.2%
0.7%
26.0%
11.5%
12.9%
Total Investments
$ 5,981,556
100.0% $ 5,838,305
100.0% $ 6,091,100
100.0% $ 5,897,708
100.0%
69
The following shows the composition of our investment portfolio by industry as of June 30, 2017 and June 30, 2016 :
Industry
Cost
Portfolio Fair Value
June 30, 2017
% of
69,837
51,952
30,222
14,796
17,489
354,185
62,258
469,869
140,847
188,912
1.2% $
0.9%
0.5%
0.2%
0.3%
5.9%
1.0%
7.9%
2.4%
3.2%
71,318
51,952
30,460
15,000
16,699
312,634
32,509
502,941
83,225
190,662
% of
Portfolio
1.2% $
0.9%
0.5%
0.3%
0.3%
5.3%
0.6%
8.6%
1.4%
3.3%
June 30, 2016
% of
Cost
Portfolio Fair Value
% of
Portfolio
57,762
55,784
20,328
—
22,453
479,034
60,436
449,203
190,835
176,678
0.9% $
0.9%
0.3%
—%
0.4%
7.9%
1.0%
7.4%
3.1%
2.9%
60,821
51,824
20,328
—
20,563
461,089
31,091
474,652
186,606
179,346
1.0%
0.9%
0.3%
—%
0.3%
7.9%
0.5%
8.0%
3.2%
3.0%
4,395
0.1%
4,410
0.1%
4,392
0.1%
4,392
0.1%
Aerospace & Defense
$
Air Freight & Logistics
Auto Components
Capital Markets
Chemicals
Commercial Services & Supplies
Construction & Engineering
Consumer Finance
Distributors
Diversified Consumer Services
Diversified Telecommunication
Services
Electronic Equipment, Instruments &
Components
Energy Equipment & Services
Equity Real Estate Investment Trusts
(REITs)
Food & Staples Retailing
Food Products
37,696
251,019
374,380
—
—
Health Care Providers & Services
422,919
Health Care Technology
Hotels, Restaurants & Leisure
Household Durables
Internet Software & Services
IT Services
Leisure Products
Machinery
Marine (1)
Media
Metals & Mining
Online Lending
Paper & Forest Products
Personal Products
Pharmaceuticals
Professional Services
Real Estate Management &
Development
Software
Textiles, Apparel & Luxury Goods
Tobacco
Trading Companies & Distributors
—
127,638
146,031
219,348
19,531
44,085
35,488
8,919
469,108
9,953
424,350
11,295
222,698
117,989
64,242
—
56,041
285,180
14,365
64,513
0.6%
4.2%
6.3%
—%
—%
7.2%
—%
2.1%
2.4%
3.7%
0.3%
0.7%
0.6%
0.1%
7.8%
0.2%
7.0%
0.2%
3.7%
2.0%
1.1%
—%
0.9%
4.8%
0.2%
1.1%
51,846
131,660
0.9%
2.3%
624,337
10.7%
—
—
421,389
—
103,897
146,183
219,348
20,000
44,204
32,678
8,800
466,500
10,000
370,931
11,500
192,748
117,989
64,473
—
55,150
274,206
14,431
64,513
—%
—%
7.1%
—%
1.8%
2.5%
3.8%
0.3%
0.8%
0.6%
0.2%
8.0%
0.2%
6.3%
0.2%
3.3%
2.0%
1.1%
—%
0.9%
4.7%
0.2%
1.1%
63,024
346,480
335,048
17,876
150,000
304,908
2,228
142,813
106,831
46,253
128,197
144,065
35,391
8,886
432,444
9,934
406,931
—
213,585
70,739
170,865
3,916
26,772
323,139
—
330
1.0%
5.7%
5.5%
0.3%
2.5%
5.0%
—%
2.3%
1.8%
0.8%
2.1%
2.4%
0.6%
0.1%
7.1%
0.2%
6.7%
—%
3.5%
1.2%
2.7%
0.1%
0.4%
5.3%
—%
—%
73,071
173,081
480,763
18,000
145,546
305,503
2,842
142,954
107,394
45,058
128,396
143,043
36,877
8,886
418,918
9,309
377,385
—
193,054
70,739
166,741
3,900
25,425
319,904
—
511
1.2%
2.9%
8.2%
0.3%
2.5%
5.2%
—%
2.4%
1.8%
0.8%
2.2%
2.4%
0.6%
0.2%
7.1%
0.2%
6.4%
—%
3.3%
1.2%
2.9%
0.1%
0.4%
5.4%
—%
—%
82.9%
17.1%
Subtotal
$ 4,831,550
80.8% $ 4,758,593
81.5% $ 5,007,560
82.2% $ 4,888,012
Structured Finance (2)
$ 1,150,006
19.2% $ 1,079,712
18.5% $ 1,083,540
17.8% $ 1,009,696
Total Investments
$ 5,981,556
100.0% $ 5,838,305
100.0% $ 6,091,100
100.0% $ 5,897,708
100.0%
(1)
Industry includes exposure to the energy markets through our investments in Harley Marine Services, Inc. Including this investment, our overall fair value exposure to the
broader energy industry, including energy equipment and services as noted above, as of June 30, 2017 and June 30, 2016 is $140,460 and $181,967 , respectively.
70
(2) Our CLO investments do not have industry concentrations and as such have been separated in the table above.
Portfolio Investment Activity
During the year ended June 30, 2017 , we acquired $850,770 of new investments, completed follow-on investments in existing portfolio companies totaling
approximately $599,333 , funded $21,559 of revolver advances, and recorded PIK interest of $17,808 , resulting in gross investment originations of $1,489,470 .
The more significant of these transactions are briefly described below.
On July 1, 2016, we made an investment of $7,320 to purchase 19.7% of the subordinated notes in Madison Park Funding IX, Ltd.
On July 22, 2016, we made a $32,500 Senior Secured Term Loan A and a $32,500 Senior Secured Term Loan B debt investment in Universal Turbine Parts,
LLC, an independent supplier of aftermarket turboprop engines and parts. The $32,500 Term Loan A bears interest at the greater of 6.75% or LIBOR plus
5.75% and has a final maturity of July 22, 2021. The $32,500 Term Loan B bears interest at the greater of 12.75% or LIBOR plus 11.75% and has a final
maturity of July 22, 2021.
On August 9, 2016, we made an investment of $29,634 to purchase 71.9% of the subordinated notes in Carlyle Global Market Strategies CLO 2016-3, Ltd. in
a co-investment transaction with Priority Income Fund, Inc., a closed-end fund managed by an affiliate of Prospect Capital Management.
On August 17, 2016, we made a $5,000 first lien senior secured debt investment in BCD Acquisition, Inc. (“Big Tex”). On August 18, 2016, we sold our
$5,000 investment in Big Tex and realized a gain of $138 on the sale.
On September 6, 2016, we made an additional investment of $5,693 to purchase 18.0% of the subordinated notes in California Street CLO IX Ltd. (f/k/a
Symphony CLO IX Ltd.).
On September 16, 2016, we made a $15,000 second lien secured investment in J.D. Power and Associates, a global market research company, in support of an
acquisition of the company. The second lien term loan bears interest at the greater of 9.50% or LIBOR plus 8.50% and has a final maturity of September 7,
2024.
On September 28, 2016, we have made an additional $12,523 second lien debt and $2,098 equity investment in Credit Central. The note bears interest of
10.00% and interest payment in kind of 10.00%, and has a final maturity date of June 26, 2019.
On September 30, 2016, we made an investment of $26,414 to purchase 50.2% of the subordinated notes in Voya 2016-3, Ltd. in a co-investment transaction
with Priority Income Fund, Inc., a closed-end fund managed by an affiliate of Prospect Capital Management.
On September 30, 2016, we made an additional $22,500 of Senior Secured Term Loan A and $22,500 of Senior Secured Term Loan B debt investment in
Onyx Payments (“Onyx”) to fund a dividend recapitalization. The $22,500 Term Loan A bears interest at the greater of 6.00% or LIBOR plus 5.00% and has a
final maturity of September 10, 2019. The $22,500 Term Loan B bears interest at the greater of 13.00% or LIBOR plus 12.00% and has a final maturity of
September 10, 2019.
On September 30, 2016, we made a $10,000 follow-on first lien senior secured debt investment in Matrixx Initiatives, Inc. (“Matrixx”) to fund a dividend
recapitalization. The $5,000 Term Loan A bears interest at the greater of 7.50% or LIBOR plus 6.50% and has a final maturity of February 24, 2020. The
$5,000 Term Loan B bears interest at the greater of 12.50% or LIBOR plus 11.50% and has a final maturity of February 24, 2020.
On October 4, 2016, we made a $40,000 second lien senior secured investment to support the recapitalization of Outerwall Inc. (“Outerwall”), an automated
network of self-service coin counting machines. The second lien term loan bears interest at the greater of 9.75% or LIBOR plus 8.75% and has a final maturity
of September 27, 2024.
On October 7, 2016, we made an $11,500 second lien senior secured debt investment in Dunn Paper, Inc., a leading specialty packaging supplier, in support of
an acquisition of the company. The second lien term loan bears interest at the greater of 9.75% or LIBOR plus 8.75% and has a final maturity of August 26,
2023.
On October 14, 2016, we provided $22,500 of second lien senior secured debt to support the refinancing of Vivid Seats LLC (“Vivid Seats”), a secondary
marketplace for entertainment tickets. The second lien term loan bears interest at the greater of 10.75% or LIBOR plus 9.75% and has a final maturity of
October 12, 2023.
71
On October 20, 2016, we made a $50,000 second lien senior secured debt investment in Rocket Software, Inc. (“Rocket”) to support an acquisition and
dividend recapitalization. The second lien term loan bears interest at the greater of 10.50% or LIBOR plus 9.50% and has a final maturity of October 14, 2024.
On November 1, 2016, we made a $13,000 second lien secured investment to support an acquisition of K&N Parent, Inc., a leader in aftermarket automotive
performance filtration products. The second lien term loan bears interest at the greater of 9.75% or LIBOR plus 8.75% and has a final maturity of October 20,
2024.
During the period from November 29, 2016 through December 7, 2016, we collectively made a $34,000 second lien secured investment to fund a
recapitalization of Digital Room LLC, an online printing and design company. The second lien term loan bears interest at the greater of 11.00% or LIBOR
plus 10.00% and has a final maturity of May 21, 2023.
On December 8, 2016, we made a $15,400 second lien secured investment in National Home Healthcare Corp., a provider of home health and hospice care
services, to support an acquisition. The second lien term loan bears interest at the greater of 10.00% or LIBOR plus 9.00% and has a final maturity of
December 8, 2022.
On December 9, 2016, we made a $42,000 follow-on first lien senior secured debt investment in Atlantis Health Care Group (Puerto Rico), Inc. to support a
recapitalization. The senior secured term loan bears interest at the greater of 9.50% or LIBOR plus 8.00% and has a final maturity of February 21, 2020.
On December 9, 2016, we made a follow-on $16,044 first lien senior secured debt and $2,831 equity investment in Echelon to support an asset acquisition.
The new senior secured term loan bears interest at the greater of 11.00% or LIBOR plus 9.00% and interest payment in kind of 1.0%, and has a final maturity
of December 7, 2024.
On December 9, 2016, we made an investment of $29,951 to purchase 69.0% of the subordinated notes in CIFC 2016-I, Ltd. in a co-investment transaction
with Priority Income Fund, Inc., a closed-end fund managed by an affiliate of Prospect Capital Management L.P.
On December 22, 2016, we made a $10,000 follow-on first lien senior secured debt investment in Inpatient Care Management Company, LLC (“Inpatient
Care”). The senior secured term loan bears interest at the greater of 10.00% or LIBOR plus 9.00% and has a final maturity of June 8, 2021.
On December 28, 2016, we made a $45,000 second lien senior secured investment to fund a recapitalization of Keystone Peer Review Organization Holdings,
Inc. (“KEPRO”), a medical management services company. The second lien term loan bears interest at the greater of 10.00% or LIBOR plus 9.00% and has a
final maturity of July 28, 2023.
On December 28, 2016, we made a $15,000 follow-on second lien senior secured debt investment in PGX Holdings, Inc. The second lien term loan bears
interest at the greater of 10.00% or LIBOR plus 9.00% and has a final maturity of September 29, 2021.
On January 17, 2017, we invested an additional $8,000 of Senior Secured Term Loan A and $8,000 of Senior Secured Term Loan B debt investments in MITY
to fund an acquisition. Term Loan A bears interest at the greater of 10.00% or LIBOR plus 7.00% and has a final maturity of January 30, 2020. Term Loan B
bears interest at the greater of 10.00% or LIBOR plus 7.00% and interest payment in kind of 10.0% and has a final maturity of January 30, 2020.
On January 17, 2017, we made a $68,000 of Senior Secured Term Loan A and $68,000 of Senior Secured Term Loan B debt investments in Centerfield Media
Holdings, LLC, a provider of customer acquisition and conversion services, to support an acquisition and refinancing of existing debt. Term Loan A bears
interest at the greater of 8.00% or LIBOR plus 7.00% and has a final maturity of January 17, 2022. Term Loan B bears interest at the greater of 13.50% or
LIBOR plus 12.50% and has a final maturity of January 17, 2022.
On January 31, 2017, we made a $20,000 of Senior Secured Term Loan A and $20,000 of Senior Secured Term Loan B debt investments in Traeger Pellet
Grills LLC, to fund a recapitalization of the company. Term Loan A bears interest at the greater of 6.50% or LIBOR plus 4.50% and has a final maturity of
June 18, 2019. Term Loan B bears interest at the greater of 11.50% or LIBOR plus 9.50% and has a final maturity of June 18, 2019.
On February 1, 2017, we made a $10,000 senior secured debt investment to support a recapitalization in CURO Financial Technologies Corp. The senior
secured debt bears interest at 12.00% and has a final maturity of March 1, 2022. On March 17, 2017, CURO Group Holdings Corp (f/k/a Speedy Cash
Holdings Corp.) repaid the $25,000 loan receivable to us.
72
On February 17, 2017, we made a $14,500 second lien secured investment in Turning Point Brands, Inc., a provider of other tobacco products. The second lien
note bears interest at 11.00% and has a final maturity of August 17, 2022.
On February 24, 2017, we made an additional $33,000 of Senior Secured Term Loan A and $7,000 of Senior Secured Term Loan B debt investment in
Matrixx to fund a dividend recapitalization. Term Loan A bears interest at the greater of 7.50% or LIBOR plus 6.50% and has a final maturity of February 24,
2020. Term Loan B bears interest at the greater of 12.50% or LIBOR plus 11.50% and has a final maturity of February 24, 2020.
On March 8, 2017, we made a $20,000 second lien secured investment in VC GB Holdings II Corp. to support a refinancing and acquisition for Generation
Brands Holdings, Inc. (“Generation Brands”). The second lien note bears interest at the greater of 9.00% or LIBOR plus 8.00% and has a final maturity of
February 28, 2025.
On March 16, 2017, we made a first lien senior secured investment of $38,000 to support the recapitalization of Memorial MRI & Diagnostic, L.L.C., a
provider of multi-modality diagnostic imaging and pain management services. The Term Loan bears interest at the greater of 9.50% or LIBOR plus 8.50% and
has a final maturity of March 16, 2022.
On March 28, 2017, we made a $15,000 of Senior Secured Term Loan A and $15,000 of Senior Secured Term Loan B debt investment to support an
acquisition of EZShield, Parent Inc., a provider of fraud and identify theft protection services. Term Loan A bears interest at the greater of 7.75% or LIBOR
plus 6.75% and has a final maturity of February 26, 2021. Term Loan B bears interest at the greater of 12.75% or LIBOR plus 11.75% and has a final maturity
of February 26, 2021.
On April 7, 2017, we made an investment of $19,408 to purchase 50.48% of the subordinated notes in Carlyle Global Market Strategies CLO 2014-4, Ltd. in a
co-investment transaction Pathway Energy Infrastructure Fund, Inc., a closed-end fund managed by an affiliate of Prospect Capital Management.
On April 20, 2017, we made a $15,000 first lien senior secured investment to support a refinancing of RGIS Services, LLC, a provider of inventory,
merchandising and staffing solutions. The senior secured term loan bears interest at the greater of 8.50% or LIBOR plus 7.50% and has a final maturity of
March 31, 2023.
On May 4, 2017, we provided $64,500 of senior secured financing, of which $62,500 was funded at closing, to support the acquisition of RME Group
Holdings Company, a provider of client acquisition and lead generation services to professional service firms. The $2,000 unfunded revolver bears interest in
at the greater of 9.00% or LIBOR plus 8.00% and has a final maturity of August 4, 2017. The $37,500 Term Loan A bears interest at the greater of 7.00% or
LIBOR plus 6.00% and has a final maturity of May 4, 2022. The $25,000 Term Loan B bears interest at the greater of 12.00% or LIBOR plus 11.00% and has
a final maturity of May 4, 2022.
On May 18, 2017, we made a $50,000 second lien secured investment to support KEPRO’s refinancing and acquisition of Keystone Acquisition Corp. The
second lien term loan bears interest at the greater of 10.25% or LIBOR plus 9.25% and has a final maturity of May 1, 2025.
On June 13, 2017, we made an investment of $44,900 to purchase 84.21% of the subordinated notes in Voya CLO 2017-3, Ltd. in a co-investment transaction
with Priority Income Fund, Inc., a closed-end fund managed by an affiliate of Prospect Capital Management L.P.
During the year ended June 30, 2017 , we made twelve follow-on investments in NPRC totaling $123,506 to support the online consumer lending initiative.
We invested $23,077 of equity through NPH and $100,429 of debt directly to NPRC and its wholly-owned subsidiaries. We also provided $75,591 of debt and
$25,200 of equity financing to NPRC, which was utilized for the acquisition of real estate properties. In addition, we provided $13,553 of equity investment
which was used to fund capital expenditures for existing properties.
During the year ended June 30, 2017 , we purchased $51,802 of small business whole loans from OnDeck.
During the year ended June 30, 2017 , we received full repayments on twenty-one investments, sold six investments, and received several partial prepayments and
amortization payments totaling $1,413,882 , which resulted in net realized losses totaling $96,306 . The more significant of these transactions are briefly described
below.
On July 1, 2016, BNN Holdings Corp. was sold. The sale provided net proceeds for our minority position of $2,365, resulting in a realized gain of $137.
During the three months ended December 31, 2016 we received remaining escrow proceeds, realizing an additional gain of $50.
On August 9, 2016, JHH Holdings, Inc. repaid the $35,507 loan receivable to us.
73
On August 19, 2016, we sold our investment in Nathan’s Famous, Inc. for net proceeds of $3,240 and realized a gain of $240 on the sale.
On September 28, 2016, Rocket repaid the $20,000 loan receivable to us.
On October 5, 2016, Focus Brands, Inc. repaid the $18,000 loan receivable to us.
On October 13, 2016, Harbortouch Payments LLC (“Harbortouch”) repaid the $27,711 loan receivable to us.
On October 14, 2016, Security Alarm Financing Enterprise, L.P. repaid the $25,000 loan receivable to us.
On October 14, 2016, Trinity Services Group, Inc. repaid the $134,576 loan receivable to us.
On October 31, 2016, System One Holdings, LLC (“System One”) repaid the $104,553 loan receivable to us.
On December 19, 2016, Empire Today, LLC repaid the $50,426 loan receivable to us.
On December 20, 2016, Onyx repaid the $70,130 Senior Secured Term Loan A and $81,889 Senior Secured Term Loan B receivable to us.
On January 1, 2017, we restructured our investment in NPRC and exchanged $55,000 of Senior Secured Term Loan E for common stock.
On February 23, 2017, SESAC Holdco II LLC repaid the $10,000 loan receivable to us.
On February 28, 2017, Generation Brands repaid the $19,000 loan receivable to us.
On March 20, 2017, Arctic Glacier U.S.A., Inc. repaid the $150,000 loan receivable to us.
On March 31, 2017, ALG USA Holdings, LLC repaid the $11,771 loan receivable to us.
On March 14, 2017, assets previously held by Ark-La-Tex Wireline Services, LLC (“Ark-La-Tex”) were distributed to us in exchange for the reduction of
Ark-La-Tex’s debt by $22,145, eliminating Senior Secured Term Loan A in full. The assets we received were simultaneously assigned to Wolf Energy
Services Company, LLC, a wholly owned subsidiary of Wolf Energy Holdings. The cost basis of the transferred assets is equal to the appraised fair value of
assets at the time of transfer.
On April 3, 2017, AFI Shareholder, LLC was sold. The sale provided net proceeds for our minority position of $965, resulting in a realized gain of $693.
On May 1, 2017, Broder Bros., Co. (“Broder”) partially repaid the $6,910 Senior Secured Term Loan A and $4,607 Senior Secured Term Loan B receivable to
us.
On May 2, 2017, KEPRO repaid the $45,000 loan receivable to us.
On May 12, 2017, Outerwall repaid the $40,000 loan receivable to us.
During the period from April 25, 2017 to May 17, 2017, we sold our $21,750 debt investment in SITEL Worldwide Corporation.
On June 2, 2017, Crosman Corporation (“Crosman”) repaid the $98,054 loan receivable to us.
During the period from May 10, 2017 through June 9, 2017, Hollander Sleep Products, LLC repaid the $21,860 loan receivable to us.
On June 3, 2017, Gulfco sold all of its assets to a third party, for total consideration of $10,250, including escrowed amounts. The proceeds from the sale were
primarily used to repay a $6,115 third party revolving credit facility, and the remainder was used to pay other legal and administrative costs incurred by
Gulfco. As no proceeds were allocated to Prospect, our debt and equity investment in Gulfco was written-off for tax purposes and we recorded a realized loss
of $66,103. Gulfco holds $2,050 in escrow related to the sale, which will be distributed to Prospect once released to Gulfco, and will be recognized as a
realized gain if and when it is received.
On June 30, 2017, Mineral Fusion Natural Brands was sold. The sale provided net proceeds for our minority position of $490, resulting in a realized gain of
the same amount.
74
On June 30, 2017, we received $169 of escrow proceeds related to SB Forging, realizing a gain of the same amount
On June 30, 2017, Vivid Seats repaid the $22,500 loan receivable to us.
During the year ended June 30, 2017, we received additional proceeds of $6,287 related to the May 31, 2016 sale of Harbortouch $4,286 of which are from an
escrow release. We realized a gain for the same amount.
During the three months ended June 30, 2017, Ark-La-Tex Term Loan B was partially written-off for tax purposes and a loss of $19,818 was realized.
During the year ended June 30, 2017, four of our CLO investments were deemed to have an other-than-temporary loss. In accordance with ASC 325-40,
Beneficial Interest in Securitized Financial Assets, we recorded a total loss of $17,242 related to these investments for the amount our amortized cost exceeded
fair value as of the respective determination dates. During the year ended June 30, 2016, there was no OTTI assessed for any CLO investment within our
portfolio.
During the year ended June 30, 2017 , we received a partial repayment of $122,009 for the NPRC and its wholly-owned subsidiaries’ loan previously
outstanding and $52,923 as a return of capital on the equity investment in NPRC.
The following table provides a summary of our investment activity for each quarter within the three years ending June 30, 2017 :
Quarter Ended
September 30, 2014
December 31, 2014
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
Acquisitions(1)
Dispositions(2)
714,255
522,705
219,111
411,406
345,743
316,145
23,176
294,038
347,150
469,537
449,607
223,176
690,194
224,076
108,124
389,168
436,919
354,855
163,641
383,460
114,331
644,995
302,513
352,043
(1)
Includes investments in new portfolio companies, follow-on investments in existing portfolio companies, refinancings and PIK interest.
(2)
Includes sales, scheduled principal payments, prepayments and refinancings.
Investment Valuation
In determining the range of values for debt instruments, except CLOs and debt investments in controlling portfolio companies, management and the independent
valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted
cash flow technique was then prepared using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of
values for debt investments of controlled companies and equity investments, the enterprise value was determined by applying earnings before interest, income tax,
depreciation and amortization (“EBITDA”) multiples, the discounted cash flow technique, net income and/or book value multiples for similar guideline public
companies and/or similar recent investment transactions. For stressed debt and equity investments, a liquidation analysis was prepared.
75
In determining the range of values for our investments in CLOs, management and the independent valuation firm use primarily a discounted multi-path cash flow
model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as
to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized using Monte Carlo simulations ,which is a simulation used to model
the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are
discounted using appropriate market discount rates, and relevant data in the CLO market and certain benchmark credit indices are considered, to determine the
value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness
of the implied discount rate that would be effective for the value derived from the corresponding multi-path cash flow model.
With respect to our online consumer and SME lending initiative, we invest primarily in marketplace loans through marketplace lending facilitators. We do not
conduct loan origination activities ourselves. Therefore, our ability to purchase consumer and SME loans, and our ability to grow our portfolio of consumer and
SME loans, are directly influenced by the business performance and competitiveness of the marketplace loan origination business of the marketplace lending
facilitators from which we purchase consumer and SME loans. In addition, our ability to analyze the risk-return profile of consumer and SME loans is significantly
dependent on the marketplace facilitators’ ability to effectively evaluate a borrower's credit profile and likelihood of default. If we are unable to effectively
evaluate borrowers' credit profiles or the credit decisioning and scoring models implemented by each facilitator, we may incur unanticipated losses which could
adversely impact our operating results.
The Board of Directors looked at several factors in determining where within the range to value the asset including: recent operating and financial trends for the
asset, independent ratings obtained from third parties, comparable multiples for recent sales of companies within the industry and discounted cash flow models for
our investments in CLOs. The composite of all these various valuation techniques, applied to each investment, was a total valuation of $5,838,305 .
Our portfolio companies are generally lower middle market companies, outside of the financial sector, with less than $100,000 of annual EBITDA. We believe our
investment portfolio has experienced less volatility than others because we believe there are more buy and hold investors who own these less liquid investments.
Control investments offer increased risk and reward over straight debt investments. Operating results and changes in market multiples can result in dramatic
changes in values from quarter to quarter. Significant downturns in operations can further result in our looking to recoveries on sales of assets rather than the
enterprise value of the investment. Equity positions in our portfolio are susceptible to potentially significant changes in value, both increases as well as decreases,
due to changes in operating results and market multiples. Several of our controlled companies discussed below experienced such changes and we recorded
corresponding fluctuations in valuations during the year ended June 30, 2017 .
Arctic Energy Services, LLC
Prospect owns 100% of the equity of Arctic Oilfield Equipment USA, Inc. (“Arctic Equipment”), a Consolidated Holding Company. Arctic Equipment owns
70% of the equity of Arctic Energy, with Ailport Holdings, LLC (100% owned and controlled by Arctic Energy management) owning the remaining 30% of
the equity of Arctic Energy. Arctic Energy provides oilfield service personnel, well testing flowback equipment, frac support systems and other services to
exploration and development companies in the Rocky Mountains.
The Board of Directors decreased the fair value of our investment in Arctic Energy to $17,370 as of June 30, 2017 , a discount of $43,506 to its amortized
cost, compared to the discount of $22,536 to its amortized cost as of June 30, 2016. The decrease in fair value was driven primarily by the impact of current
energy market conditions resulting in a continued decline in operating performance.
CP Energy Services Inc.
Prospect owns 100% of the equity of CP Holdings, a Consolidated Holding Company. CP Holdings owns 82.3% of the equity of CP Energy, and the
remaining 17.7% of the equity is owned by CP Energy management. CP Energy provides oilfield flowback services and fluid hauling and disposal services
through its subsidiaries
As a result of a continued decline in operating performance primarily driven by the impact of current energy market conditions, the Board of Directors
decreased the fair value of our investment in CP Energy to $72,216 as of June 30, 2017 , a discount of $41,284 from its amortized cost, compared to the
discount of $37,498 to its amortized cost as of June 30, 2016 .
76
Freedom Marine Solutions, LLC
Prospect owns 100% of the equity of Energy Solutions, a Consolidated Holding Company. Energy Solutions owns 100% of Freedom Marine. Freedom Marine
owns 100% of each of Vessel Company, LLC, Vessel Company II, LLC, and Vessel Company III, LLC. Freedom Marine owns, manages, and operates
offshore supply vessels to provide transportation and support services for the oil and gas exploration and production industries in the Gulf of Mexico.
On October 30, 2015, we restructured our investment in Freedom Marine. Concurrent with the restructuring, we exchanged our $32,500 senior secured loans
for additional membership interest in Freedom Marine.
The Board of Directors decreased the fair value of our investment in Freedom Marine to $ 23,994 as of June 30, 2017 , a discount of $18,616 to its amortized
cost, compared to a discount of $14,192 to its amortized cost as of June 30, 2016 . The decline in fair value was driven by the continuing challenging
environment for the oil and gas industry, which has decreased the utilization of their vessels.
National Property REIT Corp.
NPRC is a Maryland corporation and a qualified REIT for federal income tax purposes. NPRC is held for purposes of investing, operating, financing, leasing,
managing and selling a portfolio of real estate assets and engages in any and all other activities that may be necessary, incidental, or convenient to perform the
foregoing. NPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-family properties. NPRC may acquire real estate
assets directly or through joint ventures by making a majority equity investment in a property-owning entity. Additionally, through its wholly-owned
subsidiaries, NPRC invests in online consumer loans. Effective May 23, 2016, APRC and UPRC merged with and into NPRC, to consolidate all of our real
estate holdings, with NPRC as the surviving entity. As of June 30, 2017 , we own 100% of the fully-diluted common equity of NPRC.
During the year ended June 30, 2017 , we provided $75,591 of debt and $25,200 of equity financing to NPRC for the acquisition of real estate properties and
$13,553 of equity financing to NPRC to fund capital expenditures for existing properties. In addition, during the year ended June 30, 2017 , we received partial
repayments of $32,954 of our loans previously outstanding and $42,059 as a return of capital on our equity investment.
During the year ended June 30, 2017 , we provided $100,429 and $23,077 of debt and equity financing, respectively, to NPRC and its wholly-owned
subsidiaries to support the online consumer lending initiative. In addition, during the year ended June 30, 2017 , we received partial repayments of $89,055 of
our loans previously outstanding with NPRC and its wholly-owned subsidiaries and $10,864 as a return of capital on our equity investment in NPRC.
The online consumer loan investments held by certain of NPRC’s wholly-owned subsidiaries are unsecured obligations of individual borrowers that are issued
in amounts ranging from $1 to $50, with fixed terms ranging from 24 to 84 months. As of June 30, 2017 , the outstanding investment in online consumer loans
by certain of NPRC’s wholly-owned subsidiaries was comprised of 102,602 individual loans and one securitization equity residual, and had an aggregate fair
value of $648,277. The average outstanding individual loan balance is approximately $6 and the loans mature on dates ranging from July 1, 2017 to June 28,
2024 with a weighted-average outstanding term of 31 months as of June 30, 2017 . Fixed interest rates range from 4.0% to 36.0% with a weighted-average
current interest rate of 23.9%. As of June 30, 2017 , our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair
value of $362,967 .
As of June 30, 2017 , based on outstanding principal balance, 6.3% of the portfolio was invested in super prime loans (borrowers with a Fair Isaac Corporation
(“FICO”) score, of 720 or greater), 18.0% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 75.7% of the portfolio in near prime
loans (borrowers with a FICO score of 580 to 659).
Loan Type
Outstanding Principal
Balance
Fair Value
Weighted Average Interest
Rate*
Super Prime
Prime
Near Prime
$
41,293 $
117,505
495,467
40,264
112,159
465,293
11.8%
15.8%
26.9%
*Weighted by outstanding principal balance of the online consumer loans.
77
As of June 30, 2017 , our investment in NPRC and its wholly-owned subsidiaries had an amortized cost of $790,296 and a fair value of $987,304 , including
our investment in online consumer lending as discussed above. The fair value of $624,337 related to NPRC’s real estate portfolio was comprised of thirty-
seven multi-families properties, twelve self-storage units, eight student housing properties and three commercial properties. The following table shows the
location, acquisition date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as of June 30, 2017 .
No.
Property Name
City
Acquisition
Date
Purchase
Price
Mortgage
Outstanding
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
Filet of Chicken
Forest Park, GA
10/24/2012 $
7,400 $
5100 Live Oaks Blvd, LLC
Lofton Place, LLC
Arlington Park Marietta, LLC
Tampa, FL
Tampa, FL
Marietta, GA
1/17/2013
4/30/2013
5/8/2013
63,400
26,000
14,850
—
46,700
20,350
9,650
NPRC Carroll Resort, LLC
Pembroke Pines, FL
6/24/2013
225,000
178,970
Cordova Regency, LLC
Crestview at Oakleigh, LLC
Inverness Lakes, LLC
Kings Mill Pensacola, LLC
Plantations at Pine Lake, LLC
Verandas at Rocky Ridge, LLC
Matthews Reserve II, LLC
City West Apartments II, LLC
Vinings Corner II, LLC
Pensacola, FL
Pensacola, FL
Mobile, AL
Pensacola, FL
Tallahassee, FL
Birmingham, AL
Matthews, NC
Orlando, FL
Smyrna, GA
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/19/2013
11/19/2013
11/19/2013
Uptown Park Apartments II, LLC
Altamonte Springs, FL
11/19/2013
St. Marin Apartments II, LLC
Coppell, TX
Atlanta Eastwood Village LLC
Stockbridge, GA
Atlanta Monterey Village LLC
Atlanta Hidden Creek LLC
Atlanta Meadow Springs LLC
Atlanta Meadow View LLC
Jonesboro, GA
Morrow, GA
College Park, GA
College Park, GA
Atlanta Peachtree Landing LLC
Fairburn, GA
APH Carroll Bartram Park, LLC
Jacksonville, FL
Plantations at Hillcrest, LLC
Crestview at Cordova, LLC
Mobile, AL
Pensacola, FL
11/19/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/31/2013
1/17/2014
1/17/2014
13,750
17,500
29,600
20,750
18,000
15,600
22,063
23,562
35,691
36,590
73,078
25,957
11,501
5,098
13,116
14,354
17,224
38,000
6,930
8,500
APH Carroll Atlantic Beach, LLC
Atlantic Beach, FL
1/31/2014
13,025
Taco Bell, OK
Taco Bell, MO
23 Mile Road Self Storage, LLC
36th Street Self Storage, LLC
Yukon, OK
Marshall, MO
Chesterfield, MI
Wyoming, MI
Ball Avenue Self Storage, LLC
Grand Rapids, MI
Ford Road Self Storage, LLC
Westland, MI
Ann Arbor Kalamazoo Self Storage, LLC Ann Arbor, MI
Ann Arbor Kalamazoo Self Storage, LLC Ann Arbor, MI
Ann Arbor Kalamazoo Self Storage, LLC Kalamazoo, MI
6/4/2014
6/4/2014
8/19/2014
8/19/2014
8/19/2014
8/29/2014
8/29/2014
8/29/2014
8/29/2014
Canterbury Green Apartments Holdings
LLC
Fort Wayne, IN
9/29/2014
Abbie Lakes OH Partners, LLC
Canal Winchester, OH
9/30/2014
Kengary Way OH Partners, LLC
Reynoldsburg, OH
9/30/2014
Lakeview Trail OH Partners, LLC
Canal Winchester, OH
9/30/2014
1,719
1,405
5,804
4,800
7,281
4,642
4,458
8,927
2,363
85,500
12,600
11,500
26,500
78
11,375
13,845
24,700
17,550
14,092
10,205
19,934
23,293
32,943
29,809
62,441
22,906
11,145
4,771
13,121
13,176
15,606
27,639
4,786
7,959
8,608
—
—
4,350
3,600
5,460
3,480
3,345
6,695
1,775
74,169
13,055
13,502
23,256
No.
Property Name
City
Acquisition
Date
Purchase
Price
Mortgage
Outstanding
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Lakepoint OH Partners, LLC
Pickerington, OH
Sunbury OH Partners, LLC
Heatherbridge OH Partners, LLC
Jefferson Chase OH Partners, LLC
Goldenstrand OH Partners, LLC
Jolly Road Self Storage, LLC
Columbus, OH
Blacklick, OH
Blacklick, OH
Hilliard, OH
Okemos, MI
Eaton Rapids Road Self Storage, LLC
Lansing West, MI
Haggerty Road Self Storage, LLC
Novi, MI
Waldon Road Self Storage, LLC
Lake Orion, MI
Tyler Road Self Storage, LLC
SSIL I, LLC
Vesper Tuscaloosa, LLC
Vesper Iowa City, LLC
Vesper Corpus Christi, LLC
Vesper Campus Quarters, LLC
Vesper College Station, LLC
Vesper Kennesaw, LLC
Vesper Statesboro, LLC
Vesper Manhattan KS, LLC
JSIP Union Place, LLC
9220 Old Lantern Way, LLC
Ypsilanti, MI
Aurora, IL
Tuscaloosa, AL
Iowa City, IA
Corpus Christi, TX
Corpus Christi, TX
College Station, TX
Kennesaw, GA
Statesboro, GA
Manhattan, KS
Franklin, MA
Laurel, MD
9/30/2014
9/30/2014
9/30/2014
9/30/2014
10/29/2014
1/16/2015
1/16/2015
1/16/2015
1/16/2015
1/16/2015
11/5/2015
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
12/7/2016
11,000
13,000
18,416
13,551
7,810
7,492
1,741
6,700
6,965
3,507
34,500
54,500
32,750
14,250
18,350
41,500
57,900
7,500
23,250
64,750
14,480
14,115
18,328
17,200
9,600
5,620
1,305
5,025
5,225
2,630
26,450
41,250
24,825
10,800
14,175
32,058
44,727
5,292
15,921
51,800
1/30/2017
187,250
153,580
$ 1,600,720 $
1,312,667
The Board of Directors increased the fair value of our investment in NPRC to $987,304 as of June 30, 2017 , a premium of $197,008 from its amortized cost,
compared to the $116,557 unrealized appreciation, inclusive of APRC and UPRC, recorded at June 30, 2016 . This increase is primarily due to improved
operating performance at the property level, partially offset by a decline in our online lending portfolio value resulting from an increase in delinquent loans.
NMMB, Inc.
Prospect owns 100% of the equity of NMMB Holdings, a Consolidated Holding Company. NMMB Holdings owns 96.33% of the fully-diluted equity of
NMMB (f/k/a NMMB Acquisition, Inc.), with NMMB management owning the remaining 3.67% of the equity. NMMB owns 100% of Refuel Agency, Inc.
(“Refuel Agency”). Refuel Agency owns 100% of Armed Forces Communications, Inc. NMMB is an advertising media buying business.
Due to reduced operating expenses resulting from a realignment of operations, new initiatives and improved focus on core business segments, the Board of
Directors increased the fair value of our investment in NMMB to $ 20,825 as of June 30, 2017 , a discount of $2,658 to its amortized cost, compared to the
discount of $13,576 to its amortized cost at June 30, 2016.
USES Corp.
We own 99.96% of USES as of June 30, 2017 . USES provides industrial and environmental services in the Gulf States region. USES offers industrial
services, such as tank and chemical cleaning, hydro blasting, waste management, vacuum, safety training, turnaround management, and oilfield
response/remediation services.
On June 15, 2016, we provided additional $1,300 debt financing to USES and its subsidiaries in the form of additional Term Loan A debt and, in connection
with such Term Loan A debt financing, USES issued to us 99,900 shares of its common stock. On June 29, 2016, we provided additional $2,200 debt
financing to USES and its subsidiaries in the form of additional Term Loan A debt and, in connection with such Term Loan A debt financing, USES issued to
us 169,062 shares of its common stock. As a result of such debt financing and recapitalization, as of June 29, 2016, we held 268,962 shares of USES common
stock representing a 99.96% common equity ownership interest in USES.
79
Due to an industry-wide decline in emergency response activity as well as a decline in revenues from other service lines, the Board of Directors determined
the fair value of our investment in USES to be $12,517 as of June 30, 2017 , a discount of $51,655 from its amortized cost, compared to the $21,440
unrealized depreciation recorded at June 30, 2016.
Valley Electric Company, Inc.
We own 94.99% of Valley Electric as of June 30, 2017 . Valley Electric owns 100% of the equity of VE Company, Inc., which owns 100% of the equity of
Valley Electric Co. of Mt. Vernon, Inc. (“Valley”). Valley is a leading provider of specialty electrical services in the state of Washington and is among the top
50 electrical contractors in the U.S. The company, with its headquarters in Everett, Washington, offers a comprehensive array of contracting services,
primarily for commercial, industrial, and transportation infrastructure applications, including new installation, engineering and design, design-build, traffic
lighting and signalization, low to medium voltage power distribution, construction management, energy management and control systems, 24-hour electrical
maintenance and testing, as well as special projects and tenant improvement services. Valley was founded in 1982 by the Ward family, who held the company
until the end of 2012.
On December 31, 2012, we acquired 96.3% of the outstanding shares of Valley. On June 24, 2014, Prospect and management of Valley formed Valley Electric
and contributed their shares of Valley stock to Valley Electric. Valley management made an additional equity investment in Valley Electric, reducing our
ownership to 94.99%.
In early 2016, Valley’s project backlog and revenue steadily improved primarily due to a more robust construction market in the state of Washington and
successful project execution.
Due to increased project margins partially offset by the softening of the energy markets, the Board of Directors determined the fair value of our investment in
Valley Electric to be $32,509 as of June 30, 2017 , a discount of $29,749 from its amortized cost, compared to the $29,345 unrealized depreciation recorded at
June 30, 2016 .
Our controlled investments, other than those discussed above, have seen steady or improved operating performance and are valued at $61,504 above cost. Overall,
combined with those portfolio companies impacted by the energy markets and discussed above, our controlled investments at June 30, 2017 are valued at $71,044
above their amortized cost.
With the non-control/non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than
with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments,
the fair value is generally limited on the high side to each loan’s par value, plus any prepayment premium that could be imposed. Many of the debt investments in
this category have not experienced a significant change in value, as they were previously valued at or near par value. Non-control/non-affiliate investments did not
experience significant changes and are generally performing as expected or better. However, as of June 30, 2017 , four of our non-control/non-affiliate
investments, Pacific World Corporation, PrimeSport, Inc., Spartan Energy Services, Inc. and United Sporting Companies, Inc. (“USC”) are valued at discounts to
amortized cost of $30,216 , $23,741 , $16,769 and $57,622 , respectively. As of June 30, 2017 , our CLO investment portfolio is valued at a $70,294 discount to
amortized cost. Excluding these investments, non-control/non-affiliate investments at June 30, 2017 are valued $4,125 below their amortized cost.
Capitalization
Our investment activities are capital intensive and the availability and cost of capital is a critical component of our business. We capitalize our business with a
combination of debt and equity. Our debt as of June 30, 2017 consists of: a Revolving Credit Facility availing us of the ability to borrow debt subject to borrowing
base determinations; Convertible Notes which we issued in April 2012, August 2012, December 2012, April 2014 and April 2017; Public Notes which we issued in
March 2013, April 2014, December 2015, and from time to time, through our 2024 Notes Follow-on Program; and Prospect Capital InterNotes® which we issue
from time to time. Our equity capital is comprised entirely of common equity.
80
The following table shows our outstanding debt as of June 30, 2017 .
Revolving Credit Facility (2)
$
— $
4,779 $
— (3) $
—
1ML+2.25% (6)
Principal
Outstanding
Unamortized
Discount & Debt
Issuance Costs
Net Carrying
Value
Fair Value
(1)
Effective Interest
Rate
2017 Notes
2018 Notes
2019 Notes
2020 Notes
2022 Notes
Convertible Notes
5.00% 2019 Notes
2023 Notes
2024 Notes
Public Notes
50,734
85,419
200,000
392,000
225,000
953,153
300,000
250,000
199,281
749,281
77
394
1,846
6,458
6,737
1,705
4,087
5,189
50,657
85,025
198,154
385,542
218,263
937,641
298,295
245,913
194,092
738,300
51,184
87,660
206,614
394,689
223,875
964,022
308,439
258,045
207,834
774,318
(4)
(4)
(4)
(4)
(4)
(4)
(4)
(4)
5.91% (7)
6.42% (7)
6.51% (7)
5.38% (7)
5.63% (7)
5.29% (7)
6.22% (7)
6.72% (7)
Prospect Capital InterNotes ®
980,494
14,240
966,254
1,003,852
(5)
5.55% (8)
Total
$
2,682,928
$
2,642,195
$
2,742,192
(1) As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair
value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of June 30, 2017 .
(2) The maximum draw amount of the Revolving Credit facility as of June 30, 2017 is $885,000 .
(3) Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Critical Accounting Policies and Estimates for accounting policy
details.
(4) We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5) The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread.
(6) Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7) The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs. For the 2024 Notes, the
rate presented is a combined effective interest rate of the 2024 Notes and 2024 Notes Follow-on Program.
(8) For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are
amortized on a straight-line method over the stated life of the obligation, are weighted against the average year-to-date principal balance.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes ® as of
June 30, 2017 .
Payments Due by Period
Total
Less than 1
Year
1 – 3 Years 3 – 5 Years
After 5
Years
Revolving Credit Facility
$
— $
— $
— $
— $
—
Convertible Notes
Public Notes
Prospect Capital InterNotes®
953,153
749,281
980,494
136,153
—
39,038
592,000
300,000
325,661
—
—
399,490
225,000
449,281
216,305
Total Contractual Obligations
$ 2,682,928 $
175,191 $ 1,217,661 $
399,490 $
890,586
81
On April 6, 2017, we refinanced a majority of our debt with payments due in less than one year by issuing $225,000 aggregate principal amount of Convertible
Notes due July 15, 2022 which bear interest at a rate of 4.95% per year, and repurchasing $78,766 aggregate principal amount of 2017 Notes which bear interest at
a rate of 5.375% and $114,581 aggregate principal amount of 2018 Notes which bear interest at a rate of 5.75%.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes ® as of
June 30, 2016 .
Payments Due by Period
Total
Less than 1
Year
1 – 3 Years 3 – 5 Years
Revolving Credit Facility
$
— $
— $
— $
— $
Convertible Notes
Public Notes
Prospect Capital InterNotes®
1,089,000
167,500
529,500
711,380
908,808
—
—
8,819
257,198
392,000
300,000
360,599
After 5
Years
—
—
411,380
282,192
Total Contractual Obligations
$ 2,709,188 $
176,319 $
786,698 $ 1,052,599 $
693,572
Historically, we have funded a portion of our cash needs through borrowings from banks, issuances of senior securities, including secured, unsecured and
convertible debt securities, or issuances of common equity. For flexibility, we maintain a universal shelf registration statement that allows for the public offering
and sale of our debt securities, common stock, preferred stock, subscription rights, and warrants and units to purchase such securities in an amount up to
$5,000,000 less issuances to date. As of June 30, 2017 , we can issue up to $4,691,212 of additional debt and equity securities in the public market under this shelf
registration. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt
or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be
successful.
Each of our Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Unsecured Notes”) are our general, unsecured obligations and
rank equal in right of payment with all of our existing and future unsecured indebtedness and will be senior in right of payment to any of our subordinated
indebtedness that may be issued in the future. The Unsecured Notes are effectively subordinated to our existing secured indebtedness, such as our credit facility,
and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to any existing and future
liabilities and other indebtedness of any of our subsidiaries.
Revolving Credit Facility
On August 29, 2014, we renegotiated our previous credit facility and closed an expanded five and a half year revolving credit facility (the “2014 Facility” or the
“Revolving Credit Facility”). The lenders have extended commitments of $885,000 under the 2014 Facility as of June 30, 2017 . The 2014 Facility includes an
accordion feature which allows commitments to be increased up to $1,500,000 in the aggregate. The revolving period of the 2014 Facility extends through
March 2019, with an additional one year amortization period (with distributions allowed) after the completion of the revolving period. During such one year
amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one year amortization period, the
remaining balance will become due, if required by the lenders.
The 2014 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate
payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2014 Facility also contains certain requirements
relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in
the early termination of the 2014 Facility. The 2014 Facility also requires the maintenance of a minimum liquidity requirement. As of June 30, 2017 , we were in
compliance with the applicable covenants.
Interest on borrowings under the 2014 Facility is one-month LIBOR plus 225 basis points. Additionally, the lenders charge a fee on the unused portion of the 2014
Facility equal to either 50 basis points if at least 35% of the credit facility is drawn or 100 basis points otherwise. The 2014 Facility requires us to pledge assets as
collateral in order to borrow under the credit facility.
82
As of June 30, 2017 and June 30, 2016 , we had $665,409 and $538,456 , respectively, available to us for borrowing under the Revolving Credit Facility, of which
nothing was outstanding at either date. As additional eligible investments are transferred to PCF and pledged under the Revolving Credit Facility, PCF will
generate additional availability up to the current commitment amount of $885,000 . As of June 30, 2017 , the investments, including cash and money market funds,
used as collateral for the Revolving Credit Facility had an aggregate fair value of $1,618,986 , which represents 26.3% of our total investments, including cash and
money market funds. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and as such, these investments are not available to our
general creditors. The release of any assets from PCF requires the approval of the facility agent.
In connection with the origination and amendments of the Revolving Credit Facility, we incurred $12,405 of new fees and $3,539 were carried over for continuing
participants from the previous facility, all of which are being amortized over the term of the facility in accordance with ASC 470-50. As of June 30, 2017 , $4,779
remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $12,173 , $13,213 and $14,424 , respectively, of interest costs, unused fees and amortization of
financing costs on the Revolving Credit Facility as interest expense.
Convertible Notes
On December 21, 2010, we issued $150,000 aggregate principal amount of convertible notes that matured on December 15, 2015 (the “2015 Notes”). The 2015
Notes bore interest at a rate of 6.25% per year, payable semi-annually on June 15 and December 15 of each year, beginning June 15, 2011. Total proceeds from the
issuance of the 2015 Notes, net of underwriting discounts and offering costs, were $145,200. On December 15, 2015, we repaid the outstanding principal amount
of the 2015 Notes, plus interest. No gain or loss was realized on the transaction.
On February 18, 2011, we issued $172,500 aggregate principal amount of convertible notes that mature on August 15, 2016 (the “2016 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2016 Notes bore interest at a rate of 5.50% per year, payable semi-annually on February 15 and
August 15 of each year, beginning August 15, 2011. Total proceeds from the issuance of the 2016 Notes, net of underwriting discounts and offering costs, were
$167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 aggregate principal amount of the 2016 Notes at a price of 97.5, including
commissions. The transactions resulted in our recognizing $10 of loss in the year ended June 30, 2012. On August 15, 2016, we repaid the outstanding principal
amount of the 2016 Notes, plus interest. No gain or loss was realized on the transaction.
On April 16, 2012, we issued $130,000 aggregate principal amount of convertible notes that mature on October 15, 2017 (the “2017 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2017 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 15 and
October 15 of each year, beginning October 15, 2012. Total proceeds from the issuance of the 2017 Notes, net of underwriting discounts and offering costs, were
$126,035. On March 28, 2016, we repurchased $500 aggregate principal amount of the 2017 Notes at a price of 98.25, including commissions. The transaction
resulted in our recognizing a $9 gain for the period ended March 31, 2016. On April 6, 2017, we repurchased $78,766 aggregate principal amount of the 2017
Notes at a price of 102.0, including commissions. The transaction resulted in our recognizing a $1,786 loss during the three months ended June 30, 2017.
On August 14, 2012, we issued $200,000 aggregate principal amount of convertible notes that mature on March 15, 2018 (the “2018 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2018 Notes bear interest at a rate of 5.75% per year, payable semi-annually on March 15 and
September 15 of each year, beginning March 15, 2013. Total proceeds from the issuance of the 2018 Notes, net of underwriting discounts and offering costs, were
$193,600. On April 6, 2017, we repurchased $114,581 aggregate principal amount of the 2018 Notes at a price of 103.5, including commissions. The transaction
resulted in our recognizing a $4,700 loss during the three months ended June 30, 2017.
On December 21, 2012, we issued $200,000 aggregate principal amount of convertible notes that mature on January 15, 2019 (the “2019 Notes”), unless
previously converted or repurchased in accordance with their terms. The 2019 Notes bear interest at a rate of 5.875% per year, payable semi-annually on
January 15 and July 15 of each year, beginning July 15, 2013. Total proceeds from the issuance of the 2019 Notes, net of underwriting discounts and offering costs,
were $193,600.
On April 11, 2014, we issued $400,000 aggregate principal amount of convertible notes that mature on April 15, 2020 (the “2020 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2020 Notes bear interest at a rate of 4.75% per year, payable semi-annually on April 15 and October
15 each year, beginning October 15, 2014. Total proceeds from the issuance of the 2020 Notes, net of underwriting discounts and offering costs, were $387,500.
On January 30, 2015, we repurchased $8,000 aggregate principal amount of the 2020 Notes at a price of 93.0, including commissions. As a result of this
83
transaction, we recorded a gain of $332, in the amount of the difference between the reacquisition price and the net carrying amount of the notes, net of the
proportionate amount of unamortized debt issuance costs.
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “2022 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July
15 each year, beginning July 15, 2017. Total proceeds from the issuance of the 2022 Notes, net of underwriting discounts and offering costs, were $218,010.
Certain key terms related to the convertible features for the 2017 Notes, the 2018 Notes, the 2019 Notes, the 2020 Notes and the 2022 Notes (collectively, the
“Convertible Notes”) are listed below.
Initial conversion rate(1)
Initial conversion price
Conversion rate at June 30, 2017(1)(2)
Conversion price at June 30 , 2017(2)(3)
Last conversion price calculation date
Dividend threshold amount (per share)(4)
2017 Notes
2018 Notes
2019 Notes
2020 Notes
2022 Notes
85.8442
82.3451
79.7766
80.6647
100.2305
11.65 $
12.14 $
12.54 $
12.40 $
9.98
87.7516
84.1497
79.8360
80.6670
100.2305
11.40 $
11.88 $
12.53 $
12.40 $
9.98
4/16/2017
8/14/2016
12/21/2016
4/11/2017
4/11/2017
0.101500 $
0.101600 $
0.110025 $
0.110525 $
0.083330
$
$
$
(1) Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
(2) Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
(3) The conversion price will increase only if the current monthly dividends (per share) exceed the dividend threshold amount (per share).
(4) The conversion rate is increased if monthly cash dividends paid to common shares exceed the monthly dividend threshold amount, subject to adjustment. Current dividend
rates are at or below the minimum dividend threshold amount for further conversion rate adjustments for all bonds.
Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a
separate cash payment with respect to the notes surrendered for conversion representing accrued and unpaid interest to, but not including, the conversion date. Any
such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes.
No holder of Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt
would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation
shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the
Convertible Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to
100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change
repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the
present value of all remaining interest payments (without duplication of the foregoing amounts) on such Convertible Notes through and including the maturity date.
In connection with the issuance of the Convertible Notes, we incurred $31,884 of fees which are being amortized over the terms of the notes, of which $15,512
remains to be amortized and is included as a reduction within Convertible Notes on the Consolidated Statement of Assets and Liabilities as of June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $55,217 , $68,966 and $74,365 , respectively, of interest costs and amortization of financing
costs on the Convertible Notes as interest expense.
Public Notes
On March 15, 2013, we issued $250,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “2023 Notes”). The 2023 Notes bear
interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each
84
year, beginning September 15, 2013. Total proceeds from the issuance of the 2023 Notes, net of underwriting discounts and offering costs, were $243,641.
On April 7, 2014, we issued $300,000 aggregate principal amount of unsecured notes that mature on July 15, 2019 (the “5.00% 2019 Notes”). Included in the
issuance is $45,000 of Prospect Capital InterNotes® that were exchanged for the 5.00% 2019 Notes. The 5.00% 2019 Notes bear interest at a rate of 5.00% per
year, payable semi-annually on January 15 and July 15 of each year, beginning July 15, 2014. Total proceeds from the issuance of the 5.00% 2019 Notes, net of
underwriting discounts and offering costs, were $295,998.
On December 10, 2015, we issued $160,000 aggregate principal amount of unsecured notes that mature on June 15, 2024 (the “2024 Notes”). The 2024 Notes bear
interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning March 15, 2016. Total
proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were $155,043. On June 16, 2016, we entered into an at-the-market
program with FBR Capital Markets & Co. through which we could sell, by means of at-the-market offerings, from time to time, up to $100,000 in aggregate
principal amount of our existing 2024 Notes. As of June 30, 2017 , we issued $199,281 in aggregate principal amount of our 2024 Notes for net proceeds of
$193,253 after commissions and offering costs.
The 2023 Notes, the 5.00% 2019 Notes, and the 2024 Notes (collectively, the “Public Notes”) are direct unsecured obligations and rank equally with all of our
unsecured indebtedness from time to time outstanding.
In connection with the issuance of the 2023 Notes, the 5.00% 2019 Notes, and the 2024 Notes, we incurred $13,613 of fees which are being amortized over the
term of the notes, of which $9,091 remains to be amortized and is included as a reduction within Public Notes on the Consolidated Statement of Assets and
Liabilities as of June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015, we recorded $43,898 , $36,859 and $37,063 , respectively, of interest costs and amortization of financing
costs on the Public Notes as interest expense.
Prospect Capital InterNotes ®
On February 16, 2012, we entered into a selling agent agreement (the “Selling Agent Agreement”) with Incapital LLC, as purchasing agent for our issuance and
sale from time to time of up to $500,000 of Prospect Capital InterNotes® (the “InterNotes® Offering”), which was increased to $1,500,000 in May 2014.
Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement.
These notes are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding. Each series of notes will be
issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of
issuance.
During the year ended June 30, 2017 , we issued $138,882 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $137,150 . The
following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2017 .
Tenor at
Origination
(in years)
Principal
Amount
Interest Rate
Range
Weighted
Average
Interest Rate
Maturity Date Range
5
$
138,882
4.75%–5.50%
5.08%
July 15, 2021 – June 15, 2022
During the year ended June 30, 2016 , we issued $88,435 aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $87,141 . These
notes were issued with stated interest rates ranging from 4.63% to 6.00% with a weighted average interest rate of 5.18% . These notes mature between July 15,
2020 and December 15, 2025 . The following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2016 .
Tenor at
Origination
(in years)
5
6.5
7
10
Principal
Amount
Interest Rate
Range
$
51,503
4.63%–6.00%
35,155
5.10%–5.25%
990
787
5.63%–6.00%
5.13%–6.00%
$
88,435
Weighted
Average
Interest Rate
5.12%
5.25%
5.77%
5.33%
85
Maturity Date Range
July 15, 2020 – June 15, 2021
January 15, 2022 – May 15, 2022
November 15, 2022 – December 15, 2022
November 15, 2025 – December 15, 2025
During the year ended June 30, 2017 , we redeemed $49,497 aggregate principal amount of Prospect Capital InterNotes® at par
with a weighted average interest rate of 4.87% in order to replace debt with shorter maturity dates. During the year ended June 30, 2017 , we repaid $8,880
aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. As
a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital
InterNotes® in the year ended June 30, 2017 was $525. The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2017 .
Tenor at
Origination
(in years)
4
5
5.2
5.3
5.4
5.5
6
6.5
7
7.5
10
12
15
18
20
25
30
Principal
Amount
Interest Rate
Range
39,038
3.75%–4.00%
354,805
4.25%–5.50%
4,440
2,686
5,000
4.63%
4.63%
4.75%
109,068
4.25%–5.00%
2,182
4.88%
40,702
5.10%–5.50%
191,356
4.00%–6.55%
1,996
5.75%
37,509
4.27%–7.00%
2,978
6.00%
17,245
5.25%–6.00%
21,532
4.13%–6.25%
4,248
5.63%–6.00%
34,218
6.25%–6.50%
111,491
5.50%–6.75%
$
980,494
Weighted
Average
Interest Rate
3.92%
5.00%
4.63%
4.63%
4.75%
4.67%
4.88%
5.24%
5.38%
5.75%
6.20%
6.00%
5.36%
5.47%
5.84%
6.39%
6.22%
86
Maturity Date Range
November 15, 2017 – May 15, 2018
July 15, 2018 – June 15, 2022
August 15, 2020 – September 15, 2020
September 15, 2020
August 15, 2019
February 15, 2019 – November 15, 2020
April 15, 2021 – May 15, 2021
February 15, 2020 – May 15, 2022
June 15, 2019 – December 15, 2022
February 15, 2021
March 15, 2022 – December 15, 2025
November 15, 2025 – December 15, 2025
May 15, 2028 – November 15, 2028
December 15, 2030 – August 15, 2031
November 15, 2032 – October 15, 2033
August 15, 2038 – May 15, 2039
November 15, 2042 – October 15, 2043
During the year ended June 30, 2016 , we repaid $7,069 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s
Option, as defined in the InterNotes® Offering prospectus. As a result of these transactions, we recorded a loss in the amount of the difference between the
reacquisition price and the net carrying amount of the notes, net of the proportionate amount of unamortized debt issuance costs. The net gain on the
extinguishment of Prospect Capital InterNotes® in the year ended June 30, 2016 was $215.
The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2016 .
Tenor at
Origination
(in years)
3
3.5
4
5
5.2
5.3
5.4
5.5
6
6.5
7
7.5
10
12
15
18
20
25
30
Principal
Amount
Interest Rate
Range
$
5,710
3,109
4.00%
4.00%
45,690
3.75%–4.00%
259,191
4.25%–5.75%
4,440
2,686
5,000
4.63%
4.63%
4.75%
109,808
4.25%–5.00%
2,197
3.38%
40,867
5.10%–5.50%
192,076
4.00%–6.55%
1,996
5.75%
37,533
3.62%–7.00%
2,978
6.00%
17,325
5.25%–6.00%
22,303
4.13%–6.25%
4,462
5.63%–6.00%
35,110
6.25%–6.50%
116,327
5.50%–6.75%
$
908,808
Weighted
Average
Interest Rate
4.00%
4.00%
3.92%
4.95%
4.63%
4.63%
4.75%
4.65%
3.38%
5.24%
5.13%
5.75%
6.11%
6.00%
5.36%
5.53%
5.89%
6.39%
6.23%
Maturity Date Range
October 15, 2016
April 15, 2017
November 15, 2017 – May 15, 2018
July 15, 2018 – June 15, 2021
August 15, 2020 – September 15, 2020
September 15, 2020
August 15, 2019
February 15, 2019 – November 15, 2020
April 15, 2021 – May 15, 2021
February 15, 2020 – May 15, 2022
June 15, 2019 – December 15, 2022
February 15, 2021
March 15, 2022 – December 15, 2025
November 15, 2025 – December 15, 2025
May 15, 2028 – November 15, 2028
December 15, 2030 – August 15, 2031
November 15, 2032 – October 15, 2033
August 15, 2038 – May 15, 2039
November 15, 2042 – October 15, 2043
In connection with the issuance of Prospect Capital InterNotes ® , we incurred $24,284 of fees which are being amortized over the term of the notes, of which
$14,240 remains to be amortized and is included as a reduction within Prospect Capital InterNotes ® on the Consolidated Statement of Assets and Liabilities as of
June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $53,560 , $48,681 and $44,808 , respectively, of interest costs and amortization of financing
costs on the Prospect Capital InterNotes ® as interest expense.
Net Asset Value
During the year ended June 30, 2017, our net asset value decreased by $80,965, or $0.30 per share. This decrease is primarily from dividends exceeding net
investment income by $52,905, or $0.15 per share, and from net realized and change in unrealized losses of $53,176, or $0.15 per share. Our net investment
income decreased primarily from a decrease in interest income due to reduced returns from our structured credit investments as a result of lower future expected
cash flows and a reduced interest earning asset base. Net investment income further decreased due to a decline in dividend income primarily from a non-recurring
dividends received from APRC in the amount of $11,016 and a decrease in Echelon dividend in the amount of $7,050. These decreases were partially offset by
lower management fees and other operating expenses. The following table shows the calculation of net asset value per share as of June 30, 2017 and June 30, 2016.
Net assets
Shares of common stock issued and outstanding
Net asset value per share
$
$
3,354,952 $
360,076,933
9.32 $
3,435,917
357,107,231
9.62
June 30, 2017
June 30, 2016
87
Results of Operations
Net increase in net assets resulting from operations for the years ended June 30, 2017, 2016 and 2015 was $252,906 , $103,362 and $346,339 , or $0.70 , $0.29 ,
and $0.98 per weighted average share, respectively. During the year ended June 30, 2017 , the $149,544 increase is primarily due to a decrease in net realized and
change in unrealized losses of $46,165 recognized during the year ended June 30, 2017 compared to $267,990 of net realized and unrealized losses recognized
during the year ended June 30, 2016. This fluctuation is primarily due to decreases in market yields and the competitive environment faced by our energy-related
companies during the year ended June 30, 2016. The $221,825 , or $0.62 per weighted average share, favorable decrease in net realized and change in unrealized
losses is partially offset by a $62,901 decrease in interest income driven by a decline in returns from CLOs, a reduced interest earning asset base and additional
loans on non-accrual status. Additionally, net realized and change in unrealized losses is partially offset by a $20,822 decline in dividend income primarily a non-
recurring dividend received from APRC in the prior year period. (See “Investment Income”, “Net Realized Losses” and “Net Change in Unrealized Gains
(Losses)” for further discussion.)
Net increase in net assets resulting from operations for the year ended June 30, 2016 was $103,362, a decrease of $242,977 compared to the year ended June 30,
2015. The decrease is primarily due to a $255,532 unfavorable increase in net realized and change in unrealized losses on investments when comparing results for
the years ended June 30, 2016 and June 30, 2015. This $255,532, or $0.71 per per weighted average share, is primarily due to softening of the energy markets, non-
credit related changes in the capital markets and increased default rates impacting the underlying collateral of our CLO residual interest investments. These factors
resulted in an unfavorable increase in net change in unrealized and realized losses of $15,178 in our energy-related investments and $88,104 in our CLO
investments for the year ended June 30, 2016. The remaining $152,250 increase in net realized and unrealized losses is primarily due to net unrealized losses for
certain controlled investments, including Harbortouch, First Tower Finance and USES, partially offset by unrealized gains related to our real estate investments.
While we seek to maximize gains and minimize losses, our investments in portfolio companies can expose our capital to risks greater than those we may anticipate.
These companies typically do not issue securities rated investment grade, and have limited resources, limited operating history, and concentrated product lines or
customers. These are generally private companies with limited operating information available and are likely to depend on a small core of management talents.
Changes in any of these factors can have a significant impact on the value of the portfolio company.
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees
generated from the structuring of new deals. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a
fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We
also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated
basis. In addition, we may generate revenue in other forms including prepayment penalties and possibly consulting fees. Any such fees generated in connection
with our investments are recognized as earned.
Investment income, which consists of interest income, including accretion of loan origination fees and prepayment penalty fees, dividend income and other
income, including settlement of net profits interests, overriding royalty interests and structuring fees, was $ 701,046 , $ 791,973 and $ 791,084 for the years ended
June 30, 2017, 2016 and 2015, respectively. Investment income decreased from June 30, 2016 compared to June 30, 2017 primarily due to reduced returns from
our structured credit investments due to lower future expected cash flows and a reduced interest earning asset base. Investment income also declined due to
dividend income related to our investments in APRC and Echelon. Investment income remained relatively stable for the year ended June 30, 2016 compared to the
year ended June 30, 2015 primarily due to an increase in dividend income offset by a decrease in interest income.
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The following table describes the various components of investment income and the related levels of debt investments:
Interest income
Dividend income
Other income
Year Ended June 30,
2017
2016
2015
$
668,717
$
731,618
$
748,974
5,679
26,650
26,501
33,854
7,663
34,447
Total investment income
$
701,046
$
791,973
$
791,084
Average debt principal of performing investments
$ 5,706,090
$ 6,013,754
$ 6,183,163
Weighted average interest rate earned on performing
assets
11.72%
12.17%
12.11%
Average interest income producing assets decreased from $6,013,754 for the year ended June 30, 2016 to $ 5,706,090 for the year ended June 30, 2017. We have
not been fully invested, which along with non-performing assets, contributed to the decline. The average interest earned on interest bearing performing assets
decreased from 12.17% for the year ended June 30, 2016 to 11.72% for the year ended June 30, 2017. The decrease is primarily due to reduced returns from our
structured credit investments due to lower future expected cash flows. Average interest income producing assets decreased from $6,183,163 for the year ended
June 30, 2015 to $6,013,754 for the year ended June 30, 2016. The average interest earned on interest bearing performing assets increased from 12.11% for the
year ended June 30, 2015 to 12.17% for the year ended June 30, 2016. This moderate increase is primarily due to repayments of lower yielding portfolio
investments.
Investment income is also generated from dividends and other income which is less predictable than interest income. Dividend income decreased from $26,501 for
the year ended June 30, 2016 to $5,679 for the year ended June 30, 2017. The $20,822 decrease in dividend income is primarily attributable to an $11,016 dividend
received during the year ended June 30, 2016 from our investment in APRC resulting from the sale of APRC’s Vista Palma Sola property. No such dividend was
received from NPRC during the year ended June 30, 2017. Additionally, a $7,250 dividend was received during the year ended June 30, 2016 from our investment
in Echelon, whereas only $200 of dividend was received during the year ended June 30, 2017. Additionally, the level of dividends received from our investment in
CCPI and MITY decreased by $3,073 and $242, respectively, during the year ended June 30, 2017 as compared to the same period in the prior year. The decrease
was partially offset by an increase of $347 in dividends received from Nationwide for the year ended June 30, 2017.
Dividend income increased from $7,663 for the year ended June 30, 2015 to $26,501 for the year ended June 30, 2016. The $18,838 increase in dividend income is
primarily attributable to an $11,016 dividend received from our investment in APRC and $7,250 dividend received from our investment in Echelon. No such
dividends were received from either APRC or Echelon during the year ended June 30, 2015. Additionally, we received dividends of $3,196, $3,963 and $711
related to our investments in CCPI, Nationwide and MITY, respectively, during the year ended June 30, 2016. No such dividends were received from CCPI or
MITY during the year ended June 30, 2015. The increase in dividend income was partially offset by dividends of $4,425 and $1,929 received from our investments
in Nationwide and First Tower Finance, respectively, during the year ended June 30, 2015. No such dividends were received from First Tower Finance during the
year ended June 30, 2016.
Other income has come primarily from structuring fees, royalty interests, and settlement of net profits interests. Income from other sources decreased from $33,854
for the year ended June 30, 2016 to $26,650 for the year ended June 30, 2017. The decrease is primarily due to a $12,632 decrease in advisory fee income, which
was generated from the Harbortouch transaction, as well as from follow-on investments in existing portfolio companies. This was offset by a $4,388 increase in
structuring fees and by a $1,669 increase in amendment fee income, which are generated from new originations as well as from follow-on investments and
amendments to existing portfolio companies. During the fiscal year ended June 30, 2015, we elected to suspend our equity raising activities. The curtailment of
capital raising activities suppressed our levels of origination. Total originations decreased from $1,867,477 in the year ended June 30, 2015 to $979,102 in the year
ended June 30, 2016. As a result, structuring fees fell from $28,562 in the year ended June 30, 2015 to $26,207 in the year ended June 30, 2016. Included within
the $26,207 of structuring fees recognized during the year ended June 30, 2016 is a $12,909 advisory fee for the Harbortouch transaction, as well as from follow-on
investments in existing portfolio companies and new originations, primarily from our investments in Crosman, PeopleConnect Intermediate, LLC (f/k/a Intelius,
Inc.), Broder, Coverall North America, Inc., NPRC, Inpatient Care and System One.
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Operating Expenses
Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees
and other operating and overhead-related expenses. These expenses include our allocable portion of overhead under the Administration Agreement with Prospect
Administration under which Prospect Administration provides administrative services and facilities for us. Our investment advisory fees compensate the
Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our
operations and transactions. Operating expenses were $394,964 , $420,845 and $428,337 for the years ended June 30, 2017, 2016 and 2015, respectively.
Total gross base management fee was $124,077 , $128,416 and $134,760 for the years ended June 30, 2017, 2016 and 2015, respectively. The decrease in total
gross base management fee is directly related a decrease in average total assets. The Investment Adviser has entered into a servicing agreement with certain
institutions who purchased loans with us, where we serve as the agent and collect a servicing fee on behalf of the Investment Adviser. We received payments of
$1,203 , $1,893 and $170 from these institutions for the years ended June 30, 2017, 2016 and 2015, respectively, on behalf of the Investment Adviser, for
providing such services under the servicing agreement. We were given a credit for these payments as a reduction of base management fee payable by us to the
Investment Adviser resulting in net base management fees of $122,874 , $126,523 and $134,590 for the years ended June 30, 2017, 2016 and 2015, respectively.
The net base management fee was $122,874 , $126,523 and $134,590 for the years ended June 30, 2017, 2016 and 2015, respectively.
For the years ended June 30, 2017, 2016 and 2015, we incurred $76,520 , $92,782 and $90,687 of income incentive fees, respectively ( $0.21 , $0.26 and $0.26 per
weighted average share, respectively). This decrease was driven by a corresponding decrease in pre-incentive fee net investment income from $463,910 for the
year ended June 30, 2016 to $382,602 for the year ended June 30, 2017 , primarily from decreases in interest income due to repayments on investments and
increased default rates in the underlying collateral of our CLO investments, and dividend income. No capital gains incentive fee has yet been incurred pursuant to
the Investment Advisory Agreement.
During the years ended June 30, 2017, 2016 and 2015, we incurred $164,848 , $167,719 and $170,660 , respectively, of interest expenses related to our Revolving
Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Notes”). These expenses are related directly to the leveraging
capacity put into place for each of those periods and the levels of indebtedness actually undertaken in those periods.
The table below describes the various expenses of our Notes and the related indicators of leveraging capacity and indebtedness during these years.
Year Ended June 30,
2017
2016
2015
Interest on borrowings
$
142,819
$
146,659
$
149,312
Amortization of deferred financing costs
Accretion of discount on Public Notes
Facility commitment fees
13,013
269
8,747
13,561
200
7,299
14,266
213
6,869
Total interest and credit facility expenses
$
164,848
$
167,719
$
170,660
Average principal debt outstanding
$ 2,683,254
$ 2,807,125
$ 2,830,727
Weighted average stated interest rate on borrowings(1)
Weighted average interest rate on borrowings(2)
5.32%
6.14%
5.22%
5.97%
5.27%
6.03%
(1)
Includes only the stated interest expense.
(2)
Includes the stated interest expense, amortization of deferred financing costs, accretion of discount on Public Notes and commitment fees on the undrawn portion of our
Revolving Credit Facility.
Interest expense is relatively stable during the years ended June 30, 2017 and June 30, 2016. The weighted average stated interest rate on borrowings (excluding
amortization, accretion and undrawn facility fees) increased from 5.22% for the year ended June 30, 2016 to 5.32% for the year ended June 30, 2017 . This
increase is primarily due to issuances of the 2024 Notes and Prospect Capital InterNotes® at higher rates, partially offset by the repayment and repurchases of our
Convertible Notes.
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The allocation of gross overhead expense from Prospect Administration was $22,882, $20,313 and $21,991 for the years ended June 30, 2017, 2016 and 2015,
respectively. Prospect Administration received estimated payments of $8,760, $7,445 and $7,014 directly from our portfolio companies and certain funds managed
by the Investment Adviser for legal, tax and portfolio level accounting services during the years ended June 30, 2017, 2016 and 2015, respectively. We were given
a credit for these payments as a reduction of the administrative services cost payable by us to Prospect Administration. Had Prospect Administration not received
these payments, Prospect Administration’s charges for its administrative services would have increased by these amounts. During the year ended June 30, 2017 ,
other operating expenses in the amount of $876 incurred by us, which were attributable to CCPI, have been reimbursed by CCPI and are reflected as an offset to
our overhead allocation. No such reimbursements or expenses occurred during the years ended June 30, 2016 or June 30, 2015. During the year ended June 30,
2016, we renegotiated the managerial assistance agreement with First Tower LLC (“First Tower”) and reversed $1,200 of previously accrued managerial assistance
at First Tower Delaware, $600 of which was expensed during the three months ended June 30, 2015, as the fee was paid by First Tower, which decreased our
overhead expense. During the year ended June 30, 2016, we also incurred $379 of overhead expense related to our consolidated entity SB Forging. Net overhead
during the years ended June 30, 2017, 2016 and 2015 totaled $13,246 , $12,647 and $14,977 , respectively.
Total operating expenses, excluding investment advisory fees, interest and credit facility expenses, and allocation of overhead from Prospect Administration
(“Other Operating Expenses”) were $17,476 , $21,174 and $17,423 for the years ended June 30, 2017, 2016 and 2015, respectively. The decrease of $3,698 during
the year ended June 30, 2017 is primarily due a reversal of excise tax previously accrued due to lower levels of taxable income, offset by a slight increase in audit,
compliance and tax related fees.
Net Investment Income
Net investment income represents the difference between investment income and operating expenses. Net investment income was $306,082 , $371,128 and
$362,747 for the years ended June 30, 2017, 2016, 2015, respectively. The $65,046 decrease for the year ended June 30, 2017 compared to the year ended June 30,
2016 is primarily the result of a $62,901 decrease in interest income, driven primarily by a decline in interest income from reduced returns from our structured
credit investments due to lower future expected cash flows, an additional $248,357 weighted average balance of loans on non-accrual status and a reduced interest
earning asset base, and a $20,822 decrease in dividend income related to APRC, Echelon, CCPI and MITY discussed earlier. In addition to a decrease of $7,204 in
other income due to a decrease of $12,632 of advisory fee income from the sale of Harbortouch offset by an increase of $4,888 in structuring fees and by a $1,669
increase in amendment fee income. These decreases were partially offset by a favorable $19,911 decrease in advisory fees and a decrease of $3,698 in Other
Operating Expenses.
During the year ended June 30, 2016, the $8,381 increase as compared to the year ended June 30, 2015 was primarily the result of an $18,838 increase in dividend
income from Echelon and APRC, and a $5,972 decrease in base management fees from a decrease in our asset base. These results were partially offset by a
$17,356 decrease in interest income, primarily due to a decrease in our interest earning asset base.
Net investment income for years ended June 30, 2017, 2016, 2015 was $0.85 , $1.04 and $1.03 per weighted average share, respectively. During the year ended
June 30, 2017, the decrease is primarily due to a $0.19 per weighted average share decrease in interest, in addition to a $0.05 per weighted average share decrease
in dividend income and a decrease of $0.03 per weighted average share in other income. This decrease was partially offset by a $0.06 per weighted average share
decrease in base management fees and a $0.02 per weighted average share decrease in Other Operating Expenses.
During the year ended June 30, 2016, the increase as compared to the year ended June 30, 2015 was primarily due to a $0.02 per weighted average share decrease
in advisory fees. This decrease was partially offset by a $0.07 per weighted average share decrease in interest income driven by reduced interest earning asset base
and an increase of $0.05 per weighted average share in dividend income received by our investments in APRC and Echelon.
Net Realized Gains (Losses)
During the years ended June 30, 2017, 2016 and 2015, we recognized net realized losses on investments of $96,306 , $24,417 and $180,423 , respectively. The net
realized loss during the year ended June 30, 2017 was primarily due to the sale of Gulfco assets for which we recognized a total realized loss of $66,103, of which
$53,063 had been previously recorded as an unrealized loss as of June 30, 2016. Additionally, in conjunction with the restructuring of our investment in Ark-La-
Tex, we wrote-down the Term Loan B to its cost basis and realized a loss of $19,818, of which $23,239 had been previously recorded as an unrealized loss as of
June 30, 2016. Additionally, during the year ended June 30, 2017, four of our CLO investments were redeemed and we recorded a total loss of $17,242 to write
down the amortized cost basis to its fair value.
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During the year ended June 30, 2017, we repurchased $78,766 aggregate principal amount of the 2017 Notes, repurchased $114,581 aggregate principal amount of
the 2018 Notes, and redeemed $58,377 aggregate principal amount of Prospect Capital InterNotes® (including amounts repaid in accordance with the Survivor’s
Option). As a result of these transactions, we recognized net realized losses on debt extinguishment of $7,011 in the year ended June 30, 2017.
The net realized loss during the year ended June 30, 2016 was primarily due to the write-down of our investment in Targus of $14,194, the sale of our investments
in American Gilsonite Company, ICON Health and Fitness, Inc., and Harbortouch for which we recognized total realized losses of $10,860 and the write-off of
defaulted loans in our small business lending portfolio of $5,986. These losses were partially offset by net realized gains from the sale of two of our CLO
investments for which we realized total gains of $3,911.
During the year ended June 30, 2016, we repurchased $500 aggregate principal amount of the 2017 Notes and repaid $7,069 aggregate principal amount of
Prospect Capital InterNotes® (including amounts repaid in accordance with the Survivor’s Option). As a result of these transactions, we recognized net realized
gain on debt extinguishment of $224 in the year ended June 30, 2016.
During the year ended June 30, 2015, we determined that the impairments of several of our investments (e.g., Appalachian Energy Holdings, LLC, Change Clean
Energy Company, Coalbed LLC, Edmentum, Manx Energy Inc., NCT, Stryker Energy, LLC, The Healing Staff, Inc., Wind River Resources Corporation, and
Yatesville Coal Company) were other-than-temporary and recorded total realized losses of $123,555 (which were previously recognized as unrealized losses) for
the amount that the amortized cost exceeded the fair value. These losses were partially offset by net realized gains from the proceeds collected on warrants
redeemed from Snacks Parent Corporation, litigation settlements, partial sales, and the release of escrowed amounts due to us from several portfolio companies, for
which we recognized total realized gains of $6,239.
During the year ended June 30, 2015, we repurchased $8,000 aggregate principal amount of the 2020 Notes, redeemed $100,000 aggregate principal amount of the
2022 Notes, and redeemed $83,924 aggregate principal amount of Prospect Capital InterNotes® (including amounts repaid in accordance with the Survivor’s
Option). As a result of these transactions, we recognized net realized losses on debt extinguishment of $3,950 in the year ended June 30, 2015.
Net Change in Unrealized Gains (Losses)
Net change in unrealized gains (losses) was $50,141 , $(243,573) and $167,965 for the years ended June 30, 2017, 2016 and 2015, respectively. For the year ended
June 30, 2017 , the $50,141 net change in unrealized gains was primarily the result of $104,242 unrealized gains in our REITs portfolio due to improved operating
performance at the property-level, and $87,550 of realized losses that were previously unrealized related to our sale of Gulfco and the restructuring of Ark-La-Tex.
The remaining $141,077 increase in unrealized losses is primarily due to USC, energy-related companies, USES and our online lending portfolio. The value of our
investment in USC decreased by $53,443 due to both a decline in operating performance and the overall decline in demand for firearms and ammunition. Our
energy-related companies continued to face a competitive market environment and declined in value by $33,629. USES also declined in value by $30,214 due to
energy-related factors as well as a decline in operating performance. Additionally, the increase in unrealized losses on our online lending portfolio of $23,791 were
due to an increase in delinquent loans for the year ended June 30, 2017 .
For the year ended June 30, 2016, the $(243,573) change in net unrealized losses was driven primarily due to softening of the energy markets, non-credit related
changes in the capital markets and increased default rates impacting the underlying collateral of our CLO residual interest investments. These factors resulted in
net unrealized losses of $86,617 in our energy-related investments and $114,131 in our CLO investments. The remaining $42,825 increase in unrealized loss is
primarily due to net unrealized losses for certain controlled investments - Harbortouch, First Tower Finance and USES. Our investment in Harbortouch was sold
and the previously recorded unrealized gain was reversed. Additionally, First Tower Finance and USES experienced a decline in operating results contributing
$21,471 and $17,148 of unrealized losses during the year ended June 30, 2016. These combined increases in unrealized losses in certain controlled investments
were partially offset by unrealized appreciation in our real estate portfolio due to improved operating performance at the property level and selected cap rates,
partially offset by a decline in our online lending portfolio value resulting from an increase in delinquent loans.
Financial Condition, Liquidity and Capital Resources
For the years ended June 30, 2017, 2016 and 2015, our operating activities provided $376,201 , $861,869 and $45,464 of cash, respectively. There were no
investing activities for the years ended June 30, 2017, 2016 and 2015. Financing activities used $375,916 , $654,097 and $69,663 of cash during the years ended
June 30, 2017, 2016 and 2015, respectively, which included dividend payments of $333,623 , $336,637 and $414,833 , respectively.
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Our primary uses of funds have been to continue to invest in portfolio companies, through both debt and equity investments, repay outstanding borrowings and to
make cash distributions to holders of our common stock.
Our primary sources of funds have historically been issuances of debt and equity. More recently, we have and may continue to fund a portion of our cash needs
through repayments and opportunistic sales of our existing investment portfolio. We may also securitize a portion of our investments in unsecured or senior
secured loans or other assets. Our objective is to put in place such borrowings in order to enable us to expand our portfolio. During the year ended June 30, 2017 ,
we borrowed $635,000 and made repayments totaling $635,000 under the Revolving Credit Facility. As of June 30, 2017 , we had, net of unamortized discount and
debt issuance costs, $937,641 outstanding on the Convertible Notes, $738,300 outstanding on the Public Notes and $966,254 outstanding on the Prospect Capital
InterNotes®, and no outstanding balance on the Revolving Credit Facility. (See “Capitalization” above.)
Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 4.00%. As of
June 30, 2017 and June 30, 2016 , we had $22,925 and $40,560 , respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio
companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as of June 30, 2017 and June 30, 2016 .
Our shareholders’ equity accounts as of June 30, 2017 , June 30, 2016 and June 30, 2015 reflect cumulative shares issued, net of shares repurchased, as of those
respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the
underwriters, our dividend reinvestment plan and in connection with the acquisition of certain controlled portfolio companies. When our common stock is issued,
the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
As part of our Repurchase Program, we delivered a notice with our annual proxy mailing on September 21, 2016 and our most recent notice was delivered with a
shareholder letter mailing on August 2, 2017. This notice extends for six months after the date that notice is delivered. We did not repurchase any shares of our
common stock for the year ended June 30, 2017 . During the year ended June 30, 2016 , we repurchased 4,708,750 shares of our common stock pursuant to our
publicly announced Repurchase Program for $34,140 , or approximately $7.25 weighted average price per share at approximately a 30% discount to net asset value
as of June 30, 2015. Our NAV per share was increased by approximately $0.02 for the year ended June 30, 2016 as a result of the share repurchases.
On November 3, 2016, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to
$4,691,212 of additional debt and equity securities in the public market as of June 30, 2017 .
Off-Balance Sheet Arrangements
As of June 30, 2017 , we did not have any off-balance sheet liabilities or other contractual obligations that are reasonably likely to have a current or future material
effect on our financial condition, other than those which originate from 1) the investment advisory and management agreement and the administration agreement
and 2) the portfolio companies.
Recent Developments
We have provided notice to call on July 11, 2017 with settlement on August 15, 2017, $41,441 of our Prospect Capital InterNotes® at par maturing between
February 15, 2018 and February 15, 2019, with a weighted average rate of 4.83%.
On July 19, 2017, we received $17,926 and $22,167 as a partial return of capital on our investments in Voya CLO 2012-2, Ltd. and Voya CLO 2012-3, Ltd.,
respectively.
During the period from July 19, 2017 through August 16, 2017, we made a $11,000 follow-on first lien senior debt investment in RGIS Services, LLC.
On July 25, 2017, EZShield Parent, Inc. repaid the $14,963 Senior Secured Term Loan A and $15,000 Senior Secured Term Loan B receivable to us.
On July 28, 2017, Global Employment Solutions, Inc. repaid the $48,131 loan receivable to us.
On August 7, 2017, Water Pik, Inc. repaid the $13,739 loan receivable to us.
We have provided notice to call on August 11, 2017 with settlement on September 15, 2017, $48,539 of our Prospect Capital InterNotes® at par maturing between
March 15, 2018 and September 15, 2019, with a weighted average rate of 4.89%.
On August 14, 2017, we announced the then current conversion rate on the 2018 Notes as 84.1497 shares of common stock per
$1 principal amount of the 2018 Notes converted, which is equivalent to a conversion price of approximately $11.88.
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During the period from July 10, 2017 through August 24, 2017, we made one follow-on investments in NPRC totaling $8,382 to support the online consumer
lending initiative. We invested $2,934 of equity through NPH and $5,448 of debt directly to NPRC and its wholly-owned subsidiaries. In addition, we received a
partial repayment of $4,034 of our loans previously outstanding with NPRC. We also provided $450 of debt and $2,603 of equity financing to NPRC which was
used to fund capital expenditures for existing properties.
During the period from July 1, 2017 through August 28, 2017 we issued $18,392 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of
$18,126. In addition, we sold $3,047 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $3,003 with expected closing on August 31,
2017.
On August 28, 2017, we announced the declaration of monthly dividends in the following amounts and with the following dates:
•
•
$0.06 per share for September 2017 to holders of record on September 29, 2017 with a payment date of October 19, 2017.
$0.06 per share for October 2017 to holders of record on October 31, 2017 with a payment date of November 22, 2017.
Critical Accounting Policies and Estimates
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”)
pursuant to the requirements for reporting on Form 10-K, ASC 946, Financial Services—Investment Companies (“ASC 946”), and Articles 3, 6 and 12 of
Regulation S-X. Under the 1940 Act, ASC 946, and the regulations pursuant to Article 6 of Regulation S-X, we are precluded from consolidating any entity other
than another investment company or an operating company which provides substantially all of its services to benefit us. Our consolidated financial statements
include the accounts of Prospect, PCF, PSBL, PYC, and the Consolidated Holding Companies. All intercompany balances and transactions have been eliminated in
consolidation. The financial results of our non-substantially wholly-owned holding companies and operating portfolio company investments are not consolidated in
the financial statements. Any operating companies owned by the Consolidated Holding Companies are not consolidated.
Reclassifications
Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of
and for the year ended June 30, 2017 .
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, expenses, and gains and losses during the reported
period. Changes in the economic environment, financial markets, creditworthiness of the issuers of our investment portfolio and any other parameters used in
determining these estimates could cause actual results to differ, and these differences could be material.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in
the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a
company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of
more than 25% of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are
deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting
securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our
total assets are qualifying assets (with certain limited exceptions). As of June 30, 2017 and June 30, 2016 , our qualifying assets as a percentage of total assets,
stood at 71.75% and 74.58% , respectively.
Investment Transactions
Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument.
Specifically, we record all security transactions on a trade date basis. Investments are derecognized
94
when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. In accordance with ASC 325-40,
Beneficial Interest in Securitized Financial Assets , investments in CLOs are periodically assessed for other-than-temporary impairment (“OTTI”). When the
Company determines that a CLO has OTTI, the amortized cost basis of the CLO is written down to its fair value as of the date of the determination based on events
and information evaluated and that write-down is recognized as a realized loss. Amounts for investments traded but not yet settled are reported in Due to Broker or
Due from Broker, in the Consolidated Statements of Assets and Liabilities .
Foreign Currency
Foreign currency amounts are translated into US Dollars (USD) on the following basis:
i.
ii.
fair value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and
purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such investment
transactions, income or expenses.
We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from
changes in fair values of investments held or disposed of during the period. Such fluctuations are included within the net realized and net change in unrealized
gains or losses from investments in the Consolidated Statements of Operations.
Investment Risks
Our investments are subject to a variety of risks. Those risks include the following:
Market Risk
Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.
Credit Risk
Credit risk represents the risk that we would incur if the counterparties failed to perform pursuant to the terms of their agreements with us.
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to rapidly adjust the size of our investment positions in times of high volatility and financial
stress at a reasonable price.
Interest Rate Risk
Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.
Prepayment Risk
Many of our debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a
faster than expected rate, thereby effectively shortening the maturity of the security and making us less likely to fully earn all of the expected income of that
security and reinvesting in a lower yielding instrument.
Structured Credit Related Risk
CLO investments may be riskier and less transparent to us than direct investments in underlying companies. CLOs typically will have no significant assets
other than their underlying senior secured loans. Therefore, payments on CLO investments are and will be payable solely from the cash flows from such senior
secured loans.
Online Small-and-Medium-Sized Business Lending Risk
With respect to our online SME lending initiative, we invest primarily in marketplace loans through marketplace lending facilitators. We do not conduct loan
origination activities ourselves. Therefore, our ability to purchase SME loans, and our ability to grow our portfolio of SME loans, is directly influenced by the
business performance and competitiveness of the
95
marketplace loan origination business of the marketplace lending facilitators from which we purchase SME loans. In addition, our ability to analyze the risk-
return profile of SME loans is significantly dependent on the marketplace facilitators’ ability to effectively evaluate a borrower's credit profile and likelihood
of default. If we are unable to effectively evaluate borrowers' credit profiles or the credit decisioning and scoring models implemented by each facilitator, we
may incur unanticipated losses which could adversely impact our operating results.
Foreign Currency
Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with
those of domestic origin. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic
developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S.
government securities.
Investment Valuation
To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for
measuring fair value in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and requires disclosures about fair
value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an
orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1 : Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2 : Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not
active, or other observable inputs other than quoted prices.
Level 3 : Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input
that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to each investment.
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such
market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below.
1. Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.
2. The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.
3. The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a
recommendation to the Board of Directors of the value for each investment.
4. The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the
Investment Adviser, the respective independent valuation firm and the Audit Committee.
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, liquidation technique, discounted
cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by
market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over
the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market
(multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction
96
metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used
to derive a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this
purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation
technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a
hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from
which a single estimate may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current
market expectations about those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call
protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal
markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among
other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued primarily using a discounted multi-path cash flow
model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are
sensitized using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-
path) cash flows from the underlying assets and liabilities. These cash flows, after payments to debt tranches senior to our equity positions, are discounted using
appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each
CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the
implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset
management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third party CLO collateral managers.
The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
Valuation of Other Financial Assets and Financial Liabilities
ASC 825, Financial Instruments , specifically ASC 825-10-25, permits an entity to choose, at specified election dates, to measure eligible items at fair value (the
“Fair Value Option”). We have not elected the Fair Value Option to report selected financial assets and financial liabilities. See Note 8 in the accompanying
Consolidated Financial Statements for further discussion of our financial liabilities that are measured using another measurement attribute.
Convertible Notes
We have recorded the Convertible Notes at their contractual amounts. We have determined that the embedded conversion options in the Convertible Unsecured
Notes are not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging . See Note 5 in the accompanying Consolidated
Financial Statements for further discussion.
Revenue Recognition
Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Loan origination fees, original issue discount, and
market discounts are capitalized and accreted into interest income over the respective terms of the applicable loans using the effective interest method or straight-
line, as applicable, and adjusted only for material amendments or prepayments. Upon a prepayment of a loan, prepayment premiums, original issue discount, or
market discounts are recorded as interest income. Other income generally includes amendment fees, commitment fees, administrative agent fees and structuring
fees which are recorded when earned.
Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Unpaid accrued interest is generally reversed
when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending
upon management’s judgment of the collectibility of the loan receivable. Non-accrual loans are restored to accrual status when past due principal and interest is
paid and in management’s judgment, is likely to remain current. As of June 30, 2017 , approximately 2.5% of our total assets at fair value are in non-accrual status.
Interest income from investments in the “equity” class of security of CLO funds (typically preferred shares, income notes or subordinated notes) and “equity” class
of security of securitized trust is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC
325-40, Beneficial Interests in Securitized Financial
97
Assets . We monitor the expected cash inflows from our CLO and securitized trust equity investments, including the expected residual payments, and the effective
yield is determined and updated periodically.
Dividend income is recorded on the ex-dividend date.
Structuring fees and similar fees are recognized as income is earned, usually when paid. Structuring fees, excess deal deposits, net profits interests and overriding
royalty interests are included in other income. See Note 10 in the accompanying Consolidated Financial Statements for further discussion.
Federal and State Income Taxes
We have elected to be treated as a RIC and intend to continue to comply with the requirements of the Code applicable to regulated investment companies. We are
required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our
investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and
gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to
stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.
If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income and 98.2% of our capital gains in the calendar year
earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains
exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in
excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of June
30, 2017, we do not expect to have any excise tax due for the 2017 calendar year. Thus, we have not accrued any excise tax for this period.
If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable
income at regular corporate income tax rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions.
Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced
maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other
requirements are met. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. To qualify
again to be taxed as a RIC in a subsequent year, we would be required to distribute to our shareholders our accumulated earnings and profits attributable to non-
RIC years. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would
be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have
been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
We follow ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and
disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax
returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. June 2017 As of June 30, 2017 and 2016, we did not record any
unrecognized tax benefits or liabilities. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon
factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Although we file both federal and state income tax
returns, our major tax jurisdiction is federal. Our federal tax returns for the tax years ended August 31, 2014 and thereafter remain subject to examination by the
Internal Revenue Service.
Dividends and Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a monthly dividend or distribution is
approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our future taxable earnings. Net realized capital gains, if
any, are distributed at least annually.
Financing Costs
We record origination expenses related to our Revolving Credit Facility and the Unsecured Notes as deferred financing costs. These expenses are deferred and
amortized as part of interest expense using the straight-line method over the stated life of the obligation for our Revolving Credit Facility. The same methodology
is used to approximate the effective yield method for our Prospect Capital InterNotes® and our 2024 Notes Follow-on Program. The effective interest method is
used for our remaining
98
Unsecured Notes over the respective expected life or maturity. In the event that we modify or extinguish our debt before maturity, we follow the guidance in ASC
470-50, Modification and Extinguishments (“ASC 470-50”). For modifications to or exchanges of our Revolving Credit Facility, any unamortized deferred costs
relating to lenders who are not part of the new lending group are expensed. For extinguishments of our Unsecured Notes, any unamortized deferred costs are
deducted from the carrying amount of the debt in determining the gain or loss from the extinguishment.
For the year ended June 30, 2017, we have changed our method of presentation relating to debt issuance costs in accordance with ASU 2015-03, Interest -
Imputation of Interest (Subtopic 835-30). Prior to July 1, 2016, our policy was to present debt issuance costs in Deferred financing costs as an asset on the
Consolidated Statements of Assets and Liabilities , net of accumulated amortization. Beginning with the period ended September 30, 2016, we have presented these
costs, except those incurred by the Revolving Credit Facility, as a direct deduction to our Unsecured Notes. Unamortized deferred financing costs of $40,526,
$44,140, $57,010, and $37,607 previously reported as an asset on the Consolidated Statements of Assets and Liabilities for the years ended June 30, 2016, 2015,
2014, and 2013, respectively, have been reclassified as a direct deduction to the respective Unsecured Notes (see Notes 5, 6, and 7 in the accompanying
Consolidated Financial Statements for further discussion).
We may record registration expenses related to shelf filings as prepaid expenses. These expenses consist principally of SEC registration fees, legal fees and
accounting fees incurred. These prepaid expenses are charged to capital upon the receipt of proceeds from an equity offering or charged to expense if no offering is
completed. As of June 30, 2017 and June 30, 2016 , there are no prepaid expenses related to registration expenses and all amounts incurred have been expensed.
Guarantees and Indemnification Agreements
We follow ASC 460, Guarantees (“ASC 460”). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual consolidated financial
statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those
guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.
Per Share Information
Net increase or decrease in net assets resulting from operations per share is calculated using the weighted average number of common shares outstanding for the
period presented. In accordance with ASC 946, convertible securities are not considered in the calculation of net asset value per share.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”), which amends the financial instruments impairment guidance so that an entity is required to measure expected credit losses for financial assets based on
historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses.
ASU 2016-13 also amends the guidance in FASB ASC Subtopic No. 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets , related to the
subsequent measurement of accretable yield recognized as interest income over the life of a beneficial interest in securitized financial assets under the effective
yield method. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are
currently evaluating the impact, if any, of adopting this ASU on our consolidated financial statements .
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-
15”), which addresses certain aspects of cash flow statement classification. One such amendment requires cash payments for debt prepayment or debt
extinguishment costs to be classified as cash outflows for financing activities. ASU 2016-15 is effective for financial statements issued for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early
adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. The adoption of the amended guidance in ASU 2016-15 is not expected to have a
significant effect on our consolidated financial statements and disclosures.
In October 2016, the SEC adopted significant reforms under the 1940 Act that impose extensive new disclosure and reporting obligations on most 1940 Act funds
(collectively, the “Reporting Rules”). The Reporting Rules greatly expand the volume of information regarding fund portfolio holdings and investment practices
that must be disclosed. The adopted amendments to Regulation S-X for 1940 Act funds and BDCs include an update to the disclosures for investments in and
advances to affiliates,
99
and the requirement to include in their financial statements a standardized schedule containing detailed information about derivative investments (among other
changes). The amendments to Regulation S-X are effective for reporting periods ending after August 1, 2017, and adoption of the amended reform is not expected
to have a significant effect on our consolidated financial statements and disclosures.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates and equity price risk. Interest rate sensitivity refers to the change in our earnings that
may result from changes in the level of interest rates impacting some of the loans in our portfolio which have floating interest rates. Additionally, because we fund
a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we
borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment
income. See “Risk Factors - Risks Relating to Our Business - Changes in interest rates may affect our cost of capital and net investment income.”
Our debt investments may be based on floating rates or fixed rates. For our floating rate loans the rates are determined from the LIBOR, EURO Interbank Offer
Rate, the Federal Funds Rate or the Prime Rate. The floating interest rate loans may be subject to a LIBOR floor. Our loans typically have durations of one to three
months after which they reset to current market interest rates. As of June 30, 2017 , 90.4% of the interest earning investments in our portfolio, at fair value, bore
interest at floating rates.
We also have a revolving credit facility and certain Prospect Capital InterNotes® issuances that are based on floating LIBOR rates. Interest on borrowings under
the revolving credit facility is one-month LIBOR plus 225 basis points with no minimum LIBOR floor and there is no outstanding balance as of June 30, 2017 .
Interest on five Prospect Capital InterNotes® is three-month LIBOR plus a range of 300 to 350 basis points with no minimum LIBOR floor. The Convertible
Notes, Public Notes and remaining Prospect Capital InterNotes® bear interest at fixed rates.
The following table shows the approximate annual impact on net investment income of base rate changes in interest rates (considering interest rate flows for
floating rate instruments, excluding our investments in CLO residual interests) to our loan portfolio and outstanding debt as of June 30, 2017 , assuming no
changes in our investment and borrowing structure:
(in thousands)
Basis Point Change
Up 300 basis points
Up 200 basis points
Up 100 basis points
Down 100 basis points
Interest Income
Interest Expense
Net Investment
Income
Net Investment Income
(1)
$
99,317 $
63,596
28,356
(6,522)
43
29
14
(19)
$
99,274 $
63,567
28,342
(6,503)
79,419
50,854
22,674
(5,202)
(1)
Includes the impact of income inc entive fees. See Note 13 in the accompanying Consolidated Financial Statements for more information on income incentive fees.
As of June 30, 2017 , one and three month LIBOR was 1.23% and 1.30% , respectively.
We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of
the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of
higher interest rates with respect to our portfolio of investments. During the year ended June 30, 2017 , we did not engage in hedging activities.
100
Item 8. Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Assets and Liabilities as of June 30, 2017 and June 30, 2016
Consolidated Statements of Operations for the years ended June 30, 2017, 2016 and 2015
Consolidated Statements of Changes in Net Assets for the years ended June 30, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended June 30, 2017, 2016 and 2015
Consolidated Schedules of Investments as of June 30, 2017 and June 30, 2016
Notes to Consolidated Financial Statements
101
Page
102
103
104
105
106
107
140
Board of Directors and Stockholders
Prospect Capital Corporation
New York, New York
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated statements of assets and liabilities of Prospect Capital Corporation (the “Company”), including the consolidated
schedules of investments, as of June 30, 2017 and 2016, and the related consolidated statements of operations, changes in net assets, and cash flows for each of the
three years in the period ended June 30, 2017, and the financial highlights for each of the five years in the period ended June 30, 2017. These consolidated financial
statements and financial highlights are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of
securities owned as of June 30, 2017 and 2016 by correspondence with the custodians and brokers, online lending servicers, portfolio companies, or by other
appropriate auditing procedures where replies were not received. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of
Prospect Capital Corporation at June 30, 2017 and 2016, and the results of its operations, the changes in its net assets, and its cash flows for each of the three years
in the period ended June 30, 2017, and the financial highlights for each of the five years in the period ended June 30, 2017, in conformity with accounting
principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Prospect Capital Corporation’s
internal control over financial reporting as of June 30, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated August 28, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
New York, New York
August 28, 2017
102
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
June 30, 2017
June 30, 2016
Assets
Investments at fair value:
Control investments (amortized cost of $1,840,731 and $1,768,220, respectively)
$
1,911,775 $
1,752,449
Affiliate investments (amortized cost of $22,957 and $10,758, respectively)
Non-control/non-affiliate investments (amortized cost of $4,117,868 and $4,312,122, respectively)
Total investments at fair value (amortized cost of $5,981,556 and $6,091,100, respectively)
Cash
Receivables for:
Interest, net
Other
Prepaid expenses
Due from Affiliate
Deferred financing costs on Revolving Credit Facility (Note 4)
Total Assets
Liabilities
Revolving Credit Facility (Notes 4 and 8)
Prospect Capital InterNotes® (Notes 7 and 8)
Convertible Notes (Notes 5 and 8)
Public Notes (Notes 6 and 8)
Due to Prospect Capital Management (Note 13)
Interest payable
Dividends payable
Due to Prospect Administration (Note 13)
Accrued expenses
Other liabilities
Due to broker
Total Liabilities
Commitments and Contingencies (Note 3)
Net Assets
Components of Net Assets
Common stock, par value $0.001 per share (1,000,000,000 common shares authorized; 360,076,933 and 357,107,231
issued and outstanding, respectively) (Note 9)
Paid-in capital in excess of par (Note 9)
Accumulated overdistributed net investment income
Accumulated net realized loss
Net unrealized loss
Net Assets
Net Asset Value Per Share (Note 16)
See notes to consolidated financial statements.
103
11,429
3,915,101
5,838,305
318,083
9,559
924
1,125
14
4,779
11,320
4,133,939
5,897,708
317,798
12,127
168
855
—
7,525
6,172,789
6,236,181
—
966,254
937,641
738,300
48,249
38,630
30,005
1,910
4,380
2,097
50,371
—
893,210
1,074,361
699,368
54,149
40,804
29,758
1,765
2,259
3,633
957
2,817,837
2,800,264
—
—
3,354,952 $
3,435,917
360 $
357
3,991,317
3,967,397
(54,039)
(439,435)
(143,251)
(3,623)
(334,822)
(193,392)
3,354,952 $
3,435,917
9.32 $
9.62
$
$
$
$
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
Year Ended June 30,
2017
2016
2015
$
177,496 $
207,377 $
200,409
297
342,696
148,228
668,717
896
347,132
176,213
731,618
5,250
26,435
—
429
—
66
5,679
26,501
11,470
22,528
—
15,180
26,650
—
11,326
33,854
3,799
385,710
159,056
748,974
6,811
778
74
7,663
12,975
226
21,246
34,447
701,046
791,973
791,084
Investment Income
Interest income:
Control investments
Affiliate investments
Non-control/non-affiliate investments
Structured credit securities
Total interest income
Dividend income:
Control investments
Affiliate investments
Non-control/non-affiliate investments
Total dividend income
Other income:
Control investments
Affiliate investments
Non-control/non-affiliate investments
Total other income (Note 10)
Total Investment Income
Operating Expenses
Base management fee (Note 13)
Income incentive fee (Note 13)
Interest and credit facility expenses
Allocation of overhead from Prospect Administration (Note 13)
Audit, compliance and tax related fees
Directors’ fees
Excise Tax
Other general and administrative expenses
Total Operating Expenses
Net Investment Income
Net Realized and Change in Unrealized Gains (Losses) from
Investments
Net realized gains (losses)
Control investments
Affiliate investments
Non-control/non-affiliate investments
Net realized losses
Net change in unrealized gains (losses)
Control investments
Affiliate investments
Non-control/non-affiliate investments
Net change in unrealized gains (losses)
Net Realized and Change in Unrealized Losses from Investments
Net realized (losses) gains on extinguishment of debt
Net Increase in Net Assets Resulting from Operations
Net increase in net assets resulting from operations per share
Dividends declared per share
122,874
76,520
164,848
13,246
5,088
454
(1,100)
13,034
394,964
306,082
(65,915)
137
(30,528)
(96,306)
86,817
553
126,523
92,782
167,719
12,647
4,428
379
2,295
14,072
420,845
371,128
134,590
90,687
170,660
14,977
3,772
379
2,505
10,767
428,337
362,747
(5,406)
(14,194)
(4,817)
(24,417)
(80,640)
—
(99,783)
(180,423)
(88,751)
158,346
(233)
(37,229)
(154,589)
50,141
(243,573)
(46,165)
(267,990)
(7,011)
224
503
9,116
167,965
(12,458)
(3,950)
$
$
$
252,906 $
103,362 $
346,339
0.70 $
(1.00) $
0.29 $
(1.00) $
0.98
(1.19)
See notes to consolidated financial statements.
104
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share data)
Operations
Net investment income
Net realized losses
Net change in unrealized gains (losses)
Net Increase in Net Assets Resulting from Operations
Year Ended June 30,
2017
2016
2015
$
306,082 $
371,128 $
362,747
(103,317)
(24,193)
(184,373)
50,141
(243,573)
252,906
103,362
167,965
346,339
Distributions to Shareholders
Distribution from net investment income
Net Decrease in Net Assets Resulting from Distributions to
Shareholders
(358,987)
(356,110)
(421,594)
(358,987)
(356,110)
(421,594)
Common Stock Transactions
Issuance of common stock, net of underwriting costs
Less: Offering costs from issuance of common stock
Repurchase of common stock under stock repurchase program
Value of shares issued through reinvestment of dividends
—
—
—
25,116
—
118
(34,140)
19,638
146,085
(644)
—
14,681
Net Increase (Decrease) in Net Assets Resulting from Common Stock
Transactions
25,116
(14,384)
160,122
Total (Decrease) Increase in Net Assets
Net assets at beginning of year
(80,965)
(267,132)
84,867
3,435,917
3,703,049
3,618,182
Net Assets at End of Year (Accumulated Overdistributed Net Investment
Income of $54,039, $3,623, and $21,077, respectively)
$
3,354,952 $
3,435,917 $
3,703,049
Common Stock Activity
Shares sold
Shares repurchased under stock repurchase program
Shares issued through reinvestment of dividends
—
—
—
14,845,556
(4,708,750)
—
2,969,702
2,725,222
1,618,566
Net shares issued (repurchased) due to common stock activity
2,969,702
(1,983,528)
16,464,122
Shares issued and outstanding at beginning of year
357,107,231 359,090,759 342,626,637
Shares Issued and Outstanding at End of Year
360,076,933 357,107,231 359,090,759
See notes to consolidated financial statements.
105
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
Operating Activities
Net increase in net assets resulting from operations
Net realized losses (gains) on extinguishment of debt
Net realized losses on investments
Net change in unrealized (gains) losses on investments
Amortization of discounts and (accretion of premiums), net
Accretion of discount on Public Notes (Note 6)
Amortization of deferred financing costs
Payment-in-kind interest
Structuring fees
Change in operating assets and liabilities:
Payments for purchases of investments
Proceeds from sale of investments and collection of investment principal
Increase (decrease) in due to broker
(Decrease) increase in due to Prospect Capital Management
Decrease in interest receivable, net
(Decrease) increase in interest payable
Increase (decrease) in accrued expenses
(Decrease) increase in other liabilities
(Increase) decrease in other receivables
(Increase) in due from affiliate
(Increase) decrease in prepaid expenses
Increase (decrease) in due to Prospect Administration
Net Cash Provided by Operating Activities
Financing Activities
Borrowings under Revolving Credit Facility (Note 4)
Principal payments under Revolving Credit Facility (Note 4)
Issuances of Public Notes, net of original issue discount (Note 6)
Redemptions of Public Notes (Note 6)
Redemptions of Convertible Notes (Note 5)
Issuance of Convertible Notes (Note 5)
Issuances of Prospect Capital InterNotes® (Note 7)
Redemptions of Prospect Capital InterNotes®, net (Note 7)
Financing costs paid and deferred
Cost of shares repurchased under stock repurchase program
Proceeds from issuance of common stock, net of underwriting costs
Offering costs from issuance of common stock
Dividends paid
Net Cash Used in Financing Activities
Net Increase (Decrease) in Cash
Cash at beginning of year
Cash at End of year
Supplemental Disclosures
Cash paid for interest
Non-Cash Financing Activities
Value of shares issued through reinvestment of dividends
Cost basis of investments written off as worthless
Year Ended June 30,
2017
2016
2015
$
252,906 $
103,362 $
7,011
96,306
(50,141)
88,827
269
13,013
(17,808)
(12,929)
(224)
24,417
243,573
84,087
200
13,561
(20,531)
(9,393)
346,339
3,950
180,423
(167,965)
87,638
213
14,266
(29,277)
(20,916)
(1,458,733)
1,413,882
(921,679)
(1,817,284)
1,311,375
1,411,562
49,414
(5,900)
2,568
(2,174)
2,121
(1,536)
(756)
(14)
(270)
145
376,201
635,000
(635,000)
37,466
—
(25,821)
51,599
8,281
1,145
(1,149)
(1,080)
2,717
—
(98)
(2,473)
861,869
615,000
(983,700)
161,364
—
(366,433)
(150,500)
225,000
138,882
(67,196)
(10,012)
—
—
—
(333,623)
(375,916)
—
88,435
(7,069)
(6,968)
(34,140)
—
118
(336,637)
(654,097)
285
317,798
207,772
110,026
318,083 $
317,798 $
26,778
2,547
1,589
2,200
(1,382)
980
(298)
—
2,071
2,030
45,464
1,567,000
(1,290,300)
—
(102,600)
(7,668)
—
125,696
(85,606)
(6,793)
—
146,085
(644)
(414,833)
(69,663)
(24,199)
134,225
110,026
153,740 $
152,817 $
153,982
25,116 $
86,605 $
19,638 $
25,138 $
14,681
123,555
$
$
$
$
See notes to consolidated financial statements.
106
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(49)
Arctic Energy
Services, LLC(18)
Wyoming / Energy
Equipment & Services
Class D Units (32,915 units)(16)
Class E Units (21,080 units)(16)
Class A Units (700 units)(16)
Class C Units (10 units)(16)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
31,640 $
17,370
0.5%
20,230
9,006
—
— —%
— —%
— —%
60,876
17,370
0.5%
CCPI Inc.(19)
Ohio / Electronic
Equipment, Instruments
& Components
Senior Secured Term Loan A (10.00%, due
12/31/2020)(3)
Senior Secured Term Loan B (12.00% plus 7.00%
PIK, due 12/31/2020)(3)(48)
Common Stock (14,857 shares)
2,966
2,966
2,966
0.1%
18,216
18,216
6,759
18,216
21,870
0.5%
0.7%
CP Energy Services
Inc.(20)
Oklahoma / Energy
Equipment & Services
Series B Convertible Preferred Stock (1,043 shares)
(16)
Common Stock (2,924 shares)(16)
Credit Central Loan
Company, LLC(21)
South Carolina /
Consumer Finance
Subordinated Term Loan (10.00% plus 10.00% PIK,
due 6/26/2019)(14)(48)
51,855
Echelon Aviation
LLC
New York / Aerospace
& Defense
Edmentum Ultimate
Holdings, LLC(22)
Minnesota / Diversified
Consumer Services
Class A Units (10,640,642 units)(14)(16)
Net Revenues Interest (25% of Net Revenues)(14)(16)
Senior Secured Term Loan (11.75% (LIBOR + 9.75%
with 2.00% LIBOR floor) plus 2.25% PIK, due
3/31/2022)(10)(13)(48)
Senior Secured Term Loan (11.00% (LIBOR + 9.00%
with 2.00% LIBOR floor) plus 1.00% PIK, due
12/7/2024)(10)(13)(48)
Membership Interest (99%)
Second Lien Revolving Credit Facility to Edmentum,
Inc. – $7,834 Commitment (5.00%, due 6/9/2020)(15)
Unsecured Senior PIK Note (8.50% PIK, due
6/9/2020)(48)
Unsecured Junior PIK Note (10.00% PIK, in non-
accrual status effective 1/1/2017, due 6/9/2020)
Class A Units (370,964 units)(16)
First Tower Finance
Company LLC(23)
Mississippi / Consumer
Finance
Subordinated Term Loan to First Tower, LLC (10.00%
plus 7.00% PIK, due 6/24/2019)(14)(48)
Class A Units (93,997,533 units)(14)(16)
Freedom Marine
Solutions, LLC(24)
Louisiana / Energy
Equipment & Services
Membership Interest (100%)(16)
See notes to consolidated financial statements.
107
27,941
43,052
1.3%
98,273
15,227
72,216
2.2%
— —%
113,500
72,216
2.2%
45,255
13,731
51,855
9,881
1.5%
0.3%
—
2,699
0.1%
58,986
64,435
1.9%
31,055
31,055
31,055
0.9%
16,044
16,044
22,738
16,044
24,219
0.5%
0.7%
69,837
71,318
2.1%
7,834
7,834
7,834
0.2%
6,905
6,905
6,905
0.2%
31,870
23,829
6,577
31,870
1.0%
286 —%
45,145
46,895
1.4%
261,114
261,114
78,481
261,114
104,474
7.8%
3.1%
339,595
365,588
10.9%
42,610
23,994
0.7%
42,610
23,994
0.7%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(49)
MITY, Inc.(25)
Utah / Commercial
Services & Supplies
National Property REIT
Corp.(26)
Various / Equity Real
Estate Investment
Trusts (REITs) /
Online Lending
Nationwide Loan
Company LLC(27)
Illinois / Consumer
Finance
NMMB, Inc.(28)
New York / Media
R-V Industries, Inc.
Pennsylvania /
Machinery
Senior Secured Note A (10.00% (LIBOR + 7.00%
with 3.00% LIBOR floor), due 1/30/2020)(3)(10)
(11)
Senior Secured Note B (10.00% (LIBOR + 7.00%
with 3.00% LIBOR floor) plus 10.00% PIK, due
1/30/2020)(3)(10)(11)(48)
Subordinated Unsecured Note to Broda Enterprises
ULC (10.00%, due on demand)(14)
Common Stock (42,053 shares)
Senior Secured Term Loan A (6.00% (LIBOR +
4.00% with 2.00% LIBOR floor) plus 5.50% PIK,
due 4/1/2019)(10)(11)(48)
Senior Secured Term Loan E (11.00% (LIBOR +
9.00% with 2.00% LIBOR floor) plus 5.00% PIK,
due 4/1/2019)(10)(11)(48)
Senior Secured Term Loan C to ACL Loan
Holdings, Inc. (11.00% (LIBOR + 9.00% with
2.00% LIBOR floor) plus 5.00% PIK, due
4/1/2019)(10)(11)(14)(48)
Senior Secured Term Loan C to American
Consumer Lending Limited (11.00% (LIBOR +
9.00% with 2.00% LIBOR floor) plus 5.00% PIK,
due 12/15/2020)(10)(11)(14)(48)
Common Stock (2,280,992 shares)(16)
Net Operating Income Interest (5% of Net
Operating Income)
Senior Subordinated Term Loan to Nationwide
Acceptance LLC (10.00% plus 10.00% PIK, due
6/18/2019)(14)(48)
Class A Units (32,456,159 units)(14)
Senior Secured Note (14.00%, due 5/6/2021)
Senior Secured Note to Armed Forces
Communications, Inc. (14.00%, due 5/6/2021)
Series A Preferred Stock (7,200 shares)(16)
Series B Preferred Stock (5,669 shares)(16)
Senior Subordinated Note (10.30% (LIBOR +
9.00% with 1.00% LIBOR floor), due 3/31/2022)
(3)(10)(11)
Common Stock (745,107 shares)
SB Forging Company II,
Inc. (f/k/a Gulf Coast
Machine & Supply
Company)(29)
Texas / Energy
Equipment &
Services
Series A Convertible Preferred Stock (99,900
shares)(16)
Common Stock (100 shares)(16)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
26,250 $
26,250 $
26,250
0.8%
24,442
24,442
24,442
0.7%
5,659
7,200
6,849
5,659
20,161
0.2%
0.6%
64,741
76,512
2.3%
291,315
291,315
291,315
8.7%
122,314
122,314
122,314
3.6%
59,722
59,722
59,722
1.8%
87,130
87,130
87,130
2.6%
229,815
338,046
10.1%
16,819
3,714
6,900
—
88,777
2.6%
790,296
987,304
29.4%
16,819
18,183
35,002
3,714
6,900
7,200
5,669
16,819
20,126
0.5%
0.6%
36,945
1.1%
3,714
0.1%
6,900
5,713
0.2%
0.2%
4,498
0.1%
23,483
20,825
0.6%
28,622
28,622
6,866
28,622
4,056
0.9%
0.1%
35,488
32,678
1.0%
—
—
—
1,940
0.1%
— —%
1,940
0.1%
See notes to consolidated financial statements.
108
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale /
Industry
Investments(1)
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
June 30, 2017
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(49)
USES Corp.(30)
Texas /
Commercial
Services &
Supplies
Senior Secured Term Loan A (9.00% PIK, in non-accrual
status effective 4/1/2016, due 7/22/2020)
Senior Secured Term Loan B (15.50% PIK, in non-accrual
status effective 4/1/2016, due 7/22/2020)
Common Stock (268,962 shares)(16)
$
31,068 $
28,604 $
12,517
0.4%
41,475
35,568
—
— —%
— —%
64,172
12,517
0.4%
Valley Electric
Company, Inc.(31)
Washington /
Construction &
Engineering
Senior Secured Note to Valley Electric Co. of Mt. Vernon,
Inc. (8.00% (LIBOR + 5.00% with 3.00% LIBOR floor) plus
2.50% PIK, due 12/31/2024)(3)(10)(11)(48)
Senior Secured Note (10.00% plus 8.50% PIK, due 6/23/2024)
(48)
Common Stock (50,000 shares)(16)
10,430
10,430
10,430
0.3%
25,624
25,624
26,204
22,079
0.7%
— —%
Wolf Energy,
LLC(32)
Kansas / Energy
Equipment &
Services
Membership Interest (100%)(16)
Membership Interest in Wolf Energy Services Company, LLC
(100%)(16)
Net Profits Interest (8% of Equity Distributions)(4)(16)
Affiliate Investments (5.00% to 24.99% voting control)(50)
Nixon, Inc.(39) California / Textiles,
Apparel & Luxury Goods
Senior Secured Term Loan (11.50% PIK, in non-
accrual status effective 7/1/2016, due 11/12/2022)(8)
Common Stock (857 units)(16)
$
16,499 $
—
62,258
32,509
1.0%
—
— —%
6,801
—
6,801
5,662
0.1%
15 —%
5,677
0.1%
$ 1,840,731 $ 1,911,775
57.0%
14,197 $
—
14,197
— —%
— —%
— —%
Targus
International,
LLC(33)
California / Textiles,
Apparel & Luxury Goods
Senior Secured Term Loan A (15.00% PIK, due
12/31/2019)(8)(48)
Senior Secured Term Loan B (15.00% PIK, due
12/31/2019)(8)(48)
Common Stock (1,262,737 shares)(16)
1,532
1,320
1,532 —%
4,596
3,961
3,479
8,760
4,596
5,301
0.1%
0.2%
11,429
0.3%
$
22,957 $
11,429
0.3%
See notes to consolidated financial statements.
109
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
American Gilsonite
Company(34)
Utah / Chemicals
Membership Interest (1.93%)(16)
$
— $
— —%
Apidos CLO IX
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield 0.00%,
due 7/15/2023)(5)(14)(17)
23,525
Apidos CLO XI
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield 9.54%,
due 10/17/2028)(5)(14)
40,500
Apidos CLO XII
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield 5.73%,
due 4/15/2025)(5)(14)
44,063
Apidos CLO XV
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.29%, due 10/20/2025)(5)(14)
Apidos CLO XXII Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.51%, due 10/20/2027)(5)(6)(14)
Ark-La-Tex
Wireline Services,
LLC(32)
Louisiana / Energy
Equipment &
Services
Senior Secured Term Loan B (12.73% (LIBOR + 11.50%
with 1.00% LIBOR floor), in non-accrual status effective
4/1/2016, due 4/8/2019)(10)(13)
36,515
31,350
26,080
Armor Holding II
LLC
New York /
Commercial
Services & Supplies
Second Lien Term Loan (10.30% (LIBOR + 9.00% with
1.25% LIBOR floor), due 12/26/2020)(3)(8)(10)(11)
7,000
—
— —%
7,597
7,597
30,494
30,494
30,745
30,745
29,491
29,491
26,991
26,991
1,630
1,630
6,928
6,928
7,597
0.2%
7,597
0.2%
24,777
0.7%
24,777
0.7%
26,047
0.8%
26,047
0.8%
26,083
0.8%
26,083
0.8%
25,432
0.8%
25,432
0.8%
1,630 —%
1,630 —%
7,000
0.2%
7,000
0.2%
Atlantis Health Care
Group (Puerto
Rico), Inc.
Puerto Rico /
Health Care
Providers &
Services
Revolving Line of Credit – $7,000 Commitment (9.50%
(LIBOR + 8.00% with 1.50% LIBOR floor), due
8/21/2018)(10)(11)(15)
Senior Term Loan (9.50% (LIBOR + 8.00% with 1.50%
LIBOR floor), due 2/21/2020)(3)(10)(11)
Babson CLO Ltd.
2014-III
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
15.01%, due 1/15/2026)(5)(6)(14)
3,850
3,850
3,850
0.1%
79,560
52,250
79,560
83,410
42,101
42,101
79,560
2.4%
83,410
2.5%
39,001
1.2%
39,001
1.2%
Broder Bros., Co.
Pennsylvania /
Textiles, Apparel &
Luxury Goods
Senior Secured Term Loan A (7.05% (LIBOR + 5.75%
with 1.25% LIBOR floor), due 6/03/2021)(3)(10)(11)
Senior Secured Term Loan B (13.55% (LIBOR + 12.25%
with 1.25% LIBOR floor), due 6/03/2021)(10)(11)
110,876
110,876
110,876
3.3%
114,901
114,901
114,901
3.4%
Brookside Mill
CLO Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield 1.29%,
due 4/17/2025)(5)(14)
26,000
225,777
225,777
6.7%
17,178
17,178
14,022
0.4%
14,022
0.4%
See notes to consolidated financial statements.
110
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
California Street CLO IX
Ltd. (f/k/a Symphony
CLO IX Ltd.)
Cayman Islands /
Structured
Finance
Preference Shares (Residual Interest, current yield
13.82%, due 10/16/2028)(5)(14)
Capstone Logistics
Acquisition, Inc.
Georgia /
Commercial
Services &
Supplies
Second Lien Term Loan (9.48% (LIBOR + 8.25%
with 1.00% LIBOR floor), due 10/7/2022)(3)(8)(10)
(13)
$
58,915 $
40,792 $
35,758
1.1%
40,792
35,758
1.1%
101,517
101,071
98,468
2.9%
101,071
98,468
2.9%
Carlyle Global Market
Strategies CLO 2014-4,
Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield
21.61%, due 10/15/2026)(5)(6)(14)
25,534
Carlyle Global Market
Strategies CLO 2016-3,
Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield
15.04%, due 10/20/2029)(5)(6)(14)
32,200
Cent CLO 17 Limited
Cent CLO 20 Limited
Cent CLO 21 Limited
Cayman Islands /
Structured
Finance
Cayman Islands /
Structured
Finance
Cayman Islands /
Structured
Finance
Centerfield Media
Holding Company(35)
California /
Internet Software
and Services
Subordinated Notes (Residual Interest, current yield
10.00%, due 1/30/2025)(5)(14)
24,870
Subordinated Notes (Residual Interest, current yield
15.81%, due 1/25/2026)(5)(14)
40,275
Subordinated Notes (Residual Interest, current yield
15.47%, due 7/27/2026)(5)(6)(14)
48,528
Senior Secured Term Loan A (8.30% (LIBOR +
7.00% with 1.00% LIBOR floor), due 1/17/2022)(3)
(8)(10)(11)
Senior Secured Term Loan B (13.80% (LIBOR +
12.50% with 1.00% LIBOR floor), due 1/17/2022)(8)
(10)(11)
67,320
67,320
67,320
2.0%
68,000
68,000
68,000
2.0%
135,320
135,320
4.0%
CIFC Funding 2013-III,
Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield
15.42%, due 10/24/2025)(5)(14)
44,100
CIFC Funding 2013-IV,
Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield
16.16%, due 11/27/2024)(5)(14)
45,500
CIFC Funding 2014-IV
Investor, Ltd.
Cayman Islands /
Structured
Finance
Income Notes (Residual Interest, current yield
13.85%, due 10/17/2026)(5)(6)(14)
CIFC Funding 2016-I,
Ltd.
Cayman Islands /
Structured
Finance
Income Notes (Residual Interest, current yield
16.33%, due 10/21/2028)(5)(6)(14)
Cinedigm DC Holdings,
LLC
New York / Media Senior Secured Term Loan (11.00% (LIBOR + 9.00%
with 2.00% LIBOR floor) plus 2.50% PIK, due
3/31/2021)(10)(11)(48)
41,500
34,000
49,156
31,233
31,233
32,859
32,859
30,002
30,002
31,780
31,780
49,106
49,106
30,265
0.9%
30,265
0.9%
32,708
1.0%
32,708
1.0%
29,139
0.9%
29,139
0.9%
29,513
0.9%
29,513
0.9%
49,156
1.5%
49,156
1.5%
See notes to consolidated financial statements.
19,494
19,494
31,449
31,449
18,100
18,100
32,105
32,105
36,659
36,659
19,757
0.6%
19,757
0.6%
26,745
0.8%
26,745
0.8%
16,708
0.5%
16,708
0.5%
32,148
1.0%
32,148
1.0%
36,178
1.1%
36,178
1.1%
111
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Coverall North
America, Inc.
Florida /
Commercial
Services & Supplies
Senior Secured Term Loan A (7.30% (LIBOR + 6.00%
with 1.00% LIBOR floor), due 11/02/2020)(3)(10)(11)
Senior Secured Term Loan B (12.30% (LIBOR + 11.00%
with 1.00% LIBOR floor), due 11/02/2020)(3)(10)(11)
CURO Financial
Technologies Corp.
Canada / Consumer
Finance
Senior Secured Notes (12.00%, due 3/1/2022)(8)(14)
24,938
10,000
Digital Room LLC California /
Commercial
Services & Supplies
Second Lien Term Loan (11.23% (LIBOR + 10.00% with
1.00% LIBOR floor), due 5/21/2023)(3)(8)(10)(13)
34,000
Dunn Paper, Inc.
Georgia / Paper &
Forest Products
Second Lien Term Loan (9.98% (LIBOR + 8.75% with
1.00% LIBOR floor), due 8/26/2023)(3)(8)(10)(13)
Easy Gardener
Products, Inc.
Texas / Household
Durables
Senior Secured Term Loan (11.30% (LIBOR + 10.00%
with .25% LIBOR floor), due 9/30/2020)(3)(10)(11)
11,500
17,194
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
22,658 $
22,658 $
22,658
0.7%
24,938
47,596
9,831
9,831
33,389
33,389
11,295
11,295
17,194
17,194
24,938
0.7%
47,596
1.4%
10,000
0.3%
10,000
0.3%
33,389
1.0%
33,389
1.0%
11,500
0.3%
11,500
0.3%
17,066
0.5%
17,066
0.5%
EZShield Parent,
Inc.
Maryland / Internet
Software &
Services
Senior Secured Term Loan A (7.98% (LIBOR + 6.75% with
1.00% LIBOR floor), due 2/26/2021)(3)(10)(13)
Senior Secured Term Loan B (12.98% (LIBOR + 11.75%
with 1.00% LIBOR floor), due 2/26/2021)(3)(10)(13)
Fleetwash, Inc.
New Jersey /
Commercial
Services & Supplies
Senior Secured Term Loan B (10.30% (LIBOR + 9.00% with
1.00% LIBOR floor), due 4/30/2022)(3)(10)(11)
Delayed Draw Term Loan – $15,000 Commitment (9.80%
(LIBOR + 8.50% with 1.00% LIBOR floor)expires
4/30/2022)(10)(11)(15)
14,963
14,963
14,963
0.4%
15,000
15,000
29,963
15,000
0.5%
29,963
0.9%
21,544
21,544
21,544
0.6%
—
—
— —%
21,544
21,544
0.6%
Galaxy XV CLO,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.14%, due 4/15/2025)(5)(14)
Galaxy XVI CLO,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
11.71%, due 11/16/2025)(5)(14)
Galaxy XVII CLO,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
10.14%, due 7/15/2026)(5)(6)(14)
50,525
24,575
39,905
Global Employment
Solutions, Inc.
Colorado /
Professional
Services
Senior Secured Term Loan (10.48% (LIBOR + 9.25%
with 1.00% LIBOR floor), due 6/26/2020)(3)(10)(13)
48,131
Halcyon Loan
Advisors Funding
2012-1 Ltd.
Cayman Islands /
Structured Finance Subordinated Notes (Residual Interest, current yield
0.00%, due 8/15/2023)(5)(14)(17)
23,188
33,887
33,887
17,854
17,854
29,502
29,502
48,131
48,131
5,086
5,086
33,794
1.0%
33,794
1.0%
16,611
0.5%
16,611
0.5%
26,833
0.8%
26,833
0.8%
48,131
1.4%
48,131
1.4%
5,086
0.2%
5,086
0.2%
Halcyon Loan
Advisors Funding
2013-1 Ltd.
Cayman Islands /
Structured Finance Subordinated Notes (Residual Interest, current yield
5.76%, due 4/15/2025)(5)(14)
40,400
26,949
26,949
23,937
0.7%
23,937
0.7%
See notes to consolidated financial statements.
112
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Halcyon Loan
Advisors Funding
2014-1 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
9.70%, due 4/18/2026)(5)(14)
$
24,500 $
15,982 $
15,984
0.5%
Halcyon Loan
Advisors Funding
2014-2 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.39%, due 4/28/2025)(5)(6)(14)
41,164
Halcyon Loan
Advisors Funding
2015-3 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
15.09%, due 10/18/2027)(5)(6)(14)
39,598
Harbortouch
Payments, LLC
Pennsylvania /
Commercial Services
& Supplies
Escrow Receivable
HarbourView CLO
VII, Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
19.25%, due 11/18/2026)(5)(6)(14)
19,025
15,982
15,984
0.5%
27,617
27,617
34,205
34,205
—
—
27,869
0.8%
27,869
0.8%
34,938
1.0%
34,938
1.0%
864 —%
864 —%
14,955
14,955
14,047
0.4%
14,047
0.4%
Harley Marine
Services, Inc.
Washington / Marine
Second Lien Term Loan (10.50% (LIBOR + 9.25%
with 1.25% LIBOR floor), due 12/20/2019)(3)(8)(10)
(11)
Inpatient Care
Management
Company, LLC
Florida / Health Care
Providers & Services
Senior Secured Term Loan (10.30% (LIBOR +
9.00% with 1.00% LIBOR floor), due 6/8/2021(3)
(10)(11)
Instant Web, LLC
Minnesota / Media
InterDent, Inc.
California / Health
Care Providers &
Services
Senior Secured Term Loan A (5.80% (LIBOR +
4.50% with 1.00% LIBOR floor), due 3/28/2019)(10)
(11)
Senior Secured Term Loan B (12.30% (LIBOR + 11.00%
with 1.00% LIBOR floor), due 3/28/2019)(3)(10)(11)
Senior Secured Term Loan C-1 (13.05% (LIBOR +
11.75% with 1.00% LIBOR floor), due 3/28/2019)
(10)(11)
Senior Secured Term Loan C-2 (13.80% (LIBOR +
12.50% with 1.00% LIBOR floor), due 3/28/2019)
(10)(11)
Senior Secured Term Loan A (6.73% (LIBOR +
5.50% with 0.75% LIBOR floor), due 8/3/2017)(10)
(13)
Senior Secured Term Loan B (11.73% (LIBOR +
10.50% with 0.75% LIBOR floor), due 8/3/2017)(3)
(10)(13)
9,000
25,467
8,919
8,919
8,800
0.3%
8,800
0.3%
25,467
25,467
25,467
0.8%
25,467
0.8%
120,948
120,948
120,948
3.6%
158,100
158,100
158,100
4.7%
27,000
27,000
27,000
0.8%
25,000
25,000
25,000
0.8%
331,048
331,048
9.9%
78,656
78,656
78,656
2.3%
131,125
131,125
129,857
3.9%
209,781
208,513
6.2%
JD Power and
Associates
California / Capital
Markets
Second Lien Term Loan (9.80% (LIBOR + 8.50%
with 1.00% LIBOR floor), due 9/7/2024)(3)(8)(10)
(11)
15,000
Jefferson Mill CLO
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
10.45%, due 7/20/2027)(5)(6)(14)
19,500
K&N Parent, Inc.
California / Auto
Components
Second Lien Term Loan (9.98% (LIBOR + 8.75%
with 1.00% LIBOR floor), due 10/20/2024)(3)(8)(10)
(13)
13,000
14,796
14,796
16,501
16,501
12,762
12,762
15,000
0.4%
15,000
0.4%
13,507
0.4%
13,507
0.4%
13,000
0.4%
13,000
0.4%
See notes to consolidated financial statements.
113
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Keystone
Acquisition Corp.
(36)
Pennsylvania / Health
Care Providers &
Services
Second Lien Term Loan (10.55% (LIBOR + 9.25%
with 1.00% LIBOR floor), due 5/1/2025)(3)(8)(10)(11) $
LaserShip, Inc.
Virginia / Air Freight
& Logistics
Senior Secured Term Loan A (10.25% (LIBOR +
8.25% with 2.00% LIBOR floor), due 3/18/2019)(3)(10)
(13)
Senior Secured Term Loan B (10.25% (LIBOR + 8.25%
with 2.00% LIBOR floor), due 3/18/2019)(3)(10)(13)
LCM XIV Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 14.99%,
due 7/15/2025)(5)(14)
30,500
Madison Park
Funding IX, Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
11.49%, due 8/15/2022)(5)(14)
43,110
Matrixx Initiatives,
Inc.
New Jersey /
Pharmaceuticals
Senior Secured Term Loan A (7.80% (LIBOR + 6.50%
with 1.00% LIBOR floor), due 2/24/2020)(3)(10)(11)
Senior Secured Term Loan B (12.80% (LIBOR + 11.50%
with 1.00% LIBOR floor), due 2/24/2020)(3)(10)(11)
Maverick
Healthcare Equity,
LLC
Arizona / Health Care
Providers & Services
Preferred Units (1,250,000 units)(16)
Class A Common Units (1,250,000 units)(16)
Memorial MRI &
Diagnostic, LLC
Texas / Health Care
Providers & Services
Senior Secured Term Loan (9.80% (LIBOR + 8.50%
with 1.00% LIBOR floor), due 3/16/2022)(10)(11)
Mountain View
CLO 2013-I Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
9.43%, due 4/12/2024)(5)(14)
Mountain View
CLO IX Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.70%, due 7/15/2027)(5)(6)(14)
37,810
43,650
47,830
National Home
Healthcare Corp.
Michigan / Health
Care Providers &
Services
Second Lien Term Loan (10.08% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 12/8/2022)(3)(8)(10)(13)
15,407
NCP Finance
Limited
Partnership(38)
Ohio / Consumer
Finance
Subordinated Secured Term Loan (11.00% (LIBOR +
9.75% with 1.25% LIBOR floor), due 9/30/2018)(3)(8)
(10)(13)(14)
26,880
Octagon Investment
Partners XV, Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 13.13%,
due 1/19/2025)(5)(14)
42,064
Octagon Investment
Partners XVIII, Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 15.36%,
due 12/16/2024)(5)(6)(14)
28,200
See notes to consolidated financial statements.
114
50,000 $
50,000 $
50,000
1.5%
50,000
50,000
1.5%
32,184
32,184
32,184
1.0%
19,768
19,768
51,952
21,243
21,243
8,558
8,558
19,768
0.5%
51,952
1.5%
21,567
0.6%
21,567
0.6%
8,472
0.3%
8,472
0.3%
65,427
65,427
65,427
2.0%
52,562
52,562
52,562
1.6%
117,989
117,989
3.6%
1,252
—
1,252
37,810
37,810
28,554
28,554
40,832
40,832
15,199
15,199
26,455
26,455
29,704
29,704
18,468
18,468
782 —%
— —%
782 —%
37,810
1.1%
37,810
1.1%
26,314
0.8%
26,314
0.8%
39,857
1.2%
39,857
1.2%
15,407
0.5%
15,407
0.5%
25,973
0.8%
25,973
0.8%
24,250
0.7%
24,250
0.7%
17,415
0.5%
17,415
0.5%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Pacific World
Corporation
California / Personal
Products
Revolving Line of Credit – $15,000 Commitment
(8.23% (LIBOR + 7.00% with 1.00% LIBOR floor),
due 9/26/2020)(10)(13)(15)
Senior Secured Term Loan A (6.23% (LIBOR +
5.00% with 1.00% LIBOR floor), due 9/26/2020)(3)
(10)(13)
Senior Secured Term Loan B (10.23% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 9/26/2020)(3)(10)(13)
Pelican Products, Inc. California / Chemicals Second Lien Term Loan (9.55% (LIBOR + 8.25%
with 1.00% LIBOR floor), due 4/9/2021)(3)(8)(10)
(11)
PeopleConnect
Intermediate, LLC
(f/k/a Intelius, Inc.)
Washington / Internet
Software & Services
Revolving Line of Credit – $1,000 Commitment
(9.80% (LIBOR + 8.50% with 1.00% LIBOR floor),
due 8/11/2017)(10)(11)(15)
Senior Secured Term Loan A (6.80% (LIBOR +
5.50% with 1.00% LIBOR floor), due 7/1/2020)(3)
(10)(11)
Senior Secured Term Loan B (12.80% (LIBOR +
11.50% with 1.00% LIBOR floor), due 7/1/2020)(3)
(10)(11)
PGX Holdings, Inc.
(41)
Utah / Diversified
Consumer Services
Second Lien Term Loan (10.23% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 9/29/2021)(3)(10)
(13)
$
14,725 $
14,725 $
14,725
0.4%
97,250
97,250
94,834
2.8%
97,250
97,250
69,450
2.1%
209,225
179,009
5.3%
17,500
17,489
17,489
16,699
0.5%
16,699
0.5%
—
—
— —%
19,606
19,606
19,606
0.6%
20,552
20,552
40,158
20,552
0.6%
40,158
1.2%
143,767
143,767
143,767
4.3%
143,767
143,767
4.3%
Photonis
Technologies SAS
France / Electronic
Equipment, Instruments
& Components
First Lien Term Loan (8.80% (LIBOR + 7.50% with
1.00% LIBOR floor), due 9/18/2019)(8)(10)(11)(14)
9,872
Pinnacle (US)
Acquisition Co.
Limited
Texas / Software
Second Lien Term Loan (10.55% (LIBOR + 9.25%
with 1.25% LIBOR floor), due 8/3/2020)(8)(10)(11)
7,037
9,755
9,755
6,947
6,947
8,794
0.3%
8,794
0.3%
5,150
0.2%
5,150
0.2%
PlayPower, Inc.
North Carolina /
Leisure Products
Second Lien Term Loan (10.05% (LIBOR + 8.75%
with 1.00% LIBOR floor), due 6/23/2022)(3)(8)(10)
(11)
PrimeSport, Inc.
Georgia / Hotels,
Restaurants & Leisure
Senior Secured Term Loan A (8.30% (LIBOR +
7.00% with 1.00% LIBOR floor), due 2/11/2021)(3)
(10)(11)
Senior Secured Term Loan B (13.30% (LIBOR +
12.00% with 1.00% LIBOR floor), due 2/11/2021)
(3)(10)(11)
Prince Mineral
Holding Corp.
New York / Metals &
Mining
Senior Secured Term Loan (11.50%, due
12/15/2019)(8)
RGIS Services, LLC Michigan / Commercial
Services & Supplies
Senior Secured Term Loan (8.80% (LIBOR + 7.50%
with 1.00% LIBOR floor), due 3/31/2023)(8)(10)
(11)
11,000
10,880
10,880
11,000
0.3%
11,000
0.3%
53,138
53,138
49,312
1.5%
74,500
74,500
54,585
1.6%
127,638
103,897
3.1%
10,000
14,963
9,953
9,953
10,000
0.3%
10,000
0.3%
14,744
14,744
14,744
0.4%
14,744
0.4%
See notes to consolidated financial statements.
115
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale /
Industry
Investments(1)
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
June 30, 2017
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
RME Group
Holding Company
Florida / Media Revolving Line of Credit – $2,000 Commitment (9.30%
(LIBOR + 8.00% with 1.00% LIBOR floor), due 8/4/2017)
(10)(11)(15)
Senior Secured Term Loan A (7.30% (LIBOR + 6.00% with
1.00% LIBOR floor), due 5/4/2022)(3)(10)(11)
Senior Secured Term Loan B (12.30% (LIBOR + 11.00%
with 1.00% LIBOR floor), due 5/4/2022)(3)(10)(11)
Rocket Software,
Inc.
Massachusetts /
Software
Second Lien Term Loan (10.80% (LIBOR + 9.50% with
1.00% LIBOR floor), due 10/14/2024)(3)(8)(10)(11)
SCS Merger Sub,
Inc.
Texas / IT
Services
Second Lien Term Loan (10.73% (LIBOR + 9.50% with
1.00% LIBOR floor), due 10/30/2023)(3)(8)(10)(13)
SESAC Holdco II
LLC
Tennessee /
Media
Second Lien Term Loan (8.37% (LIBOR + 7.25% with
1.00% LIBOR floor), due 2/23/2025)(8)(10)(12)
Small Business
Whole Loan
Portfolio(44)
New York /
Online Lending
781 Small Business Loans purchased from On Deck Capital,
Inc.
8,434
Spartan Energy
Services, Inc.
Louisiana /
Energy
Equipment &
Services
Senior Secured Term Loan A (7.23% (LIBOR + 6.00% with
1.00% LIBOR floor), in non-accrual status effective
4/1/2016, due 12/28/2018)(10)(13)
Senior Secured Term Loan B (13.23% (LIBOR + 12.00% with
1.00% LIBOR floor), in non-accrual status effective 4/1/2016, due
12/28/2018)(10)(13)
Stryker Energy,
LLC
Ohio / Oil, Gas &
Consumable
Fuels
Overriding Royalty Interests(9)
Sudbury Mill CLO
Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield 10.70%,
due 1/17/2026)(5)(14)
28,200
Symphony CLO
XIV Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield 10.41%,
due 7/14/2026)(5)(6)(14)
49,250
Symphony CLO
XV, Ltd.
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield 13.68%,
due 10/17/2026)(5)(14)
50,250
TouchTunes
Interactive
Networks, Inc.
New York /
Internet Software
& Services
Second Lien Term Loan (9.47% (LIBOR + 8.25% with
1.00% LIBOR floor), due 5/29/2022)(3)(8)(10)(11)
14,000
$
— $
— $
— —%
37,500
37,500
37,500
1.1%
25,000
50,000
20,000
3,000
25,000
62,500
49,094
49,094
19,531
19,531
2,971
2,971
8,434
8,434
25,000
0.8%
62,500
1.9%
50,000
1.5%
50,000
1.5%
20,000
0.6%
20,000
0.6%
2,971
0.1%
2,971
0.1%
7,964
0.2%
7,964
0.2%
13,156
11,933
8,833
0.3%
16,101
13,669
25,602
— —%
8,833
0.3%
—
—
19,519
19,519
36,668
36,668
41,383
41,383
13,907
13,907
— —%
— —%
17,304
0.5%
17,304
0.5%
33,744
1.0%
33,744
1.0%
38,123
1.1%
38,123
1.1%
13,907
0.4%
13,907
0.4%
Traeger Pellet Grills
LLC
Oregon /
Household
Durables
Senior Secured Term Loan A (6.50% (LIBOR + 4.50% with
2.00% LIBOR floor), due 6/18/2019)(3)(10)(11)
Senior Secured Term Loan B (11.50% (LIBOR + 9.50% with
2.00% LIBOR floor), due 6/18/2019)(3)(10)(11)
53,094
53,094
53,094
1.6%
56,031
56,031
56,031
1.6%
109,125
109,125
3.2%
See notes to consolidated financial statements.
116
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Transaction
Network Services,
Inc.
Virginia /
Diversified
Telecommunication
Services
Second Lien Term Loan (9.23% (LIBOR + 8.00% with
1.00% LIBOR floor), due 8/14/2020)(3)(8)(10)(13)
$
4,410 $
4,395 $
4,410
0.1%
Turning Point
Brands, Inc.(46)
Kentucky /
Tobacco
Second Lien Term Loan (11.00%, due 8/17/2022)(3)(8)
United Sporting
Companies, Inc.(47)
South Carolina /
Distributors
Second Lien Term Loan (12.75% (LIBOR + 11.00% with
1.75% LIBOR floor) plus 2.00% PIK, in non-accrual status
effective 4/1/2017, due 11/16/2019)(3)(10)(13)
Common Stock (24,967 shares)(16)
4,395
4,410
0.1%
14,500
14,365
14,365
14,431
0.4%
14,431
0.4%
141,559
140,847
83,225
2.5%
—
— —%
140,847
83,225
2.5%
Universal Fiber
Systems, LLC
Virginia / Textiles,
Apparel & Luxury
Goods
Second Lien Term Loan (10.76% (LIBOR + 9.50% with
1.00% LIBOR floor), due 10/02/2022)(3)(8)(10)(12)
37,000
36,446
36,446
37,000
1.1%
37,000
1.1%
Universal Turbine
Parts, LLC
Alabama / Trading
Companies &
Distributors
Senior Secured Term Loan A (6.98% (LIBOR + 5.75%
with 1.00% LIBOR floor), due 7/22/2021)(3)(10)(13)
Senior Secured Term Loan B (12.98% (LIBOR + 11.75% with
1.00% LIBOR floor), due 7/22/2021)(3)(10)(13)
USG Intermediate,
LLC
Texas / Leisure
Products
Revolving Line of Credit – $2,500 Commitment (10.98%
(LIBOR + 9.75% with 1.00% LIBOR floor), due
4/15/2018)(10)(13)(15)
Senior Secured Term Loan A (8.48% (LIBOR + 7.25%
with 1.00% LIBOR floor), due 4/15/2020)(3)(10)(13)
Senior Secured Term Loan B (13.48% (LIBOR + 12.25%
with 1.00% LIBOR floor), due 4/15/2020)(3)(10)(13)
Equity(16)
32,013
32,013
32,013
1.0%
32,500
32,500
64,513
32,500
0.9%
64,513
1.9%
1,000
1,000
1,000 —%
13,307
13,307
13,307
0.4%
18,897
18,897
18,897
0.6%
1
— —%
33,205
33,204
1.0%
VC GB Holdings,
Inc.
Illinois / Household
Durables
Subordinated Secured Term Loan (9.23% (LIBOR +
8.00% with 1.00% LIBOR floor), due 2/28/2025)(8)(10)
(13)
Venio LLC
Pennsylvania /
Professional
Services
Second Lien Term Loan (4.00% plus PIK 10.00% (LIBOR
+ 7.50% with 2.50% LIBOR floor), in non-accrual status
effective 12/31/15, due 2/19/2020)(10)(11)
20,000
20,442
Voya CLO 2012-2,
Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 0.00%, due
10/15/2022)(5)(14)(17)
38,070
Voya CLO 2012-3,
Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 0.00%, due
10/15/2022)(5)(14)(17)
46,632
Voya CLO 2012-4,
Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 14.13%, due
10/15/2028)(5)(14)
40,613
19,712
19,712
16,111
16,111
22,667
22,667
26,445
26,445
31,018
31,018
19,992
0.6%
19,992
0.6%
16,342
0.5%
16,342
0.5%
22,667
0.7%
22,667
0.7%
26,445
0.8%
26,445
0.8%
30,544
0.9%
30,544
0.9%
See notes to consolidated financial statements.
117
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Voya CLO 2014-1,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
15.96%, due 4/18/2026)(5)(6)(14)
Voya CLO 2016-3,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.55%, due 10/18/2027)(5)(6)(14)
Voya CLO 2017-3,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.89%, due 7/20/2030)(5)(6)(14)
June 30, 2017
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
32,383 $
24,613 $
26,177
0.8%
24,613
26,177
0.8%
28,100
44,885
27,130
27,130
44,885
44,885
16,711
16,711
13,473
13,473
23,497
0.7%
23,497
0.7%
44,670
1.3%
44,670
1.3%
14,182
0.4%
14,182
0.4%
13,739
0.4%
13,739
0.4%
Washington Mill
CLO Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield 8.53%,
due 4/20/2026)(5)(6)(14)
22,600
Water Pik, Inc.
Colorado /
Personal Products
Second Lien Term Loan (10.05% (LIBOR + 8.75% with
1.00% LIBOR floor), due 1/8/2021)(3)(8)(10)(11)
13,739
Wheel Pros, LLC
Colorado / Auto
Components
Senior Subordinated Secured Note (11.00% (LIBOR +
7.00% with 4.00% LIBOR floor), due 6/29/2020)(3)(10)
(11)
Senior Subordinated Secured Note (11.00% (LIBOR +
7.00% with 4.00% LIBOR floor), due 6/29/2020)(3)(10)
(11)
12,000
12,000
12,000
0.4%
5,460
5,460
5,460
0.2%
0.6%
Total Non-Control/Non-Affiliate Investments (Level 3) $ 4,117,868 $ 3,915,101 116.7%
17,460
17,460
Total Portfolio Investments $ 5,981,556 $ 5,838,305 174.0%
See notes to consolidated financial statements.
118
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(51)
Arctic Energy
Services, LLC(18)
Wyoming / Energy
Equipment & Services
Class D Units (32,915 units)(16)
Class E Units (21,080 units)(16)
Class A Units (700 units)(16)
Class C Units (10 units)(16)
CCPI Inc.(19)
Ohio / Electronic
Equipment, Instruments
& Components
Senior Secured Term Loan A (10.00%, due
12/31/2017)(3)
Senior Secured Term Loan B (12.00% plus 7.00%
PIK, due 12/31/2017)(48)
Common Stock (14,857 shares)
CP Energy Services
Inc.(20)
Oklahoma / Energy
Equipment & Services
Series B Convertible Preferred Stock (1,043 shares)
(16)
Common Stock (2,924 shares)(16)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
31,640 $
20,230
9,006
—
35,815
2,525
1.0%
0.1%
— —%
— —%
60,876
38,340
1.1%
12,313
12,313
12,313
0.4%
9,320
9,320
6,635
9,320
19,723
0.3%
0.5%
28,268
41,356
1.2%
98,273
15,227
76,002
2.2%
— —%
113,500
76,002
2.2%
36,931
11,633
—
48,564
37,855
19,907
57,762
36,931
11,707
3,616
1.1%
0.3%
0.1%
52,254
1.5%
37,855
22,966
1.1%
0.7%
60,821
1.8%
22,337
6,576
41,678
255,762
70,476
326,238
40,810
40,810
25,569
6,012
0.7%
0.2%
44,346
1.3%
255,762
96,904
7.4%
2.8%
352,666
10.2%
26,618
0.8%
26,618
0.8%
Credit Central Loan
Company, LLC(21)
South Carolina /
Consumer Finance
Subordinated Term Loan (10.00% plus 10.00% PIK,
due 6/26/2019)(14)(48)
Class A Units (7,500,000 units)(14)(16)
Net Revenues Interest (25% of Net Revenues)(14)(16)
36,931
Echelon Aviation
LLC
New York / Aerospace
& Defense
Senior Secured Term Loan (11.75% (LIBOR + 9.75%
with 2.00% LIBOR floor) plus 2.25% PIK, due
3/31/2022)(10)(13)(48)
Membership Interest (99%)
37,855
Edmentum Ultimate
Holdings, LLC(22)
Minnesota / Diversified
Consumer Services
Second Lien Revolving Credit Facility to Edmentum,
Inc. – $7,834 Commitment (5.00%, due 6/9/2020)(15)
Unsecured Senior PIK Note (8.50% PIK, due
6/9/2020)(48)
Unsecured Junior PIK Note (10.00% PIK, due
6/9/2020)(48)
Class A Units (370,964 units)(16)
28,834
6,424
6,424
6,424
0.2%
6,341
6,341
6,341
0.2%
First Tower Finance
Company LLC(23)
Mississippi / Consumer
Finance
Subordinated Term Loan to First Tower, LLC (10.00%
plus 12.00% PIK, due 6/24/2019)(14)(48)
Class A Units (86,711,625 units)(14)(16)
255,762
Freedom Marine
Solutions, LLC(24)
Louisiana / Energy
Equipment & Services
Membership Interest (100%)(16)
MITY, Inc.(25)
Utah / Commercial
Services & Supplies
Senior Secured Note A (10.00% (LIBOR + 7.00%
with 3.00% LIBOR floor), due 3/19/2019)(3)(10)(11)
Senior Secured Note B (10.00% (LIBOR + 7.00%
with 3.00% LIBOR floor) plus 10.00% PIK, due
3/19/2019)(3)(10)(11)(48)
Subordinated Unsecured Note to Broda Enterprises
ULC (10.00%, due on demand)(14)
Common Stock (42,053 shares)
18,250
18,250
18,250
0.5%
16,442
16,442
16,442
0.5%
7,200
7,200
6,848
5,667
13,690
0.2%
0.4%
48,740
54,049
1.6%
See notes to consolidated financial statements.
119
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale /
Industry
Investments(1)
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
June 30, 2016
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(51)
National Property REIT
Corp.(26)
Various /
Equity Real
Estate
Investment
Trusts
(REITs) /
Online
Lending
Senior Secured Term Loan A (6.00% (LIBOR + 4.00%
with 2.00% LIBOR floor) plus 5.50% PIK, due 4/1/2019)
(10)(11)(48)
Senior Secured Term Loan E (11.00% (LIBOR + 9.00%
with 2.00% LIBOR floor) plus 5.00% PIK, due 4/1/2019)
(10)(11)(48)
Senior Secured Term Loan C to ACL Loan Holdings,
Inc. (11.00% (LIBOR + 9.00% with 2.00% LIBOR floor)
plus 5.00% PIK, due 4/1/2019)(10)(11)(14)(48)
Common Stock (1,533,899 shares)(16)
Net Operating Income Interest (5% of Net Operating
Income)(16)
$ 248,677 $
248,677 $
248,677
7.2%
212,819
212,819
212,819
6.2%
99,972
99,972
165,908
99,972
215,491
2.9%
6.3%
—
66,974
2.0%
727,376
843,933
24.6%
Nationwide Loan
Company LLC(27)
Illinois /
Consumer
Finance
Senior Subordinated Term Loan to Nationwide
Acceptance LLC (10.00% plus 10.00% PIK, due
6/18/2019)(14)(48)
Class A Units (29,343,795 units)(14)
NMMB, Inc.(28)
New York /
Media
R-V Industries, Inc.
Pennsylvania /
Machinery
Senior Secured Note (14.00%, due 5/6/2021)
Senior Secured Note to Armed Forces Communications,
Inc. (14.00%, due 5/6/2021)
Series A Preferred Stock (7,200 shares)(16)
Series B Preferred Stock (5,669 shares)(16)
Senior Subordinated Note (10.00% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 6/12/2018)(3)(10)(11)
Common Stock (545,107 shares)
Warrant (to purchase 200,000 shares of Common Stock,
expires 6/30/2017)
16,696
3,714
7,000
28,622
SB Forging Company II,
Inc. (f/k/a Gulf Coast
Machine & Supply
Company)(29)
Texas /
Energy
Equipment &
Services
Senior Secured Term Loan (10.50% (LIBOR + 8.50%
with 2.00% LIBOR floor), in non-accrual status effective
1/1/2015, due 10/12/2017)(10)(11)
Series A Convertible Preferred Stock (99,900 shares)(16)
38,892
16,696
16,201
32,897
3,714
7,000
7,200
5,669
16,696
19,117
0.5%
0.5%
35,813
1.0%
3,442
0.1%
6,487
0.2%
44 —%
34 —%
23,583
10,007
0.3%
28,622
5,087
1,682
35,391
34,425
25,950
60,375
28,622
6,039
0.8%
0.2%
2,216
0.1%
36,877
1.1%
7,312
0.2%
— —%
7,312
0.2%
USES Corp.(30)
Texas /
Commercial
Services &
Supplies
Valley Electric Company,
Inc.(31)
Washington /
Construction
&
Engineering
Senior Secured Term Loan A (7.00% (LIBOR + 6.00%
with 1.00% LIBOR floor) plus 2.00% default interest, in
non-accrual status effective 4/1/2016, due 3/31/2019)(10)
(11)
Senior Secured Term Loan B (13.50% (LIBOR + 12.50%
with 1.00% LIBOR floor) plus 2.00% default interest, in
non-accrual status effective 4/1/2016, due 3/31/2019)(10)
(11)
Common Stock (268,962 shares)(16)
Senior Secured Note to Valley Electric Co. of Mt.
Vernon, Inc. (8.00% (LIBOR + 5.00% with 3.00%
LIBOR floor) plus 2.50% PIK, due 12/31/2019)(3)(10)
(11)(48)
Senior Secured Note (10.00% plus 8.50% PIK, due
6/23/2019)(48)
Common Stock (50,000 shares)(16)
See notes to consolidated financial statements.
120
26,300
26,158
26,300
0.8%
36,000
35,568
—
61,726
13,986
0.4%
— —%
40,286
1.2%
10,430
10,430
10,430
0.3%
23,802
23,802
26,204
60,436
20,661
0.6%
— —%
31,091
0.9%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale /
Industry
Investments(1)
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
June 30, 2016
LEVEL 3 PORTFOLIO INVESTMENTS
Control Investments (greater than 25.00% voting control)(51)
Wolf Energy, LLC(32)
Kansas /
Energy
Equipment &
Services
Senior Secured Promissory Note secured by assets
formerly owned by H&M (18.00%, in non-accrual status
effective 4/15/2013, due 4/15/2018)
Membership Interest (100%)(16)
Net Profits Interest (8% of Equity Distributions)(4)(16)
$
38,257 $
— $
—
—
—
659 —%
— —%
19 —%
678 —%
$ 1,768,220 $ 1,752,449
51.0%
Affiliate Investments (5.00% to 24.99% voting control)(52)
BNN Holdings
Corp.
Michigan / Health Care
Technology
Series A Preferred Stock (9,925.455 shares)(7)(16)
$
1,780 $
2,270
0.1%
Series B Preferred Stock (1,753.636 shares)(7)(16)
Targus
International,
LLC(33)
California / Textiles,
Apparel & Luxury
Goods
Senior Secured Term Loan A (15.00% PIK, in non-
accrual status effective 10/1/15, due 12/31/2019)(8)
Senior Secured Term Loan B (15.00% PIK , in non-
accrual status effective 10/1/15, due 12/31/2019)(8)
Common Stock (1,262,737 shares)(16)
1,319
3,957
See notes to consolidated financial statements.
121
448
2,228
572 —%
2,842
0.1%
1,263
1,319 —%
3,788
3,479
8,530
3,957
3,202
8,478
$
10,758 $
11,320
0.1%
0.1%
0.2%
0.3%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
AFI Shareholder,
LLC
(f/k/a Aircraft
Fasteners
International, LLC)
California / Trading
Companies &
Distributors
Class A Units (32,500 units)(16)
$
330 $
511 —%
Airmall Inc.
Pennsylvania / Real
Estate Management
& Development
Escrow Receivable
Ajax Rolled Ring &
Machine, LLC(43)
South Carolina /
Metals & Mining
Escrow Receivable
ALG USA
Holdings, LLC
Pennsylvania /
Hotels, Restaurants &
Leisure
Second Lien Term Loan (10.25% (LIBOR + 9.00% with
1.25% LIBOR floor), due 2/28/2020)(8)(10)(11)
11,771
American Gilsonite
Company(34)
Utah / Metals &
Mining
Membership Interest (1.93%)(16)
Apidos CLO IX
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
16.98%, due 7/15/2023)(5)(14)
Apidos CLO XI
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
11.95%, due 1/17/2023)(5)(14)
Apidos CLO XII
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
13.39%, due 4/15/2025)(5)(14)
Apidos CLO XV
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
10.72%, due 10/20/2025)(5)(14)
Apidos CLO XXII Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
17.29%, due 10/20/2027)(5)(6)(14)
23,525
38,340
44,063
36,515
31,350
330
511 —%
3,916
3,900
0.1%
3,916
3,900
0.1%
—
—
608 —%
608 —%
11,630
11,630
11,771
0.3%
11,771
0.3%
—
—
19,997
19,997
29,763
29,763
34,598
34,598
31,479
31,479
26,948
26,948
— —%
— —%
19,966
0.6%
19,966
0.6%
26,057
0.8%
26,057
0.8%
30,638
0.9%
30,638
0.9%
25,335
0.7%
25,335
0.7%
25,369
0.7%
25,369
0.7%
Arctic Glacier
U.S.A., Inc.
Minnesota / Food
Products
Second Lien Term Loan (10.50% (LIBOR + 9.25% with
1.25% LIBOR floor), due 11/10/2019)(3)(10)(11)
Ark-La-Tex
Wireline Services,
LLC(32)
Louisiana / Energy
Equipment &
Services
Senior Secured Term Loan A (6.50% (LIBOR + 5.50%
with 1.00% LIBOR floor), in non-accrual status effective
4/1/2016, due 4/8/2019)(10)(13)
Senior Secured Term Loan B (12.50% (LIBOR + 11.50%
with 1.00% LIBOR floor), in non-accrual status effective
4/1/2016, due 4/8/2019)(10)(13)
150,000
150,000
145,546
4.2%
150,000
145,546
4.2%
21,322
21,088
11,779
0.3%
23,981
23,239
44,327
— —%
11,779
0.3%
Armor Holding II
LLC
New York /
Commercial Services
& Supplies
Second Lien Term Loan (10.25% (LIBOR + 9.00% with
1.25% LIBOR floor), due 12/26/2020)(3)(8)(10)(11)
7,000
6,907
6,907
6,907
0.2%
6,907
0.2%
See notes to consolidated financial statements.
122
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Atlantis Health Care
Group (Puerto Rico), Inc.
Puerto Rico / Health
Care Providers &
Services
Revolving Line of Credit – $7,000 Commitment
(10.25% (LIBOR + 8.25% with 2.00% LIBOR
floor), due 8/21/2017)(10)(11)(15)
Senior Term Loan (10.25% (LIBOR + 8.25% with
2.00% LIBOR floor), due 2/21/2018)(3)(10)(11)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
2,350 $
2,350 $
2,350
0.1%
38,166
38,166
40,516
44,075
44,075
38,166
1.1%
40,516
1.2%
40,312
1.2%
40,312
1.2%
Babson CLO Ltd. 2014-
III
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.25%, due 1/15/2026)(5)(6)(14)
52,250
Broder Bros., Co.
Pennsylvania /
Textiles, Apparel &
Luxury Goods
Senior Secured Term Loan A (7.00% (LIBOR +
5.75% with 1.25% LIBOR floor), due 6/03/2021)(3)
(10)(13)
Senior Secured Term Loan B (13.50% (LIBOR +
12.25% with 1.25% LIBOR floor), due 6/03/2021)
(10)(13)
120,737
120,737
120,737
3.5%
121,475
121,475
121,475
3.5%
242,212
242,212
7.0%
Brookside Mill CLO Ltd. Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.44%, due 4/17/2025)(5)(14)
26,000
California Street CLO IX
Ltd. (f/k/a Symphony
CLO IX Ltd.)
Cayman Islands /
Structured Finance
Preference Shares (Residual Interest, current yield
14.11%, due 4/16/2022)(5)(14)
45,500
19,875
19,875
32,629
32,629
18,990
0.6%
18,990
0.6%
29,267
0.9%
29,267
0.9%
Capstone Logistics
Acquisition, Inc.
Georgia /
Commercial
Services & Supplies
Second Lien Term Loan (9.25% (LIBOR + 8.25%
with 1.00% LIBOR floor), due 10/7/2022)(3)(8)(10)
(13)
101,828
101,298
97,752
2.8%
101,298
97,752
2.8%
Cent CLO 17 Limited
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.64%, due 1/30/2025)(5)(14)
24,870
Cent CLO 20 Limited
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
10.19%, due 1/25/2026)(5)(14)
40,275
Cent CLO 21 Limited
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
11.64%, due 7/27/2026)(5)(6)(14)
48,528
CIFC Funding 2013-III,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
15.72%, due 10/24/2025)(5)(14)
44,100
CIFC Funding 2013-IV,
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
16.13%, due 11/27/2024)(5)(14)
45,500
CIFC Funding 2014-IV
Investor, Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield
15.05%, due 10/17/2026)(5)(6)(14)
Cinedigm DC Holdings,
LLC
New York / Media
Senior Secured Term Loan (11.00% (LIBOR +
9.00% with 2.00% LIBOR floor) plus 2.50% PIK,
due 3/31/2021)(10)(11)(48)
41,500
65,990
18,839
18,839
32,835
32,835
38,125
38,125
32,338
32,338
33,414
33,414
31,729
31,729
65,940
65,940
16,695
0.5%
16,695
0.5%
26,501
0.8%
26,501
0.8%
31,467
0.9%
31,467
0.9%
29,634
0.9%
29,634
0.9%
32,752
0.9%
32,752
0.9%
30,378
0.9%
30,378
0.9%
65,990
1.9%
65,990
1.9%
See notes to consolidated financial statements.
123
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Coverall North America,
Inc.
Florida /
Commercial
Services &
Supplies
Crosman Corporation
New York /
Leisure Products
Senior Secured Term Loan A (7.00% (LIBOR +
6.00% with 1.00% LIBOR floor), due 11/02/2020)(3)
(10)(11)
Senior Secured Term Loan B (12.00% (LIBOR +
11.00% with 1.00% LIBOR floor), due 11/02/2020)
(3)(10)(11)
Senior Secured Term Loan A (9.16% (LIBOR +
8.70% with .30% LIBOR floor) plus 4.00% PIK, due
8/5/2020)(3)(10)(13)(48)
Senior Secured Term Loan B (16.16% (LIBOR +
15.70% with .30% LIBOR floor) plus 4.00% PIK,
due 8/5/2020)(10)(13)(48)
CURO Group Holdings
Corp. (f/k/a Speedy Cash
Holdings Corp.)
Canada /
Consumer Finance Senior Unsecured Notes (12.00%, due 11/15/2017)(8)
(14)
Easy Gardener Products,
Inc.
Texas / Household
Durables
Senior Secured Term Loan (10.63% (LIBOR +
10.00% with .25% LIBOR floor), due 09/30/2020)(3)
(10)(11)
$
24,250 $
24,250 $
24,250
0.7%
25,000
25,000
49,250
25,000
0.7%
49,250
1.4%
54,185
54,185
53,935
1.6%
41,284
15,000
17,369
41,284
95,469
15,000
15,000
17,369
17,369
40,458
1.1%
94,393
2.7%
8,081
0.2%
8,081
0.2%
17,369
0.5%
17,369
0.5%
Empire Today, LLC
Fleetwash, Inc.
Illinois /
Distributors
New Jersey /
Commercial
Services &
Supplies
Senior Secured Note (11.375%, due 2/1/2017)(8)
50,426
49,988
49,938
1.4%
Senior Secured Term Loan B (10.50% (LIBOR + 9.50%
with 1.00% LIBOR floor), due 4/30/2019)(3)(10)(11)
Delayed Draw Term Loan – $15,000 Commitment
(9.50% (LIBOR + 8.50% with 1.00% LIBOR
floor)expires 4/30/2019)(10)(11)(15)
49,988
49,938
1.4%
23,402
23,402
23,402
0.7%
—
—
— —%
23,402
23,402
0.7%
Focus Brands, Inc.
Georgia / Food &
Staples Retailing
Second Lien Term Loan (10.25% (LIBOR + 9.00%
with 1.25% LIBOR floor), due 8/21/2018)(8)(10)(13)
18,000
Galaxy XV CLO, Ltd.
Galaxy XVI CLO, Ltd.
Galaxy XVII CLO, Ltd.
Cayman Islands /
Structured
Finance
Cayman Islands /
Structured
Finance
Cayman Islands /
Structured
Finance
Subordinated Notes (Residual Interest, current yield
18.19%, due 4/15/2025)(5)(14)
Subordinated Notes (Residual Interest, current yield
16.22%, due 11/16/2025)(5)(14)
Subordinated Notes (Residual Interest, current yield
15.77%, due 7/15/2026)(5)(6)(14)
Generation Brands
Holdings, Inc.
Illinois /
Household
Durables
Subordinated Secured Term Loan (11.00% (LIBOR +
10.00% with 1.00% LIBOR floor), due 12/10/2022)
(8)(10)(11)
Global Employment
Solutions, Inc.
Colorado /
Professional
Services
Senior Secured Term Loan (10.25% (LIBOR +
9.25% with 1.00% LIBOR floor), due 6/26/2020)(3)
(10)(13)
39,275
24,575
39,905
19,000
49,312
17,876
17,876
29,037
29,037
19,195
19,195
31,077
31,077
18,437
18,437
49,312
49,312
18,000
0.5%
18,000
0.5%
30,452
0.9%
30,452
0.9%
18,925
0.5%
18,925
0.5%
29,820
0.9%
29,820
0.9%
19,000
0.6%
19,000
0.6%
49,312
1.4%
49,312
1.4%
See notes to consolidated financial statements.
124
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Halcyon Loan
Advisors Funding
2012-1 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
17.90%, due 8/15/2023)(5)(14)
$
23,188 $
18,245 $
18,140
0.5%
18,245
18,140
0.5%
Halcyon Loan
Advisors Funding
2013-1 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
18.01%, due 4/15/2025)(5)(14)
40,400
Halcyon Loan
Advisors Funding
2014-1 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
13.66%, due 4/18/2026)(5)(14)
Halcyon Loan
Advisors Funding
2014-2 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
16.91%, due 4/28/2025)(5)(6)(14)
Halcyon Loan
Advisors Funding
2015-3 Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
15.86%, due 10/18/2027)(5)(6)(14)
Harbortouch
Payments, LLC
Pennsylvania /
Commercial Services
& Supplies
Second Lien Term Loan (10.00% (LIBOR + 9.00%
with 1.00% LIBOR floor) plus 3.00% PIK, due
5/31/2023)(10)(11)(48)
Escrow Receivable(16)
24,500
41,164
39,598
27,500
HarbourView CLO
VII, Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
17.35%, due 11/18/2026)(5)(6)(14)
19,025
Harley Marine
Services, Inc.
Washington / Marine Second Lien Term Loan (10.50% (LIBOR + 9.25%
with 1.25% LIBOR floor), due 12/20/2019)(3)(8)(10)
(11)
9,000
31,897
31,897
18,255
18,255
30,795
30,795
36,746
36,746
27,500
—
27,500
14,454
14,454
8,886
8,886
32,212
0.9%
32,212
0.9%
17,076
0.5%
17,076
0.5%
30,532
0.9%
30,532
0.9%
35,202
1.0%
35,202
1.0%
27,500
0.8%
1,602 —%
29,102
0.8%
13,005
0.4%
13,005
0.4%
8,886
0.3%
8,886
0.3%
Hollander Sleep
Products, LLC
Florida / Textiles,
Apparel & Luxury
Goods
Senior Secured Term Loan (9.00% (LIBOR + 8.00%
with 1.00% LIBOR floor), due 10/21/2020)(3)(10)(13)
ICV-CAS Holdings,
LLC
New York / Air
Freight & Logistics
Escrow Receivable
Inpatient Care
Management
Company, LLC
Florida / Health Care
Providers & Services
Senior Secured Term Loan (11.50% (LIBOR + 10.50%
with 1.00% LIBOR floor), due 6/8/2021(10)(13)
Instant Web, LLC Minnesota / Media
Senior Secured Term Loan A (5.50% (LIBOR + 4.50%
with 1.00% LIBOR floor), due 3/28/2019)(10)(11)
Senior Secured Term Loan B (12.00% (LIBOR + 11.00%
with 1.00% LIBOR floor), due 3/28/2019)(3)(10)(11)
Senior Secured Term Loan C-1 (12.75% (LIBOR +
11.75% with 1.00% LIBOR floor), due 3/28/2019)(10)
(11)
Senior Secured Term Loan C-2 (13.50% (LIBOR +
12.50% with 1.00% LIBOR floor), due 3/28/2019)(10)
(11)
See notes to consolidated financial statements.
125
21,860
21,860
21,860
21,098
0.6%
21,098
0.6%
—
—
6 —%
6 —%
17,000
17,000
17,000
17,000
0.5%
17,000
0.5%
122,943
122,943
122,943
3.6%
158,100
158,100
158,100
4.6%
27,000
27,000
27,000
0.8%
25,000
25,000
25,000
0.7%
333,043
333,043
9.7%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
InterDent, Inc.
California / Health
Care Providers &
Services
Senior Secured Term Loan A (6.25% (LIBOR + 5.50%
with 0.75% LIBOR floor), due 8/3/2017)(10)(13)
Senior Secured Term Loan B (11.25% (LIBOR + 10.50%
with 0.75% LIBOR floor), due 8/3/2017)(3)(10)(13)
$
79,538 $
79,538 $
79,538
2.3%
131,125
131,125
130,582
3.8%
210,663
210,120
6.1%
JAC Holding
Corporation
Michigan / Auto
Components
Senior Secured Note (11.50%, due 10/1/2019)(8)
2,868
Jefferson Mill CLO
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
9.75%, due 7/20/2027)(5)(6)(14)
JHH Holdings, Inc. Texas / Health Care
Providers &
Services
Second Lien Term Loan (11.25% (LIBOR + 10.00% with
1.25% LIBOR floor) plus 0.50% PIK, due 3/30/2019)(3)
(10)(11)(48)
19,500
35,477
2,868
2,868
16,915
16,915
35,477
35,477
2,868
0.1%
2,868
0.1%
13,072
0.4%
13,072
0.4%
35,477
1.0%
35,477
1.0%
LaserShip, Inc.
Virginia / Air
Freight & Logistics
Senior Secured Term Loan A (10.25% (LIBOR + 8.25%
with 2.00% LIBOR floor) plus 2.00% PIK, due
3/18/2019)(3)(10)(13)(48)
Senior Secured Term Loan B (10.25% (LIBOR + 8.25%
with 2.00% LIBOR floor) plus 2.00% PIK, due
3/18/2019)(3)(10)(13)(48)
LCM XIV Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 18.80%,
due 7/15/2025)(5)(14)
Madison Park
Funding IX, Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
21.15%, due 8/15/2022)(5)(14)
Matrixx Initiatives,
Inc.
New Jersey /
Pharmaceuticals
Senior Secured Term Loan A (7.50% (LIBOR + 6.00%
with 1.50% LIBOR floor), due 8/9/2018)(3)(10)(11)
Senior Secured Term Loan B (12.50% (LIBOR + 11.00% with
1.50% LIBOR floor), due 8/9/2018)(3)(10)(11)
Maverick
Healthcare Equity,
LLC
Arizona / Health
Care Providers &
Services
Preferred Units (1,250,000 units)(16)
Class A Common Units (1,250,000 units)(16)
Mineral Fusion
Natural Brands LLC
(37)
Colorado / Personal
Products
Membership Interest (1.43%)(16)
Mountain View
CLO 2013-I Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
14.72%, due 4/12/2024)(5)(14)
Mountain View
CLO IX Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
16.23%, due 7/15/2027)(5)(6)(14)
34,570
34,570
32,113
0.9%
21,214
30,500
31,110
21,214
55,784
22,890
22,890
22,259
22,259
19,705
0.6%
51,818
1.5%
23,376
0.7%
23,376
0.7%
21,174
0.6%
21,174
0.6%
30,177
30,177
30,177
0.9%
40,562
43,650
47,830
40,562
70,739
1,252
—
1,252
—
—
33,156
33,156
43,088
43,088
40,562
1.2%
70,739
2.1%
2,037
0.1%
353 —%
2,390
0.1%
266 —%
266 —%
30,928
0.9%
30,928
0.9%
40,218
1.2%
40,218
1.2%
See notes to consolidated financial statements.
126
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Nathan's Famous, Inc. New York / Hotels,
Restaurants &
Leisure
Senior Secured Notes (10.00%, due 3/15/2020)(8)
$
3,000 $
3,000 $
3,000
0.1%
NCP Finance Limited
Partnership(38)
Ohio / Consumer
Finance
Subordinated Secured Term Loan (11.00% (LIBOR +
9.75% with 1.25% LIBOR floor), due 9/30/2018)(3)(8)
(10)(13)(14)
3,000
3,000
0.1%
27,199
26,504
26,504
25,838
0.7%
25,838
0.7%
Nixon, Inc.(39)
California /
Textiles, Apparel &
Luxury Goods
Senior Secured Term Loan (9.50% plus 3.00% PIK,
due 4/16/2018)(3)(8)(48)
14,311
Octagon Investment
Partners XV, Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 16.54%,
due 1/19/2025)(5)(14)
32,921
Octagon Investment
Partners XVIII, Ltd.
Cayman Islands /
Structured Finance
Income Notes (Residual Interest, current yield 20.29%,
due 12/16/2024)(5)(6)(14)
28,200
Onyx Payments(40)
Texas / IT Services Revolving Line of Credit – $5,000 Commitment
14,197
14,197
26,213
26,213
20,046
20,046
11,776
0.3%
11,776
0.3%
24,027
0.7%
24,027
0.7%
19,701
0.6%
19,701
0.6%
Pacific World
Corporation
California /
Personal Products
(9.00% (LIBOR + 8.00% with 1.00% LIBOR floor),
due 9/10/2016)(10)(11)(15)
Senior Secured Term Loan A (6.50% (LIBOR + 5.50%
with 1.00% LIBOR floor), due 9/10/2019)(3)(10)(11)
Senior Secured Term Loan B (13.50% (LIBOR +
12.50% with 1.00% LIBOR floor), due 9/10/2019)(3)
(10)(11)
Revolving Line of Credit – $15,000 Commitment
(8.00% (LIBOR + 7.00% with 1.00% LIBOR floor),
due 9/26/2020)(10)(13)(15)
Senior Secured Term Loan A (6.00% (LIBOR + 5.00%
with 1.00% LIBOR floor), due 9/26/2020)(10)(13)
Senior Secured Term Loan B (10.00% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 9/26/2020)(3)(10)(13)
1,000
1,000
1,000 —%
48,352
48,352
48,352
1.4%
59,389
59,389
59,389
1.8%
108,741
108,741
3.2%
2,500
2,500
2,500
0.1%
97,994
97,994
93,624
2.7%
97,994
97,994
81,567
2.4%
198,488
177,691
5.2%
Pelican Products, Inc. California /
Chemicals
Second Lien Term Loan (9.25% (LIBOR + 8.25% with
1.00% LIBOR floor), due 4/9/2021)(3)(8)(10)(13)
17,500
17,486
17,486
15,744
0.5%
15,744
0.5%
PeopleConnect
Intermediate, LLC
(f/k/a Intelius, Inc.)
Washington /
Internet Software &
Services
Revolving Line of Credit – $1,500 Commitment
(9.50% (LIBOR + 8.50% with 1.00% LIBOR floor),
due 8/11/16)(10)(11)(15)
Senior Secured Term Loan A (6.50% (LIBOR + 5.50%
with 1.00% LIBOR floor), due 7/1/2020)(3)(10)(11)
Senior Secured Term Loan B (12.50% (LIBOR +
11.50% with 1.00% LIBOR floor), due 7/1/2020)(3)
(10)(11)
—
—
— —%
20,379
20,379
19,907
0.6%
20,938
20,938
41,317
20,215
0.6%
40,122
1.2%
PGX Holdings, Inc.
(41)
Utah / Diversified
Consumer Services
Second Lien Term Loan (10.00% (LIBOR + 9.00%
with 1.00% LIBOR floor), due 9/29/2021)(3)(10)(13)
135,000
135,000
135,000
135,000
3.9%
135,000
3.9%
See notes to consolidated financial statements.
127
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
Photonis
Technologies SAS
France / Electronic
Equipment, Instruments &
Components
First Lien Term Loan (8.50% (LIBOR + 7.50%
with 1.00% LIBOR floor), due 9/18/2019)(8)(10)
(13)(14)
Pinnacle (US)
Acquisition Co.
Limited
Texas / Software
Second Lien Term Loan (10.50% (LIBOR +
9.25% with 1.25% LIBOR floor), due 8/3/2020)
(8)(10)(11)
PlayPower, Inc.
North Carolina / Leisure
Products
Second Lien Term Loan (9.75% (LIBOR +
8.75% with 1.00% LIBOR floor), due 6/23/2022)
(3)(8)(10)(11)
Prime Security
Services Borrower,
LLC
Illinois / Commercial
Services & Supplies
Second Lien Term Loan (9.75% (LIBOR +
8.75% with 1.00% LIBOR floor), due 7/1/2022)
(8)(10)(13)
PrimeSport, Inc.
Georgia / Hotels,
Restaurants & Leisure
Senior Secured Term Loan A (7.00% (LIBOR +
6.00% with 1.00% LIBOR floor), due 2/11/2021)(3)
(10)(11)
Senior Secured Term Loan B (12.00% (LIBOR +
11.00% with 1.00% LIBOR floor), due 2/11/2021)(3)
(10)(11)
Prince Mineral
Holding Corp.
New York / Metals &
Mining
Senior Secured Term Loan (11.50%, due
12/15/2019)(8)
Rocket Software, Inc. Massachusetts / Software
Second Lien Term Loan (10.25% (LIBOR +
8.75% with 1.50% LIBOR floor), due 2/8/2019)
(3)(8)(10)(11)
Royal Holdings, Inc.
Indiana / Chemicals
Second Lien Term Loan (8.50% (LIBOR +
7.50% with 1.00% LIBOR floor), due 6/19/2023)
(8)(10)(13)
SCS Merger Sub,
Inc.
Texas / IT Services
Second Lien Term Loan (10.50% (LIBOR +
9.50% with 1.00% LIBOR floor), due
10/30/2023)(3)(8)(10)(13)
Security Alarm
Financing
Enterprises, L.P.(42)
California / Electronic
Equipment, Instruments &
Components
Subordinated Unsecured Notes (11.50% (LIBOR
+ 9.50% with 2.00% LIBOR floor), due
12/19/2020)(10)(13)
$
9,927 $
9,756 $
9,015
0.3%
9,756
9,015
0.3%
7,037
6,918
6,918
5,425
0.2%
5,425
0.2%
11,000
10,856
10,856
10,911
0.3%
10,911
0.3%
10,000
9,870
9,870
10,000
0.3%
10,000
0.3%
53,683
53,683
53,683
1.6%
74,500
74,500
74,500
2.1%
128,183
128,183
3.7%
10,000
9,934
9,934
8,701
0.3%
8,701
0.3%
20,000
19,854
19,854
20,000
0.6%
20,000
0.6%
5,000
4,967
4,967
4,819
0.1%
4,819
0.1%
20,000
19,456
19,456
19,655
0.6%
19,655
0.6%
25,000
25,000
25,000
22,700
0.7%
22,700
0.7%
SESAC Holdco II
LLC
Tennessee / Media
Second Lien Term Loan (9.00% (LIBOR +
8.00% with 1.00% LIBOR floor), due 4/22/2021)
(3)(8)(10)(11)
10,000
9,878
9,878
9,878
0.3%
9,878
0.3%
SITEL Worldwide
Corporation
Tennessee / Commercial
Services & Supplies
Second Lien Term Loan (10.50% (LIBOR +
9.50% with 1.00% LIBOR floor), due 9/18/2022)
(8)(10)(11)
16,000
15,715
15,715
15,715
0.5%
15,715
0.5%
See notes to consolidated financial statements.
128
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company Locale / Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Small Business
Whole Loan
Portfolio(44)
New York / Online
Lending
741 Individual Small Business Loans purchased from On
Deck Capital, Inc.
Spartan Energy
Services, Inc.
Louisiana / Energy
Equipment &
Services
Senior Secured Term Loan A (7.00% (LIBOR + 6.00%
with 1.00% LIBOR floor), in non-accrual status effective
4/1/2016, due 12/28/2017)(10)(13)
Senior Secured Term Loan B (13.00% (LIBOR + 12.00% with
1.00% LIBOR floor), in non-accrual status effective 4/1/2016,
due 12/28/2017)(10)(13)
Stryker Energy,
LLC
Ohio / Oil, Gas &
Consumable Fuels
Overriding Royalty Interests(9)
Sudbury Mill CLO
Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
12.64%, due 1/17/2026)(5)(14)
Symphony CLO
XIV Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
13.12%, due 7/14/2026)(5)(6)(14)
Symphony CLO
XV, Ltd.
Cayman Islands /
Structured Finance
Subordinated Notes (Residual Interest, current yield
13.76%, due 10/17/2026)(5)(14)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
$
14,603 $
14,603 $
14,215
0.4%
14,603
14,215
0.4%
13,156
12,923
11,368
0.3%
14,123
—
28,200
49,250
50,250
13,669
26,592
984
0.1%
12,352
0.4%
—
—
20,865
20,865
39,602
39,602
44,141
44,141
— —%
— —%
17,395
0.5%
17,395
0.5%
35,703
1.0%
35,703
1.0%
39,523
1.2%
39,523
1.2%
104,553
104,553
104,553
3.0%
104,553
3.0%
4,936
4,936
4,936
0.1%
4,936
0.1%
System One
Holdings, LLC
Pennsylvania /
Professional
Services
Senior Secured Term Loan (11.25% (LIBOR + 10.50%
with 0.75% LIBOR floor), due 11/17/2020)(3)(10)(13)
104,553
TouchTunes
Interactive
Networks, Inc.
New York / Internet
Software & Services Second Lien Term Loan (9.25% (LIBOR + 8.25% with
1.00% LIBOR floor), due 5/29/2022)(8)(10)(13)
5,000
Traeger Pellet Grills
LLC
Oregon / Household
Durables
Senior Secured Term Loan A (6.50% (LIBOR + 4.50% with
2.00% LIBOR floor), due 6/18/2018)(3)(10)(11)
34,519
34,519
34,519
1.0%
Transaction
Network Services,
Inc.
Virginia /
Diversified
Telecommunication
Services
Trinity Services
Group, Inc.(45)
Florida /
Commercial
Services & Supplies
Senior Secured Term Loan B (11.50% (LIBOR + 9.50% with
2.00% LIBOR floor), due 6/18/2018)(3)(10)(11)
36,506
Second Lien Term Loan (9.00% (LIBOR + 8.00% with
1.00% LIBOR floor), due 8/14/2020)(8)(10)(11)
4,410
36,506
71,025
36,506
1.1%
71,025
2.1%
4,392
4,392
4,392
0.1%
4,392
0.1%
Senior Secured Term Loan A (6.50% (LIBOR + 5.50% with
1.00% LIBOR floor), due 8/13/2019)(10)(11)
9,626
9,626
9,626
0.3%
Senior Secured Term Loan B (11.50% (LIBOR + 10.50% with
1.00% LIBOR floor), due 8/13/2019)(3)(10)(11)
125,000
United Sporting
Companies, Inc.(47)
South Carolina /
Distributors
Second Lien Term Loan (12.75% (LIBOR + 11.00% with
1.75% LIBOR floor), due 5/16/2018)(3)(10)(13)
140,847
Universal Fiber
Systems, LLC
Virginia / Textiles,
Apparel & Luxury
Goods
Second Lien Term Loan (10.50% (LIBOR + 9.50% with 1.00%
LIBOR floor), due 10/02/2022)(3)(8)(10)(13)
37,000
See notes to consolidated financial statements.
129
125,000
134,626
140,847
140,847
125,000
3.6%
134,626
3.9%
136,668
4.0%
136,668
4.0%
36,340
36,340
36,340
1.1%
36,340
1.1%
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Portfolio Company
Locale /
Industry
Investments(1)
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
June 30, 2016
Principal
Value
Amortized
Cost
Fair
Value(2)
% of Net
Assets
USG Intermediate,
LLC
Texas /
Leisure
Products
Revolving Line of Credit – $2,500 Commitment (10.75% (LIBOR +
9.75% with 1.00% LIBOR floor), due 4/15/2017)(10)(13)(15)
Senior Secured Term Loan A (8.25% (LIBOR + 7.25% with 1.00%
LIBOR floor), due 4/15/2020)(3)(10)(13)
$
1,000 $
1,000 $
1,000 —%
16,779
16,779
16,779
0.5%
Senior Secured Term Loan B (13.25% (LIBOR + 12.25% with 1.00%
LIBOR floor), due 4/15/2020)(3)(10)(13)
19,960
Equity(16)
Venio LLC
Pennsylvania
/ Professional
Services
Second Lien Term Loan (12.00% (LIBOR + 9.50% with 2.50%
LIBOR floor) plus 2.00% default interest, in non-accrual status
effective 12/31/15, due 2/19/2020)(10)(11)
17,000
19,960
1
37,740
17,000
17,000
19,960
0.6%
— —%
37,739
1.1%
12,876
0.4%
12,876
0.4%
Voya CLO 2012-2,
Ltd.
Voya CLO 2012-3,
Ltd.
Voya CLO 2012-4,
Ltd.
Voya CLO 2014-1,
Ltd.
Washington Mill
CLO Ltd.
Water Pik, Inc.
Cayman
Islands /
Structured
Finance
Cayman
Islands /
Structured
Finance
Cayman
Islands /
Structured
Finance
Cayman
Islands /
Structured
Finance
Cayman
Islands /
Structured
Finance
Colorado /
Personal
Products
Income Notes (Residual Interest, current yield 18.84%, due
10/15/2022)(5)(14)
Income Notes (Residual Interest, current yield 18.51%, due
10/15/2022)(5)(14)
Income Notes (Residual Interest, current yield 19.09%, due
10/15/2023)(5)(14)
Subordinated Notes (Residual Interest, current yield 19.32%,
due 4/18/2026)(5)(6)(14)
38,070
28,112
28,112
28,982
0.8%
28,982
0.8%
46,632
34,597
34,597
34,319
1.0%
34,319
1.0%
40,613
30,772
30,772
30,756
0.9%
30,756
0.9%
32,383
26,133
26,133
26,741
0.8%
26,741
0.8%
Subordinated Notes (Residual Interest, current yield 9.52%, due
4/20/2026)(5)(6)(14)
22,600
Second Lien Term Loan (9.75% (LIBOR + 8.75% with 1.00%
LIBOR floor), due 1/8/2021)(8)(10)(11)
15,439
18,406
18,406
15,097
15,097
15,056
0.4%
15,056
0.4%
15,097
0.4%
15,097
0.4%
Wheel Pros, LLC
Colorado /
Auto
Components
Senior Subordinated Secured Note (11.00% (LIBOR + 7.00% with
4.00% LIBOR floor), due 6/29/2020)(3)(10)(11)
Senior Subordinated Secured Note (11.00% (LIBOR + 7.00%
with 4.00% LIBOR floor), due 6/29/2020)(3)(10)(11)
12,000
12,000
12,000
0.4%
5,460
5,460
17,460
5,460
0.2%
17,460
0.6%
Total Non-Control/Non-Affiliate Investments (Level 3) $ 4,312,122 $ 4,133,939 120.3%
Total Portfolio Investments $ 6,091,100 $ 5,897,708 171.6%
See notes to consolidated financial statements.
130
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
The terms “Prospect,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise. The
securities in which Prospect has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended (the
“Securities Act”). These securities may be resold only in transactions that are exempt from registration under the Securities Act.
Fair value is determined by or under the direction of our Board of Directors. As of June 30, 2017 and June 30, 2016 , all of our investments were classified
as Level 3. ASC 820 classifies such unobservable inputs used to measure fair value as Level 3 within the valuation hierarchy. See Notes 2 and 3 within the
accompanying notes to consolidated financial statements for further discussion.
Security, or a portion thereof, is held by Prospect Capital Funding LLC (“PCF”), our wholly-owned subsidiary and a bankruptcy remote special purpose
entity, and is pledged as collateral for the Revolving Credit Facility and such security is not available as collateral to our general creditors (see Note 4). The
fair values of the investments held by PCF at June 30, 2017 and June 30, 2016 were $1,513,413 and $1,348,577 , respectively, representing 25.9% and
22.9% of our total investments, respectively.
In addition to the stated returns, the net profits interest held will be realized upon sale of the borrower or a sale of the interests.
This investment is in the equity class of a collateralized loan obligation (“CLO”) security. The CLO equity investments are entitled to recurring distributions
which are generally equal to the excess cash flow generated from the underlying investments after payment of the contractual payments to debt holders and
fund expenses. The current estimated yield, calculated using amortized cost, is based on the current projections of this excess cash flow taking into account
assumptions which have been made regarding expected prepayments, losses and future reinvestment rates. These assumptions are periodically reviewed and
adjusted. Ultimately, the actual yield may be higher or lower than the estimated yield if actual results differ from those used for the assumptions.
Co-investment with another fund managed by an affiliate of our investment adviser, Prospect Capital Management L.P. See Note 13 for further discussion.
On a fully diluted basis represents 10.00% of voting common shares.
Syndicated investment which was originated by a financial institution and broadly distributed.
The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower.
(10) Security, or a portion thereof, has a floating interest rate which may be subject to a LIBOR or PRIME floor. The interest rate was in effect at June 30, 2017
and June 30, 2016 .
(11) The interest rate on these investments is subject to the base rate of 3-Month LIBOR, which was 1.30% and 0.65% at June 30, 2017 and June 30, 2016 ,
respectively. The current base rate for each investment may be different from the reference rate on June 30, 2017 and June 30, 2016 .
(12) The interest rate on these investments is subject to the base rate of 2-Month LIBOR, which was 1.25% at June 30, 2017 . No investments were subject to the
base rate of 2-Month LIBOR at June 30, 2016 . The current base rate for each investment may be different from the reference rate on June 30, 2017 and
June 30, 2016 .
(13) The interest rate on these investments is subject to the base rate of 1-Month LIBOR, which was 1.23% and 0.47% at June 30, 2017 and June 30, 2016 ,
respectively. The current base rate for each investment may be different from the reference rate on June 30, 2017 and June 30, 2016 .
(14)
Investment has been designated as an investment not “qualifying” under Section 55(a) of the Investment Company Act of 1940 (the “1940 Act”). Under the
1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total
assets. As of June 30, 2017 and June 30, 2016 , our qualifying assets as a percentage of total assets, stood at 71.75% and 74.58% , respectively. We monitor
the status of these assets on an ongoing basis.
(15) Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 4.00% .
As of June 30, 2017 and June 30, 2016 , we had $22,925 and $40,560 , respectively, of undrawn revolver and delayed draw term loan commitments to our
portfolio companies.
(16) Represents non-income producing security that has not paid a dividend in the year preceding the reporting date.
(17) As of June 30, 2017, the effective yield has been estimated to be 0% as expected future cash flows are anticipated to not be sufficient to repay the
investment at cost. If the expected investment proceeds increase, there is a potential for future investment
See notes to consolidated financial statements.
131
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
income from the investment. Distributions, once received, will be recognized solely as return of capital with any remaining unamortized investment costs
written off if the actual distributions are less than the amortized investment cost.
(18) Arctic Oilfield Equipment USA, Inc., a consolidated entity in which we own 100% of the common equity, owns 70% of the equity units of Arctic Energy
Services, LLC (“Arctic Energy”), the operating company. We report Arctic Energy as a separate controlled company. On September 30, 2015, we
restructured our investment in Arctic Energy. Concurrent with the restructuring, we exchanged our $31,640 senior secured loan and our $20,230
subordinated loan for Class D and Class E Units in Arctic Energy. Our ownership of Arctic Energy includes a preferred interest in their holdings of all the
Class D, Class E, Class C, and Class A Units (in order of priority returns). These unit classes are senior to management’s interests in the F and B Units.
(19) CCPI Holdings Inc., a consolidated entity in which we own 100% of the common stock, owns 94.59% of CCPI Inc. (“CCPI”), the operating company, as of
June 30, 2017 and June 30, 2016 . We report CCPI as a separate controlled company.
(20) CP Holdings of Delaware LLC, a consolidated entity in which we own 100% of the membership interests, owns 82.3% of CP Energy Services Inc. (“CP
Energy”) as of June 30, 2017 and June 30, 2016 . As of June 30, 2016 , CP Energy owns directly or indirectly 100% of each of CP Well Testing, LLC;
Wright Foster Disposals, LLC; Foster Testing Co., Inc.; ProHaul Transports, LLC; and Wright Trucking, Inc. We report CP Energy as a separate controlled
company. Effective December 31, 2014, CP Energy underwent a corporate reorganization in order to consolidate certain of its wholly-owned subsidiaries.
On October 30, 2015, we restructured our investment in CP Energy. Concurrent with the restructuring, we exchanged our $86,965 senior secured loan and
$15,924 subordinated loan for Series B Convertible Preferred Stock in CP Energy.
(21) Credit Central Holdings of Delaware, LLC, a consolidated entity in which we own 100% of the membership interests, owns 99.91% and 74.93% of Credit
Central Loan Company, LLC (f/k/a Credit Central Holdings, LLC (“Credit Central”)) as of June 30, 2017 and June 30, 2016 , respectively. Credit Central
owns 100% of each of Credit Central, LLC; Credit Central South, LLC; Credit Central of Texas, LLC; and Credit Central of Tennessee, LLC, the operating
companies. We report Credit Central as a separate controlled company. On September 28, 2016, we have made an additional $12,523 second lien debt and
$2,098 equity investment in Credit Central, increasing its ownership to 99.91%.
(22) Prospect owns 37.1% of the equity of Edmentum Ultimate Holdings, LLC as of June 30, 2017 and June 30, 2016 .
(23) First Tower Holdings of Delaware LLC, a consolidated entity in which we own 100% of the membership interests, owns 80.1% of First Tower Finance
Company LLC (“First Tower Finance”), which owns 100% of First Tower, LLC, the operating company as of June 30, 2017 and June 30, 2016 . We report
First Tower Finance as a separate controlled company.
(24) Energy Solutions Holdings Inc., a consolidated entity in which we own 100% of equity, owns 100% of Freedom Marine Solutions, LLC (“Freedom
Marine”), which owns Vessel Company, LLC, Vessel Company II, LLC and Vessel Company III, LLC. We report Freedom Marine as a separate controlled
company. On October 30, 2015, we restructured our investment in Freedom Marine. Concurrent with the restructuring, we exchanged our $32,500 senior
secured loans for additional membership interest in Freedom Marine.
(25) MITY Holdings of Delaware Inc. (“MITY Delaware”), a consolidated entity in which we own 100% of the common stock, owns 95.48% and 95.83% of the
equity of MITY, Inc. (f/k/a MITY Enterprises, Inc.) (“MITY”), as of June 30, 2017 and June 30, 2016 , respectively. MITY owns 100% of each of MITY-
Lite, Inc. (“Mity-Lite”); Broda Enterprises USA, Inc.; and Broda Enterprises ULC (“Broda Canada”). We report MITY as a separate controlled company.
MITY Delaware has a subordinated unsecured note issued and outstanding to Broda Canada that is denominated in Canadian Dollars (“CAD”). As of
June 30, 2017 and June 30, 2016 , the principal balance of this note was CAD 7,371. In accordance with ASC 830, Foreign Currency Matters (“ASC 830”),
this note was remeasured into our functional currency, US Dollars (USD), and is presented on our Consolidated Schedule of Investments in USD. We
formed a separate legal entity domiciled in the United States, MITY FSC, Inc., (“MITY FSC”) in which Prospect owns 96.88% of the equity, and MITY-
Lite management owns the remaining portion. MITY FSC does not have material operations. This entity earns commission payments from MITY-Lite
based on its sales to foreign customers, and distribute it to its shareholders based on pro-rata ownership. During the three months ended December 31,
2016, we received $406 of such commission, which we recognized as other income. On January 17, 2017, we invested an additional $8,000 of Senior
Secured Term Loan A and $8,000 of Senior Secured Term Loan B debt investments in MITY, to fund an acquisition.
(26) NPH Property Holdings, LLC, a consolidated entity in which we own 100% of the membership interests, owns 100% of the common equity of National
Property REIT Corp. (“NPRC”) (f/k/a National Property Holdings Corp.), a property REIT which holds investments in several real estate properties.
Additionally, NPRC invests in online consumer loans through ACL Loan Holdings, Inc. (“ACLLH”) and American Consumer Lending Limited (“ACLL”),
its wholly-owned subsidiaries. We report NPRC as a separate controlled company. See Note 3 for further discussion of the properties held by NPRC. On
August 1, 2016, we made
See notes to consolidated financial statements.
132
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
an investment into ACLL, under the ACLL credit agreement, for senior secured term loans, Term Loan C, with the same terms as the existing ACLLH Term
Loan C due to us. On January 1, 2017, we restructured our investment in NPRC and exchanged $55,000 of Senior Secured Term Loan E for common stock.
(27) Nationwide Acceptance Holdings LLC, a consolidated entity in which we own 100% of the membership interests, owns 94.48% and 93.79% of Nationwide
Loan Company LLC (f/k/a Nationwide Acceptance LLC), the operating company, as of June 30, 2017 and June 30, 2016 , respectively. We report
Nationwide Loan Company LLC as a separate controlled company. On June 1, 2015, Nationwide Acceptance LLC completed a reorganization and was
renamed Nationwide Loan Company LLC (“Nationwide”) and formed two new wholly-owned subsidiaries: Pelican Loan Company LLC (“Pelican”) and
Nationwide Consumer Loans LLC. Nationwide assigned 100% of the equity interests in its other subsidiaries to Pelican which, in turn, assigned these
interests to a new operating company wholly-owned by Pelican named Nationwide Acceptance LLC (“New Nationwide”). New Nationwide also assumed
the existing senior subordinated term loan due to Prospect.
(28) NMMB Holdings, a consolidated entity in which we own 100% of the equity, owns 96.33% of the fully diluted equity of NMMB, Inc. (“NMMB”) as of
June 30, 2017 and June 30, 2016 . NMMB owns 100% of Refuel Agency, Inc., which owns 100% of Armed Forces Communications, Inc. We report
NMMB as a separate controlled company.
(29) On June 3, 2017, Gulf Coast Machine & Supply Company (“Gulf Coast”) sold all of its assets to a third party, for total consideration of $10,250, including
escrowed amounts. The proceeds from the sale were primarily used to repay a $6,115 third party revolving credit facility, and the remainder was used to pay
other legal and administrative costs incurred by Gulf Coast. As no proceeds were allocated to Prospect our debt and equity investment in Gulfco was
written-off and we recorded a realized loss of $66,103. Gulf Coast holds $2,050 in escrow related to the sale, which will be distributed to Prospect once
released to Gulf Coast, and will be recognized as a realized gain if and when it is received. On June 28, 2017, Gulf Coast was renamed to SB Forging
Company II, Inc.
(30) Prospect owns 99.96% of the equity of USES Corp. as of June 30, 2017 and June 30, 2016 .
(31) Valley Electric Holdings I, Inc., a consolidated entity in which we own 100% of the common stock, owns 100% of Valley Electric Holdings II, Inc. (“Valley
Holdings II”), another consolidated entity. Valley Holdings II owns 94.99% of Valley Electric Company, Inc. (“Valley Electric”). Valley Electric owns
100% of the equity of VE Company, Inc., which owns 100% of the equity of Valley Electric Co. of Mt. Vernon, Inc. We report Valley Electric as a separate
controlled company.
(32) On March 14, 2017, assets previously held by Ark-La-Tex Wireline Services, LLC (“Ark-La-Tex”) were assigned to Wolf Energy Services Company, LLC,
a new wholly-owned subsidiary of Wolf Energy Holdings, in exchange for a full reduction of Ark-La-Tex’s Senior Secured Term Loan A and a partial
reduction of the Senior Secured Term Loan B cost basis, in total equal to $22,145. The cost basis of the transferred assets is equal to the appraised fair value
of assets at the time of transfer. During the three months ended June 30, 2017, Ark-La-Tex Term Loan B was written-off and a loss of $19,818 was realized.
On June 30, 2017, the 18.00% Senior Secured Promissory Note, due April 15, 2018, in Wolf Energy, LLC was contributed to equity of Wolf Energy LLC.
There was no impact from the transaction due to the note being on non-accrual status and having zero cost basis.
(33) Prospect owns 12.63% of the equity in Targus Cayman HoldCo Limited, the parent company of Targus International LLC as of June 30, 2017 and June 30,
2016 .
(34) We own 99.9999% of AGC/PEP, LLC. AGC/PEP, LLC owns 2,038 out of a total of 93,485 shares (including 7,456 vested and unvested management
options) of American Gilsonite Holding Company which owns 100% of American Gilsonite Company. On October 24, 2016, American Gilsonite Company
filed for a joint prepackaged plan of reorganization under Chapter 11 of the bankruptcy code. As of June 30, 2017 , AGC/PEP, LLC has emerged from
bankruptcy and Prospect received a total of 131 shares, representing a total ownership stake of 0.05%.
(35) Centerfield Media Holding Company and Oology Direct Holdings, Inc. are joint borrowers and guarantors on the senior secured loan facilities.
(36) Keystone Acquisition Corp. is the parent borrower on the second lien term loan. Other joint borrowers on this debt investment include Keystone Peer
Review Organization, Inc., KEPRO Acquisitions, Inc., APS Healthcare Bethesda, Inc., Ohio KEPRO, Inc. and APS Healthcare Quality Review, Inc.
(37) As of June 30, 2016 , we owned 1.43% (13,220 shares) of the common and preferred interest of Mineral Fusion Natural Brands LLC, a subsidiary of Caleel
+ Hayden, LLC.
See notes to consolidated financial statements.
133
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
(38) NCP Finance Limited Partnership, NCP Finance Ohio, LLC, and certain affiliates thereof are joint borrowers on the subordinated secured term loan.
(39) As of June 30, 2017 , Prospect owns 8.57% of the equity in Nixon Holdco, LLC, the parent company of Nixon, Inc.
(40) Pegasus Business Intelligence, LP, Paycom Acquisition, LLC, and Paycom Acquisition Corp. are joint borrowers on the senior secured loan facilities.
Paycom Intermediate Holdings, Inc. is the parent guarantor of this debt investment. These entities transact business internationally under the trade name
Onyx Payments.
(41) As of June 30, 2017 and June 30, 2016 , PGX Holdings, Inc. is the sole borrower on the second lien term loan.
(42) Security Alarm Financing Enterprises, L.P. and California Security Alarms, Inc. are joint borrowers on the senior subordinated note.
(43) SB Forging Company, Inc., a consolidated entity in which we own 100% of the equity, owned 100% of Ajax Rolled Ring & Machine, LLC, the operating
company, which was sold on October 10, 2014. As part of the sale there was $3,000 being held in escrow, of which $802 and $1,750 was received on May
6, 2015 and May 31, 2016, respectively, for which Prospect realized a gain of the same amount. During the quarter ended September 30, 2016, we
determined that the remaining balance of the escrow will not be collected. On June 30, 2017, we received $169 of escrow proceeds related to SB Forging,
realizing a gain of the same amount.
(44) Our wholly-owned subsidiary Prospect Small Business Lending, LLC purchases small business whole loans from small business loan originators, including
On Deck Capital, Inc.
(45) Trinity Services Group, Inc. and Trinity Services I, LLC are joint borrowers on the senior secured loan facility.
(46) Turning Point Brands, Inc. and North Atlantic Trading Company, Inc. are joint borrowers and guarantors on the secured loan facility.
(47) Ellett Brothers, LLC, Evans Sports, Inc., Jerry’s Sports, Inc., Simmons Gun Specialties, Inc., Bonitz Brothers, Inc., and Outdoor Sports Headquarters, Inc.
are joint borrowers on the second lien term loan. United Sporting Companies, Inc. is a parent guarantor of this debt investment.
See notes to consolidated financial statements.
134
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
(48) The interest rate on these investments, excluding those on non-accrual, contains a paid in kind (“PIK”) provision, whereby the issuer has either the option or
the obligation to make interest payments with the issuance of additional securities. The interest rate in the schedule represents the current interest rate in
effect for these investments.
The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing
credit agreements, as of and for three months ended June 30, 2017 :
Security Name
CCPI Inc.
Cinedigm DC Holdings, LLC
Credit Central Loan Company
Echelon Aviation LLC
Echelon Aviation LLC
Edmentum Ultimate Holdings, LLC - Unsecured Senior PIK Note
First Tower Finance Company LLC
MITY, Inc.
National Property REIT Corp. - Senior Secured Term Loan A
National Property REIT Corp. - Senior Secured Term Loan E
National Property REIT Corp. - Senior Secured Term Loan C to ACL
Loan Holdings, Inc.
National Property REIT Corp. - Senior Secured Term Loan C to
American Consumer Lending Limited
Nationwide Loan Company LLC
Targus International, LLC - Senior Secured Term Loan A
Targus International, LLC - Senior Secured Term Loan B
Valley Electric Co. of Mt. Vernon, Inc.
Valley Electric Company, Inc.
PIK Rate -
Capitalized
PIK Rate -
Paid as cash
Maximum
Current PIK Rate
—%
—%
—%
N/A
N/A
8.50%
3.92%
—%
—%
—%
—%
—%
—%
15.00%
15.00%
—%
8.50%
7.00%
2.50%
10.00%
N/A
N/A
—%
3.08%
10.00%
5.50%
5.00%
5.00%
5.00%
10.00%
—%
—%
2.50%
—%
(A)
(B)
7.00%
2.50%
10.00%
2.25%
1.00%
8.50%
7.00%
10.00%
5.50%
5.00%
5.00%
5.00%
10.00%
15.00%
15.00%
2.50%
8.50%
(A) Next PIK payment/capitalization date was July 31, 2017. The company paid 2.25% PIK in cash.
(B) Next PIK payment/capitalization date was July 31, 2017. The company paid 1.00% PIK in cash.
The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing credit
agreements, as of and for three months ended June 30, 2016:
See notes to consolidated financial statements.
135
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
Security Name
CCPI Inc.
Cinedigm DC Holdings, LLC
Credit Central Loan Company
Crosman Corporation - Senior Secured Term Loan A
Crosman Corporation - Senior Secured Term Loan B
Echelon Aviation LLC
Edmentum Ultimate Holdings, LLC - Unsecured Senior PIK Note
Edmentum Ultimate Holdings, LLC - Unsecured Junior PIK Note
First Tower Finance Company LLC
Harbortouch Payments, LLC
JHH Holdings, Inc.
LaserShip , Inc. - Term Loan A
LaserShip , Inc. - Term Loan B
MITY, Inc.
National Property REIT Corp. - Senior Secured Term Loan A
National Property REIT Corp. - Senior Secured Term Loan E
National Property REIT Corp. - Senior Secured Term Loan C to ACL
Loan Holdings, Inc.
Nationwide Loan Company LLC
Nixon, Inc.
Valley Electric Co. of Mt. Vernon, Inc.
Valley Electric Company, Inc.
PIK Rate -
Capitalized
PIK Rate -
Paid as cash
—%
—%
6.49%
4.00%
4.00%
—%
8.50%
10.00%
0.80%
N/A
0.50%
2.00%
2.00%
—%
—%
—%
—%
—%
3.00%
—%
3.42%
7.00%
2.50%
3.51%
—%
—%
2.25%
—%
—%
11.20%
N/A
—%
—%
—%
10.00%
5.50%
5.00%
5.00%
10.00%
—%
2.50%
5.08%
Maximum
Current PIK Rate
7.00%
2.50%
10.00%
4.00%
4.00%
2.25%
8.50%
10.00%
12.00%
3.00%
0.50%
(C)
2.00%
2.00%
10.00%
5.50%
5.00%
5.00%
10.00%
3.00%
2.50%
8.50%
(C) PIK is capitalized quarterly. The issuer capitalized 3.00% PIK interest on the next payment/capitalization date, which was August 31, 2016.
See notes to consolidated financial statements.
136
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
(49) As defined in the 1940 Act, we are deemed to “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding
voting securities. Transactions during the year ended June 30, 2017 with these controlled investments were as follows:
Portfolio Company
Arctic Energy Services, LLC
CCPI Inc.
CP Energy Services Inc.
Credit Central Loan
Company, LLC
Echelon Aviation LLC
Edmentum Ultimate
Holdings, LLC
First Tower Finance
Company LLC
Freedom Marine Solutions,
LLC
MITY, Inc.
National Property REIT
Corp.
Nationwide Loan Company
LLC
NMMB, Inc.
R-V Industries, Inc.
SB Forging Company II, Inc.
(f/k/a Gulf Coast Machine &
Supply Company)
USES Corp.
Valley Electric Company,
Inc.
Wolf Energy, LLC
Fair Value at
June 30, 2016
Gross
Additions
(Cost)*
Gross
Reductions
(Cost)**
Net
unrealized
gains
(losses)
Fair Value at
June 30, 2017
Interest
income
Dividend
income
Other
income
Net
realized
gains
(losses)
38,340
41,356
76,002
52,254
60,821
—
—
—
10,826
18,875
—
(327)
—
(403)
(6,800)
44,346
9,892
(6,424)
352,666
15,577
(2,220)
26,618
54,049
1,801
16,000
—
—
(20,970)
2,023
(3,786)
1,758
(1,578)
(919)
(435)
(4,425)
6,463
17,370
43,052
72,216
64,435
71,318
—
2,992
—
10,873
5,734
46,895
1,726
365,588
51,116
23,994
76,512
—
6,848
—
123
—
—
200
—
—
—
468
—
153
—
—
1,121
—
—
—
886
843,933
237,851
(174,931)
80,451
987,304
84,777
—
9,186
35,813
10,007
36,877
7,312
40,286
31,091
678
2,104
—
—
8,750
2,599
1,821
22,145
—
(100)
96
(69,125)
(154)
—
(15,344)
(972)
10,918
(4,295)
55,003
(30,214)
(403)
(1,802)
36,945
20,825
32,678
1,940
12,517
32,509
5,677
3,406
1,518
2,877
—
—
5,629
—
4,310
—
149
—
—
124
—
—
—
—
— (66,103)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
16
—
—
—
172
Total $
1,752,449 $
348,241 $
(275,732) $
86,817 $
1,911,775 $
177,496 $
5,250 $ 11,470 $ (65,915)
* Gross additions include increases in the cost basis of the investments resulting from new portfolio investments, OID accretion and PIK interest.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales and impairments.
(50) As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio
company’s outstanding voting securities. Transactions during the year ended June 30, 2017 with these affiliated investments were as follows:
Portfolio Company
BNN Holdings Corp.
Nixon, Inc.***
Targus International LLC
Fair Value
at
June 30,
2016
Gross
Additions
(Cost)*
Gross
Reductions
(Cost)**
Net
unrealized
gains
(losses)
Fair Value at
June 30, 2017
Interest
income
Dividend
income
Other
income
2,842
—
8,478
—
1,552
231
(2,227)
—
—
(615)
(1,552)
2,720
—
—
11,429
—
—
297
—
—
—
—
—
—
Total $
11,320 $
1,783 $
(2,227) $
553 $
11,429 $
297 $
— $
— $
Net
realized
gains
(losses)
137
—
—
137
* Gross additions include increases in the cost basis of the investments resulting from new portfolio investments and PIK interest.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales and impairments.
***Investment was transfered at fair market value at the beginning of the three month ended June 30, 2017 period.
See notes to consolidated financial statements.
137
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
(51) As defined in the 1940 Act, we are deemed to “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding
voting securities. Transactions during the year ended June 30, 2016 with these controlled investments were as follows:
Portfolio Company
American Property REIT
Corp.***
Arctic Energy Services,
LLC
CCPI Inc.
CP Energy Services Inc.
Credit Central Loan
Company, LLC
Echelon Aviation LLC
Edmentum Ultimate
Holdings, LLC
First Tower Finance
Company LLC
Freedom Marine
Solutions, LLC
Harbortouch Payments,
LLC
MITY, Inc.
National Property REIT
Corp.****
Nationwide Loan
Company LLC
NMMB, Inc.
R-V Industries, Inc.
SB Forging Company, Inc.
SB Forging Company II,
Inc. (f/k/a Gulf Coast
Machine & Supply
Company)
United Property REIT
Corp.***
USES Corp.
Valley Electric Company,
Inc.
Wolf Energy, LLC
Fair Value at
June 30,
2015
Gross
Additions
(Cost)*
Gross
Reductions
(Cost)**
Net unrealized
gains (losses)
Fair Value at
June 30, 2016
Interest
income
Dividend
income
Other
income
Net
realized
gains
(losses)
$
118,256 $
2,826 $
(103,017) $
(18,065) $
— $
7,306 $
11,016 $
899 $
60,364
41,352
91,009
55,172
68,941
—
475
(2,819)
921
—
—
(6,368)
—
(323)
(2,954)
(22,024)
5,897
(12,188)
(3,516)
(5,166)
38,340
41,356
76,002
52,254
60,821
1,123
3,123
(390)
7,398
5,700
37,216
9,358
(4,896)
2,668
44,346
3,650
365,950
8,866
(679)
(21,471)
352,666
56,698
27,090
1,000
—
(1,472)
26,618
1,112
—
3,196
—
—
—
—
— 2,067
—
7,250
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
376,936
50,795
9,503
139
(314,962)
—
(71,477)
3,115
—
54,049
33,419
5,762
— 12,909
—
711
(5,419)
13
471,889
256,737
20,979
94,328
843,933
62,690
— 5,375
34,550
12,052
40,508
—
3,583
—
—
—
(300)
—
(614)
—
(2,020)
(2,045)
(3,017)
—
35,813
10,007
36,877
—
3,212
1,525
2,908
—
3,963
—
299
—
—
—
—
—
6,918
9,500
(1,075)
(8,031)
7,312
—
—
—
84,685
—
30,497
22
7,531
55,297
1,599
—
(83,159)
(150)
—
—
(9,057)
(14,861)
(1,005)
656
—
40,286
31,091
678
6,778
—
5,363
—
— 1,278
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total $
1,974,202 $
364,516 $
(497,518) $
(88,751) $
1,752,449 $ 207,377 $
26,435 $ 22,528 $
(5,406)
* Gross additions include increases in the cost basis of the investments resulting from new portfolio investments and PIK interest.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales and impairments.
***Effective May 23, 2016, American Property REIT Corp. (“APRC”) and United Property REIT Corp. (“UPRC”) merged with and into NPRC, to consolidate all of our real
estate holdings, with NPRC as the surviving entity. No gain or loss was recognized upon the merger.
****NPRC’s gross reductions include the amortized amounts of $73,314 and $75,592 transferred in from APRC and UPRC, respectively, in conjunction with the merger
described above.
See notes to consolidated financial statements.
138
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of June 30, 2017 and June 30, 2016 (Continued)
(52) As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio
company’s outstanding voting securities. Transactions during the year ended June 30, 2016 with these affiliated investments were as follows:
Portfolio Company
Fair Value
at
June 30,
2015
Gross
Additions
(Cost)*
Gross
Reductions
(Cost)**
Net
unrealized
gains (losses)
Fair Value at
June 30, 2016
Interest
income
Dividend
income
Other
income
Net
realized
gains
(losses)
BNN Holdings Corp.
Targus International LLC
$
45,945 $
—
— $
22,724
(42,922) $
(14,194)
Total $
45,945 $
22,724 $
(57,116) $
(181) $
(52)
(233) $
2,842 $
8,478
11,320 $
896 $
—
896 $
— $
—
— $
— $
—
— (14,194)
— $ (14,194)
* Gross additions include increases in the cost basis of the investments resulting from new portfolio investments and PIK interest.
** Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales and impairments.
See notes to consolidated financial statements.
139
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
Note 1. Organization
In this report, the terms “Prospect,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise.
Prospect is a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company
incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940
Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the
“Code”). We were organized on April 13, 2004 and were funded in an initial public offering completed on July 27, 2004.
On May 15, 2007, we formed a wholly-owned subsidiary Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote
special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Our wholly-owned
subsidiary Prospect Small Business Lending, LLC (“PSBL”) was formed on January 27, 2014 and purchases small business whole loans on a recurring basis from
online small business loan originators, including On Deck Capital, Inc. (“OnDeck”). On September 30, 2014, we formed a wholly-owned subsidiary Prospect
Yield Corporation, LLC (“PYC”) and effective October 23, 2014, PYC holds our investments in collateralized loan obligations (“CLOs”). Each of these
subsidiaries have been consolidated since operations commenced.
We consolidate certain of our wholly-owned and substantially wholly-owned holding companies formed by us in order to facilitate our investment strategy. The
following companies are included in our consolidated financial statements: AMU Holdings Inc. ; APH Property Holdings, LLC (“APH”); Arctic Oilfield
Equipment USA, Inc.; CCPI Holdings Inc.; CP Holdings of Delaware LLC; Credit Central Holdings of Delaware, LLC; Energy Solutions Holdings Inc.; First
Tower Holdings of Delaware LLC; Harbortouch Holdings of Delaware Inc.; MITY Holdings of Delaware Inc.; Nationwide Acceptance Holdings LLC; NMMB
Holdings, Inc.; NPH Property Holdings, LLC (“NPH”); STI Holding, Inc.; UPH Property Holdings, LLC (“UPH”); Valley Electric Holdings I, Inc.; Valley Electric
Holdings II, Inc.; and Wolf Energy Holdings Inc. (“Wolf Energy Holdings”). On October 10, 2014, concurrent with the sale of the operating company, our
ownership increased to 100% of the outstanding equity of ARRM Services, Inc. (“ARRM”) which was renamed SB Forging Company, Inc. (“SB Forging”). As
such, we began consolidating SB Forging on October 11, 2014. Effective May 23, 2016, in connection with the merger of American Property REIT Corp.
(“APRC”) and United Property REIT Corp. (“UPRC”) with and into National Property REIT Corp. (“NPRC”), APH and UPH merged with and into NPH, and
were dissolved. We collectively refer to these entities as the “Consolidated Holding Companies.”
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect
Administration LLC (“Prospect Administration” or the “Administrator”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services
and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior
and subordinated debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes.
We work with the management teams or financial sponsors to identify investments with historical cash flows, asset collateral or contracted pro-forma cash flows
for investment.
Note 2. Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”)
pursuant to the requirements for reporting on Form 10-K, ASC 946, Financial Services—Investment Companies (“ASC 946”), and Articles 3, 6 and 12 of
Regulation S-X. Under the 1940 Act, ASC 946, and the regulations pursuant to Article 6 of Regulation S-X, we are precluded from consolidating any entity other
than another investment company or an operating company which provides substantially all of its services to benefit us. Our consolidated financial statements
include the accounts of Prospect, PCF, PSBL, PYC, and the Consolidated Holding Companies. All intercompany balances and transactions have been eliminated in
consolidation. The financial results of our non-substantially wholly-owned holding companies and operating portfolio company investments are not consolidated in
the financial statements. Any operating companies owned by the Consolidated Holding Companies are not consolidated.
140
Reclassifications
Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of
and for the year ended June 30, 2017 .
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, expenses, and gains and losses during the reported
period. Changes in the economic environment, financial markets, creditworthiness of the issuers of our investment portfolio and any other parameters used in
determining these estimates could cause actual results to differ, and these differences could be material.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in
the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a
company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of
more than 25% of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are
deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting
securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our
total assets are qualifying assets (with certain limited exceptions). As of June 30, 2017 and June 30, 2016 , our qualifying assets as a percentage of total assets,
stood at 71.75% and 74.58% , respectively.
Investment Transactions
Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument.
Specifically, we record all security transactions on a trade date basis. Investments are derecognized when we assume an obligation to sell a financial instrument and
forego the risks for gains or losses related to that instrument. In accordance with ASC 325-40, Beneficial Interest in Securitized Financial Assets , investments in
CLOs are periodically assessed for other-than-temporary impairment (“OTTI”). When the Company determines that a CLO has OTTI, the amortized cost basis of
the CLO is written down to its fair value as of the date of the determination based on events and information evaluated and that write-down is recognized as a
realized loss. Amounts for investments traded but not yet settled are reported in Due to Broker or Due from Broker, in the Consolidated Statements of Assets and
Liabilities .
Foreign Currency
Foreign currency amounts are translated into US Dollars (USD) on the following basis:
i.
ii.
fair value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and
purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such investment
transactions, income or expenses.
We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from
changes in fair values of investments held or disposed of during the period. Such fluctuations are included within the net realized and net change in unrealized
gains or losses from investments in the Consolidated Statements of Operations.
Investment Risks
Our investments are subject to a variety of risks. Those risks include the following:
Market Risk
Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.
141
Credit Risk
Credit risk represents the risk that we would incur if the counterparties failed to perform pursuant to the terms of their agreements with us.
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to rapidly adjust the size of our investment positions in times of high volatility and financial
stress at a reasonable price.
Interest Rate Risk
Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.
Prepayment Risk
Many of our debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a
faster than expected rate, thereby effectively shortening the maturity of the security and making us less likely to fully earn all of the expected income of that
security and reinvesting in a lower yielding instrument.
Structured Credit Related Risk
CLO investments may be riskier and less transparent to us than direct investments in underlying companies. CLOs typically will have no significant assets
other than their underlying senior secured loans. Therefore, payments on CLO investments are and will be payable solely from the cash flows from such senior
secured loans.
Online Small-and-Medium-Sized Business Lending Risk
With respect to our online small-and-medium-sized business (“SME”) lending initiative, we invest primarily in marketplace loans through marketplace
lending facilitators. We do not conduct loan origination activities ourselves. Therefore, our ability to purchase SME loans, and our ability to grow our
portfolio of SME loans, is directly influenced by the business performance and competitiveness of the marketplace loan origination business of the
marketplace lending facilitators from which we purchase SME loans. In addition, our ability to analyze the risk-return profile of SME loans is significantly
dependent on the marketplace facilitators’ ability to effectively evaluate a borrower's credit profile and likelihood of default. If we are unable to effectively
evaluate borrowers' credit profiles or the credit decisioning and scoring models implemented by each facilitator, we may incur unanticipated losses which
could adversely impact our operating results.
Foreign Currency
Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with
those of domestic origin. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic
developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S.
government securities.
Investment Valuation
To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for
measuring fair value in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and requires disclosures about fair
value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an
orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1 : Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2 : Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not
active, or other observable inputs other than quoted prices.
Level 3 : Unobservable inputs for the asset or liability.
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In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input
that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires
judgment and considers factors specific to each investment.
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such
market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below.
1. Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.
2. The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.
3. The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a
recommendation to the Board of Directors of the value for each investment.
4. The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the
Investment Adviser, the respective independent valuation firm and the Audit Committee.
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, liquidation technique, discounted
cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by
market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over
the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market
(multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger
and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an
underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider
capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The liquidation technique is intended to
approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation
of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate
may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about
those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call
protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal
markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among
other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued primarily using a discounted multi-path cash flow
model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are
sensitized using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-
path) cash flows from the underlying assets and liabilities. These cash flows, after payments to debt tranches senior to our equity positions, are discounted using
appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each
CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the
implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset
management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third party CLO collateral managers.
The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
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Valuation of Other Financial Assets and Financial Liabilities
ASC 825, Financial Instruments , specifically ASC 825-10-25, permits an entity to choose, at specified election dates, to measure eligible items at fair value (the
“Fair Value Option”). We have not elected the Fair Value Option to report selected financial assets and financial liabilities. See Note 8 for the disclosure of the fair
value of our outstanding debt and the market observable inputs used in determining fair value.
Convertible Notes
We have recorded the Convertible Notes at their contractual amounts. We have determined that the embedded conversion options in the Convertible Unsecured
Notes are not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging . See Note 5 for further discussion.
Revenue Recognition
Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Loan origination fees, original issue discount, and
market discounts are capitalized and accreted into interest income over the respective terms of the applicable loans using the effective interest method or straight-
line, as applicable, and adjusted only for material amendments or prepayments. Upon a prepayment of a loan, prepayment premiums, original issue discount, or
market discounts are recorded as interest income. Other income generally includes amendment fees, commitment fees, administrative agent fees and structuring
fees which are recorded when earned.
Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Unpaid accrued interest is generally reversed
when a loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to the cost basis depending
upon management’s judgment of the collectibility of the loan receivable. Non-accrual loans are restored to accrual status when past due principal and interest is
paid and in management’s judgment, is likely to remain current. As of June 30, 2017 , approximately 2.5% of our total assets at fair value are in non-accrual status.
Interest income from investments in the “equity” class of security of CLO funds (typically preferred shares, income notes or subordinated notes) and “equity” class
of security of securitized trust is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC
325-40, Beneficial Interests in Securitized Financial Assets . We monitor the expected cash inflows from our CLO and securitized trust equity investments,
including the expected residual payments, and the effective yield is determined and updated periodically.
Dividend income is recorded on the ex-dividend date.
Structuring fees and similar fees are recognized as income is earned, usually when paid. Structuring fees, excess deal deposits, net profits interests and overriding
royalty interests are included in other income. See Note 10 for further discussion.
Federal and State Income Taxes
We have elected to be treated as a RIC and intend to continue to comply with the requirements of the Code applicable to regulated investment companies. We are
required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our
investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and
gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to
stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.
If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income and 98.2% of our capital gains in the calendar year
earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains
exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in
excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of June
30, 2017, we do not expect to have any excise tax due for the 2017 calendar year. Thus, we have not accrued any excise tax for this period.
If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable
income at regular corporate income tax rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions.
Distributions would generally be taxable to our individual and other
144
non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our
current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Code,
corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to
distribute to our shareholders our accumulated earnings and profits attributable to non-RIC years. In addition, if we failed to qualify as a RIC for a period greater
than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the
excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to
taxation on such built-in gain recognized for a period of five years.
We follow ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and
disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax
returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the
more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. As of June 30, 2017 and 2016, we did not record any unrecognized tax
benefits or liabilities. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but
not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Although we file both federal and state income tax returns, our major tax
jurisdiction is federal. Our federal tax returns for the tax years ended August 31, 2014 and thereafter remain subject to examination by the Internal Revenue
Service.
Dividends and Distributions
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a monthly dividend or distribution is
approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our future taxable earnings. Net realized capital gains, if
any, are distributed at least annually.
Financing Costs
We record origination expenses related to our Revolving Credit Facility, and Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our
“Unsecured Notes”) as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method over the
stated life of the obligation for our Revolving Credit Facility. The same methodology is used to approximate the effective yield method for our Prospect Capital
InterNotes® and our at-the-market offering of our existing unsecured notes that mature on June 15, 2024 (“2024 Notes Follow-on Program”). The effective interest
method is used for our remaining Unsecured Notes over the respective expected life or maturity. In the event that we modify or extinguish our debt before
maturity, we follow the guidance in ASC 470-50, Modification and Extinguishments (“ASC 470-50”). For modifications to or exchanges of our Revolving Credit
Facility, any unamortized deferred costs relating to lenders who are not part of the new lending group are expensed. For extinguishments of our Unsecured Notes,
any unamortized deferred costs are deducted from the carrying amount of the debt in determining the gain or loss from the extinguishment.
For the year ended June 30, 2017, we have changed our method of presentation relating to debt issuance costs in accordance with ASU 2015-03, Interest -
Imputation of Interest (Subtopic 835-30). Prior to July 1, 2016, our policy was to present debt issuance costs in Deferred financing costs as an asset on the
Consolidated Statements of Assets and Liabilities , net of accumulated amortization. Beginning with the period ended September 30, 2016, we have presented these
costs, except those incurred by the Revolving Credit Facility, as a direct deduction to our Unsecured Notes. Unamortized deferred financing costs of $40,526,
$44,140, $57,010, and $37,607 previously reported as an asset on the Consolidated Statements of Assets and Liabilities for the years ended June 30, 2016, 2015,
2014, and 2013, respectively, have been reclassified as a direct deduction to the respective Unsecured Notes (see Notes 5, 6, and 7).
We may record registration expenses related to shelf filings as prepaid expenses. These expenses consist principally of the Securities and Exchange Commission
(“SEC”) registration fees, legal fees and accounting fees incurred. These prepaid expenses are charged to capital upon the receipt of proceeds from an equity
offering or charged to expense if no offering is completed. As of June 30, 2017 and June 30, 2016 , there are no prepaid expenses related to registration expenses
and all amounts incurred have been expensed.
Guarantees and Indemnification Agreements
We follow ASC 460, Guarantees (“ASC 460”). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual consolidated financial
statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those
guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.
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Per Share Information
Net increase or decrease in net assets resulting from operations per share is calculated using the weighted average number of common shares outstanding for the
period presented. In accordance with ASC 946, convertible securities are not considered in the calculation of net asset value per share.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU
2016-13”), which amends the financial instruments impairment guidance so that an entity is required to measure expected credit losses for financial assets based on
historical experience, current conditions and reasonable and supportable forecasts. As such, an entity will use forward-looking information to estimate credit losses.
ASU 2016-13 also amends the guidance in FASB ASC Subtopic No. 325-40, Investments-Other, Beneficial Interests in Securitized Financial Assets , related to the
subsequent measurement of accretable yield recognized as interest income over the life of a beneficial interest in securitized financial assets under the effective
yield method. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those
fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are
currently evaluating the impact, if any, of adopting this ASU on our consolidated financial statements .
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-
15”), which addresses certain aspects of cash flow statement classification. One such amendment requires cash payments for debt prepayment or debt
extinguishment costs to be classified as cash outflows for financing activities. ASU 2016-15 is effective for financial statements issued for fiscal years beginning
after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early
adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. The adoption of the amended guidance in ASU 2016-15 is not expected to have a
significant effect on our consolidated financial statements and disclosures.
In October 2016, the SEC adopted significant reforms under the 1940 Act that impose extensive new disclosure and reporting obligations on most 1940 Act funds
(collectively, the “Reporting Rules”). The Reporting Rules greatly expand the volume of information regarding fund portfolio holdings and investment practices
that must be disclosed. The adopted amendments to Regulation S-X for 1940 Act funds and BDCs include an update to the disclosures for investments in and
advances to affiliates, and the requirement to include in their financial statements a standardized schedule containing detailed information about derivative
investments (among other changes). The amendments to Regulation S-X are effective for reporting periods ending after August 1, 2017, and adoption of the
amended reform is not expected to have a significant effect on our consolidated financial statements and disclosures.
Note 3. Portfolio Investments
At June 30, 2017 , we had investments in 121 long-term portfolio investments, which had an amortized cost of $5,981,556 and a fair value of $5,838,305 . At
June 30, 2016 , we had investments in 125 long-term portfolio investments, which had an amortized cost of $6,091,100 and a fair value of $5,897,708 .
The original cost basis of debt placement and equity securities acquired, including follow-on investments for existing portfolio companies, payment-in-kind
interest, and structuring fees, totaled $1,489,470 and $979,102 during the years ended June 30, 2017 and June 30, 2016 , respectively. Debt repayments and
considerations from sales of equity securities of approximately $1,413,882 and $1,338,875 were received during the years ended June 30, 2017 and June 30, 2016 ,
respectively.
The following table shows the composition of our investment portfolio as of June 30, 2017 and June 30, 2016 .
146
Revolving Line of Credit
Senior Secured Debt
Subordinated Secured Debt
Subordinated Unsecured Debt
Small Business Loans
CLO Residual Interest
Equity
Total Investments
June 30, 2017
June 30, 2016
Cost
Fair Value
Cost
Fair Value
$
27,409 $
27,409 $
13,274 $
2,940,163
1,160,019
37,934
8,434
2,798,796
1,107,040
44,434
7,964
3,072,839
1,228,598
75,878
14,603
1,150,006
1,079,712
1,083,540
657,591
772,950
602,368
$
5,981,556 $
5,838,305 $
6,091,100 $
13,274
2,941,722
1,209,604
68,358
14,215
1,009,696
640,839
5,897,708
In the previous table and throughout the remainder of this footnote, we aggregate our portfolio investments by type of investment, which may differ slightly from
the nomenclature used by the constituent instruments defining the rights of holders of the investment, as disclosed on our Consolidated Schedules of Investments
(“SOI”). The following investments are included in each category:
•
•
•
•
•
•
•
Revolving Line of Credit includes our investments in delayed draw term loans.
Senior Secured Debt includes investments listed on the SOI such as senior secured term loans, senior term loans, secured promissory notes, senior
demand notes, and first lien term loans.
Subordinated Secured Debt includes investments listed on the SOI such as subordinated secured term loans, subordinated term loans, senior subordinated
notes, and second lien term loans.
Subordinated Unsecured Debt includes investments listed on the SOI such as subordinated unsecured notes and senior unsecured notes.
Small Business Loans includes our investments in SME whole loans purchased from OnDeck.
CLO Residual Interest includes our investments in the “equity” security class of CLO funds such as income notes, preference shares, and subordinated
notes.
Equity, unless specifically stated otherwise, includes our investments in preferred stock, common stock, membership interests, net profits interests, net
operating income interests, net revenue interests, overriding royalty interests, escrows receivable, and warrants.
147
The following table shows the fair value of our investments disaggregated into the three levels of the ASC 820 valuation hierarchy as of June 30, 2017 .
Revolving Line of Credit
Senior Secured Debt
Subordinated Secured Debt
Subordinated Unsecured Debt
Small Business Loans
CLO Residual Interest
Equity
Total Investments
Level 1
Level 2
Level 3
Total
— $
— $
27,409 $
—
—
—
—
—
—
—
—
—
—
—
—
2,798,796
1,107,040
44,434
7,964
1,079,712
772,950
— $
— $
5,838,305 $
27,409
2,798,796
1,107,040
44,434
7,964
1,079,712
772,950
5,838,305
$
$
The following table shows the fair value of our investments disaggregated into the three levels of the ASC 820 valuation hierarchy as of June 30, 2016 .
Revolving Line of Credit
Senior Secured Debt
Subordinated Secured Debt
Subordinated Unsecured Debt
Small Business Loans
CLO Residual Interest
Equity
Total Investments
Level 1
Level 2
Level 3
Total
$
— $
— $
13,274 $
13,274
—
—
—
—
—
—
—
—
—
—
—
—
2,941,722
2,941,722
1,209,604
1,209,604
68,358
14,215
68,358
14,215
1,009,696
1,009,696
640,839
640,839
$
— $
— $
5,897,708 $
5,897,708
The following tables show the aggregate changes in the fair value of our Level 3 investments during the year ended June 30, 2017 .
Fair Value Measurements Using Unobservable Inputs (Level 3)
Fair value as of June 30, 2016
$
1,752,449 $
11,320 $
4,133,939 $
Control
Investments
Affiliate
Investments
Non-Control/
Non-Affiliate
Investments
Net realized (losses) gains on investments
Net change in unrealized gains (losses)
Net realized and unrealized gains (losses)
Purchases of portfolio investments
Payment-in-kind interest
Accretion (amortization) of discounts and premiums, net
Repayments and sales of portfolio investments
Transfers within Level 3(1)
Transfers in (out) of Level 3(1)
(65,915)
86,817
20,902
310,922
14,252
922
(209,817)
22,145
—
Total
5,897,708
(98,403)
50,141
(48,262)
(32,625)
(37,229)
(69,854)
1,160,740
1,471,662
3,325
(89,749)
17,808
(88,827)
137
553
690
—
231
—
(2,364)
(1,199,603)
(1,411,784)
1,552
—
(23,697)
—
—
—
Fair value as of June 30, 2017
$
1,911,775 $
11,429 $
3,915,101 $
5,838,305
148
Fair value as of June 30, 2016
$
Net realized (losses) gains on investments
Net change in unrealized (losses) gains
Net realized and unrealized (losses)
gains
Purchases of portfolio investments
Payment-in-kind interest
Accretion (amortization) of discounts and
premiums
Repayments and sales of portfolio
investments
Transfers within Level 3(1)
Transfers in (out) of Level 3(1)
Fair value as of June 30, 2017
$
Revolving Line
of Credit
Subordinated
Secured Debt
Subordinated
Unsecured Debt
Small Business
Loans
Senior Secured
Debt
2,941,722 $
(59,730)
(10,245)
(69,975)
762,505
5,127
531
(763,969)
(77,145)
—
13,274 $
—
—
—
21,559
—
—
(7,424)
—
—
27,409 $
1,209,604 $
(382)
(33,990)
(34,372)
378,793
10,624
5,389
(462,998)
—
—
2,798,796 $
1,107,040 $
68,358 $
6
14,020
14,026
—
2,057
—
(40,007)
—
—
44,434 $
14,215 $
(3,013)
(83)
(3,096)
51,802
—
—
(54,957)
—
—
7,964 $
CLO
Residual
Interest
1,009,696 $
(17,239)
3,550
(13,689)
178,452
—
(94,747)
—
—
—
1,079,712 $
Equity
Total
640,839 $
(18,045)
76,889
58,844
78,551
—
—
(82,429)
77,145
—
772,950 $
5,897,708
(98,403)
50,141
(48,262)
1,471,662
17,808
(88,827)
(1,411,784)
—
—
5,838,305
(1) Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred.
The following tables show the aggregate changes in the fair value of our Level 3 investments during the year ended June 30, 2016 .
Fair Value Measurements Using Unobservable Inputs (Level 3)
Fair value as of June 30, 2015
Net realized losses on investments
Net change in unrealized losses
Net realized and unrealized losses
Purchases of portfolio investments
Payment-in-kind interest
Amortization of discounts and premiums
Repayments and sales of portfolio investments
Transfers within Level 3(1)
Transfers in (out) of Level 3(1)
Control
Investments
Affiliate
Investments
Non-Control/
Non-Affiliate
Investments
$
1,974,202 $
45,945 $
4,589,151 $
Total
6,609,298
(27,737)
(243,376)
(271,113)
958,572
20,531
(84,087)
(14,194)
(8,137)
(233)
(154,392)
(14,427)
(162,529)
1,263
660,339
—
—
(42,922)
21,461
—
5,356
(84,087)
(800,459)
(1,335,493)
(73,832)
—
—
—
(5,406)
(88,751)
(94,157)
296,970
15,175
—
(492,112)
52,371
—
Fair value as of June 30, 2016
$
1,752,449 $
11,320 $
4,133,939 $
5,897,708
Fair value as of June 30, 2015
Net realized (losses) gains on
investments
Net change in unrealized (losses) gains
Net realized and unrealized
(losses) gains
Purchases of portfolio investments
Payment-in-kind interest
Accretion (amortization) of discounts
and premiums
Repayments and sales of portfolio
investments
Transfers within Level 3(1)
Transfers in (out) of Level 3(1)
Fair value as of June 30,
2016
Revolving
Line of
Credit
Senior
Secured
Debt
Subordinated
Secured Debt
$
30,546 $ 3,533,447 $
1,205,303 $
Subordinated
Unsecured
Debt
144,271 $
Small
Business
Loans
50,892 $
CLO
Residual
Interest
CLO
Debt
32,398 $ 1,113,023 $ 499,418 $ 6,609,298
Equity
Total
—
—
—
9,824
—
—
(27,096)
—
—
(1,246)
(47,455)
(48,701)
412,950
15,900
353
(847,644)
(124,583)
—
(7,456)
10,403
2,947
147,104
1,697
986
(73,200)
(75,233)
—
10
(6,146)
(6,136)
—
2,934
—
(5,986)
(722)
(6,708)
72,400
—
—
3,911
(3,784)
127
—
—
390
—
(114,131)
(114,131)
96,620
—
(85,816)
(16,970)
(81,541)
(98,511)
219,674
—
(27,737)
(243,376)
(271,113)
958,572
20,531
—
(84,087)
(72,711)
—
—
(102,369)
—
—
(32,915)
—
—
—
—
—
(179,558)
199,816
—
(1,335,493)
—
—
$
13,274 $ 2,941,722 $
1,209,604 $
68,358 $
14,215 $
— $ 1,009,696 $ 640,839 $ 5,897,708
(1) Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred.
The net change in unrealized gains (losses) on the investments that use Level 3 inputs was $10,082 and $(157,796) for investments still held as of June 30, 2017
and June 30, 2016 , respectively.
149
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2017 were as follows:
Asset Category
Fair Value
$
1,977,660
211,856
27,479
47,099
1,630
269,166
291,315
665,405
111,847
329,788
44,434
7,964
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt (1)
Senior Secured Debt (2)
Senior Secured Debt (2)
Subordinated Secured Debt
Subordinated Secured Debt
Subordinated Secured Debt (3)
Subordinated Secured Debt (3)
Subordinated Unsecured Debt
Small Business Loans (4)
CLO Residual Interest
Preferred Equity
Preferred Equity
Common Equity/Interests/Warrants
Common Equity/Interests/Warrants
Common Equity/Interests/Warrants (1)
Common Equity/Interests/Warrants (2)
Common Equity/Interests/Warrants (2)
Common Equity/Interests/Warrants (5)
Common Equity/Interests/Warrants
Common Equity/Interests/Warrants
Escrow Receivable
Primary Valuation Approach or
Technique
Discounted Cash Flow
(Yield analysis)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Discounted
cash flow)
Unobservable Input
Input
Range
Weighted
Average
Market Yield
5.1%-27.0%
10.7%
EBITDA Multiple
Revenue Multiple
4.0x-9.0x
0.3x-0.6x
Discount Rate
7.3%-15.9%
Liquidation Analysis
N/A
N/A
Enterprise Value Waterfall
Loss-adjusted discount rate
3.0%-14.2%
Enterprise Value Waterfall (NAV
Analysis)
Discounted Cash Flow
Discounted Cash Flow
(Yield analysis)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Capitalization Rate
Discount Rate
Market Yield
EBITDA Multiple
Book Value Multiple
Earnings Multiple
EBITDA Multiple
Discounted Cash Flow
Loss-adjusted Discount Rate
1,079,712
Discounted Cash Flow
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
10,992
72,216
46,373
22,671
93,801
Discount Rate
EBITDA Multiple
Revenue Multiple
EBITDA Multiple
Revenue Multiple
Enterprise Value Waterfall
Loss-adjusted discount rate
3.0%-14.2%
244,245
Enterprise Value Waterfall (NAV
analysis)
Capitalization Rate
6.7x
0.4x
11.6%
N/A
10.6%
6.1%
7.0%
11.4%
7.3x
2.4x
11.0x
7.7x
25.9%
15.7%
4.8x
2.6x
6.0x
1.2x
10.6%
6.1%
7.0%
2.3x
10.8x
7.0%
11.8%
N/A
7.0%
3.4%-8.0%
6.5%-7.5%
5.9%-27.0%
6.3x-8.0x
1.2x-2.8x
7.5x-12.0x
5.8x-8.5x
3.0%-25.9%
12.0%-21.9%
4.0x-9.0x
2.3x-2.8x
4.0x-8.5x
0.3x-2.8x
3.4%-8.0%
6.5%-7.5%
1.2x-2.8x
7.5x-12.0x
6.5%-7.5%
6.4%-18.0%
N/A
6.4%-7.5%
Common Equity/Interests/Warrants (2)
Discounted Cash Flow
Discount Rate
Common Equity/Interests/Warrants (2)
134,481
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
88,777
28,858
29,672
864
Discounted Cash Flow
Discounted Cash Flow
Liquidation Analysis
Discounted Cash Flow
Book Value Multiple
Earnings Multiple
Discount Rate
Discount Rate
N/A
Discount Rate
Total Level 3 Investments
$
5,838,305
150
(1) Represents an investment in a subsidiary of our controlled investment NPRC. The Enterprise Value Waterfall analysis of NPRC includes the fair value of the investments in
such indirect subsidiary’s consumer loans purchased from online consumer lending platforms, which are valued using a discounted cash flow valuation technique. The key
unobservable input to the discounted cash flow analysis is noted in the table. In addition, the valuation also used projected loss rates as an unobservable input ranging from
0.16-18.46%, with a weighted average of 8.57%.
(2) Represents our REIT investments. EV waterfall methodology uses both the net asset value analysis and discounted cash flow analysis, which are weighted equally (50%).
(3) Represents investments in consumer finance subsidiaries. The enterprise value waterfall methodology utilizes book value and earnings multiples, as noted above. In
addition, the valuation of certain consumer finance companies utilizes the discounted cash flow technique whereby the significant unobservable input is the discount rate.
For these companies each valuation technique (book value multiple, earnings multiple and discount rate) is weighted equally. For these companies the discount rate ranged
from 13.5% to 18.0% with a weighted average of 14.7%.
(4)
Includes our investments in small business whole loans purchased from OnDeck. Valuation also used projected loss rates as an unobservable input ranging from 0.01%-
1.16%, with a weighted average of 0.88%.
(5) Represents net operating income interests in our REIT investments.
151
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2016 were as follows:
Primary Valuation Approach or
Technique
Discounted Cash Flow
(Yield analysis)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Discounted
cash flow)
Liquidation Analysis
Unobservable Input
Input
Range
Weighted
Average
Market Yield
5.3%-27.6%
11.6%
EBITDA Multiple
Revenue Multiple
Discount Rate
N/A
4.5x-6.8x
0.4x-0.6x
6.5%-8.5%
N/A
Asset Category
Fair Value
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt
Senior Secured Debt (1)
Senior Secured Debt (2)
Senior Secured Debt (2)
Subordinated Secured Debt
Subordinated Secured Debt
Subordinated Secured Debt (3)
Subordinated Secured Debt (3)
Subordinated Unsecured Debt
Subordinated Unsecured Debt
Small Business Loans (4)
CLO Residual Interest
Preferred Equity (6)
Preferred Equity
Common Equity/Interests/Warrants (7)
$
2,167,389
115,893
64,418
37,856
7,972
99,972
461,496
871,593
28,622
309,389
30,781
37,577
14,215
76,081
2,842
92,391
Common Equity/Interests/Warrants (2)
215,490
Common Equity/Interests/Warrants (2)
Common Equity/Interests/Warrants (3)
127,727
Enterprise Value Waterfall
Loss-adjusted discount rate
3.0%-18.0%
Enterprise Value Waterfall (NAV
Analysis)
Enterprise Value Waterfall (Income
approach)
Discounted Cash Flow
(Yield Analysis)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Discounted Cash Flow
(Yield Analysis)
Enterprise Value Waterfall (Market
approach)
Capitalization Rate
Discount Rate
3.4%-8.3%
6.5%-7.5%
Market Yield
5.3%-25.7%
EBITDA Multiple
Book Value Multiple
7.0x-8.0x
1.2x-3.7x
Earnings Multiple
7.0x-11.0x
Market Yield
14.1%-71.9%
EBITDA Multiple
5.8x-8.5x
Discounted Cash Flow
Loss-Adjusted Discount Rate
1,009,696
Discounted Cash Flow
Enterprise Value Waterfall (Market
approach)
Discounted Cash Flow
Discount Rate
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (NAV
analysis)
Enterprise Value Waterfall (Income
approach)
Enterprise Value Waterfall (Market
approach)
Enterprise Value Waterfall (Market
approach)
Discount Rate
EBITDA Multiple
EBITDA Multiple
Capitalization Rate
Discount Rate
12.7%-33.6%
15.6%-23.9%
4.5x-7.0x
6.2%-7.3%
4.8x-9.0x
3.4%-8.3%
6.5%-7.5%
Book Value Multiple
1.2x-3.7x
Earnings Multiple
Discount Rate
Discount Rate
Market Yield
N/A
Discount Rate
7.0x-11.0x
6.5%-7.5%
6.5%-8.5%
16.0%-18.0%
N/A
6.2%-7.5%
Common Equity/Interests/Warrants (3)
Common Equity/Interests/Warrants (5)
Common Equity/Interests/Warrants
Common Equity/Interests/Warrants
Common Equity/Interests/Warrants
Escrow Receivable
66,973
22,965
3,616
26,638
6,116
Discounted Cash Flow
Discounted Cash Flow
Discounted Cash Flow
(Yield analysis)
Liquidation Analysis
Discounted Cash Flow
Total Level 3 Investments
$
5,897,708
152
5.9x
0.5x
7.5%
N/A
13.5%
5.9%
7.0%
12.6%
7.5x
2.5x
10.2x
28.9%
7.7x
21.8%
18.0%
6.7x
6.8%
6.0x
5.9%
7.0%
2.3x
10.0x
7.0%
7.5%
17.0%
N/A
6.8%
(1) Represents an investment in a subsidiary of our controlled investment NPRC. The Enterprise Value Waterfall analysis of NPRC includes the fair value of the investments in
such indirect subsidiary’s consumer loans purchased from online consumer lending platforms, which are valued using a discounted cash flow valuation technique. The key
unobservable input to the discounted cash flow analysis is noted in the table. In addition, the valuation also used projected loss rates as an unobservable input ranging from
1.07%-24.50%, with a weighted average of 10.58%.
(2) Represents our REIT investments. EV waterfall methodology uses both the net asset value analysis and discounted cash flow analysis, which are weighted equally (50%).
(3) Represents investments in consumer finance subsidiaries. The enterprise value waterfall methodology utilizes book value and earnings multiples, as noted above. In
addition, the valuation of certain consumer finance companies utilizes the discounted cash flow technique whereby the significant unobservable input is the discount rate.
For these companies the discount rate ranged from 14.5% to 18.0% with a weighted average of 15.7%. For these companies each valuation technique (using the book value
multiple, earnings multiple and discount rate) is weighted equally.
(4)
Includes our investments in small business whole loans purchased from OnDeck. Valuation also used projected loss rates as an unobservable input ranging from 0.71%-
5.25%, with a weighted average of 1.22%.
(5) Represents net operating income interests in our REIT investments.
(6)
(7)
In addition, the valuation of certain controlled energy companies utilizes the discounted cash flow technique whereby the significant unobservable input is the discount rate.
For these companies the discounted rate ranged from 20.0% to 21.0% with a weighted average of 20.5%. For these companies each valuation technique is weighted equally.
In addition, the valuation of certain energy companies utilizes the discounted cash flow technique whereby the significant unobservable input is the discount rate. For these
companies the discounted rate ranged from 20.5% to 21.5% with a weighted average of 21.0%. For these companies each valuation technique is weighted equally.
In determining the range of values for debt instruments, except CLOs and debt investments in controlling portfolio companies, management and the independent
valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted
cash flow technique was then applied using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of values
for debt investments of controlled companies and equity investments, the enterprise value was determined by applying a market approach such as using earnings
before income interest, tax, depreciation and amortization (“EBITDA”) multiples, net income and/or book value multiples for similar guideline public companies
and/or similar recent investment transactions and/or an income approach, such as cash flow technique. For stressed debt and equity investments, a liquidation
analysis was used. During the year ended June 30, 2016, we changed the valuation methodology for our REITs portfolio (APRC, NPRC, and UPRC) from
averaging the net asset value and dividend yield methods to averaging the net asset value and discounted cash flow methods utilizing capitalization rates for similar
guideline companies and/or similar recent investment transactions.
In determining the range of values for our investments in CLOs, management and the independent valuation firm use primarily a discounted multi-path cash flow
model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as
to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized using Monte Carlo simulations to generate probability-weighted
(i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in
the CLO market and certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash
flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived
from the corresponding multi-path cash flow model.
Our portfolio consists of residual interests in CLOs, which involve a number of significant risks. CLOs are typically very highly levered (10 - 14 times), and
therefore the residual interest tranches that we invest in are subject to a higher degree of risk of total loss. In particular, investors in CLO residual interests
indirectly bear risks of the underlying loan investments held by such CLOs. We generally have the right to receive payments only from the CLOs, and generally do
not have direct rights against the underlying borrowers or the entity that sponsored the CLOs. While the CLOs we target generally enable the investor to acquire
interests in a pool of senior loans without the expenses associated with directly holding the same investments, the prices of indices and securities underlying our
CLOs will rise or fall. These prices (and, therefore, the prices of the CLOs) will be influenced by the same types of political and economic events that affect issuers
of securities and capital markets generally. The failure by a CLO investment in which we invest to satisfy financial covenants, including with respect to adequate
collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO fails certain tests, holders of debt senior to us
would be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to
the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting
153
CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.
The interests we have acquired in CLOs are generally thinly traded or have only a limited trading market. CLOs are typically privately offered and sold, even in the
secondary market. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in debt
securities, CLO residual interests carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral securities will not be
adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the investments in CLO tranches will likely be
subordinate to other senior classes of note tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and
may produce disputes with the CLO investment or unexpected investment results. Our net asset value may also decline over time if our principal recovery with
respect to CLO residual interests is less than the cost of those investments. Our CLO investments and/or the underlying senior secured loans may prepay more
quickly than expected, which could have an adverse impact on our value.
An increase in LIBOR would materially increase the CLO’s financing costs. Since most of the collateral positions within the CLOs have LIBOR floors, there may
not be corresponding increases in investment income (if LIBOR increases but stays below the LIBOR floor rate of such investments) resulting in materially smaller
distribution payments to the residual interest investors.
We hold more than a 10% interest in certain foreign corporations that are treated as controlled foreign corporations (“CFC”) for U.S. federal income tax purposes
(including our residual interest tranche investments in CLOs). Therefore, we are treated as receiving a deemed distribution (taxable as ordinary income) each year
from such foreign corporations in an amount equal to our pro rata share of the corporation’s income for that tax year (including both ordinary earnings and capital
gains). We are required to include such deemed distributions from a CFC in our taxable income and we are required to distribute at least 90% of such income to
maintain our RIC status, regardless of whether or not the CFC makes an actual distribution during such year.
If we acquire shares in “passive foreign investment companies” (“PFICs”) (including residual interest tranche investments in CLOs that are PFICs), we may be
subject to federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable
dividend to our stockholders. Certain elections may be available to mitigate or eliminate such tax on excess distributions, but such elections (if available) will
generally require us to recognize our share of the PFICs income for each year regardless of whether we receive any distributions from such PFICs. We must
nonetheless distribute such income to maintain its status as a RIC.
Legislation enacted in 2010 imposes a withholding tax of 30% on payments of U.S. source interest and dividends paid after December 31, 2013, or gross proceeds
from the disposition of an instrument that produces U.S. source interest or dividends paid after December 31, 2016, to certain non-U.S. entities, including certain
non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its United States account
holders and its United States owners. Most CLOs in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to
comply with these reporting requirements to avoid the 30% withholding. If a CLO in which we invest fails to properly comply with these reporting requirements, it
could reduce the amounts available to distribute to residual interest and junior debt holders in such CLO vehicle, which could materially and adversely affect our
operating results and cash flows.
If we are required to include amounts in income prior to receiving distributions representing such income, we may have to sell some of our investments at times
and/or at prices management would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose.
The significant unobservable input used to value our investments based on the yield technique and discounted cash flow technique is the market yield (or
applicable discount rate) used to discount the estimated future cash flows expected to be received from the underlying investment, which includes both future
principal and interest/dividend payments. Increases or decreases in the market yield (or applicable discount rate) would result in a decrease or increase,
respectively, in the fair value measurement. Management and the independent valuation firms consider the following factors when selecting market yields or
discount rates: risk of default, rating of the investment and comparable company investments, and call provisions.
154
The significant unobservable inputs used to value our investments based on the EV analysis may include market multiples of specified financial measures such as
EBITDA, net income, or book value of identified guideline public companies, implied valuation multiples from precedent M&A transactions, and/or discount rates
applied in a discounted cash flow technique. The independent valuation firm identifies a population of publicly traded companies with similar operations and key
attributes to that of the portfolio company. Using valuation and operating metrics of these guideline public companies and/or as implied by relevant precedent
transactions, a range of multiples of the latest twelve months EBITDA, or other measure such as net income or book value, is typically calculated. The independent
valuation firm utilizes the determined multiples to estimate the portfolio company’s EV generally based on the latest twelve months EBITDA of the portfolio
company (or other meaningful measure). Increases or decreases in the multiple would result in an increase or decrease, respectively, in EV which would result in
an increase or decrease in the fair value measurement of the debt of controlled companies and/or equity investment, as applicable. In certain instances, a discounted
cash flow analysis may be considered in estimating EV, in which case, discount rates based on a weighted average cost of capital and application of the capital
asset pricing model may be utilized.
The significant unobservable input used to value our private REIT investments based on the net asset value analysis is the capitalization rate applied to the earnings
measure of the underlying property.
Changes in market yields, discount rates, capitalization rates or EBITDA multiples, each in isolation, may change the fair value measurement of certain of our
investments. Generally, an increase in market yields, discount rates or capitalization rates, or a decrease in EBITDA (or other) multiples may result in a decrease in
the fair value measurement of certain of our investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may
fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready
market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to
legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced
or liquidation sale, we could realize significantly less than the value at which we have recorded it.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on
these investments to be different than the unrealized gains or losses reflected in the currently assigned valuations.
During the year ended June 30, 2017 , the valuation methodology for Arctic Energy Services, LLC (“Arctic Energy”) changed to remove the discounted cash flow
technique and add the liquidation analysis. As a result of the company’s performance and current market conditions, the fair value of our investment in Arctic
Energy decreased to $17,370 as of June 30, 2017 , a discount of $43,506 from its amortized cost, compared to the $22,536 unrealized depreciation recorded at
June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for Ark-La-Tex Wireline Services, LLC (“Ark-La-Tex”) changed to remove the enterprise value
waterfall approach. In addition, on March 14, 2017, assets previously held by Ark-La-Tex were distributed to us in exchange for the reduction of Ark-La-Tex’s
debt by $22,145, eliminating Senior Secured Term Loan A in full. The assets we received were simultaneously assigned to Wolf Energy Services Company, LLC
(“Wolf Energy Services”), a wholly owned subsidiary of Wolf Energy Holdings. During the three months ended June 30, 2017, Ark-La-Tex Term Loan B was
written-down for tax purposes and a loss of $19,818 was therefore realized for the amount that the amortized cost exceeded the fair value. As a result of this
change, and in recognition of recent company performance, the fair value of our investment in Ark-La-Tex decreased to $1,630 as of June 30, 2017 , equal to its
amortized cost, compared to the $32,548 unrealized depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for CP Energy Services Inc. (“CP Energy”) changed to remove the discounted cash flow
technique. As a result of the company’s performance and current market conditions, the fair value of our investment in CP Energy decreased to $72,216 as of
June 30, 2017 , a discount of $41,284 from its amortized cost, compared to the $37,498 unrealized depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for Nixon, Inc. (“Nixon”) changed to remove the discounted cash flow yield technique and
incorporate an enterprise value waterfall approach. As a result of the company’s performance the fair value of our investment in Nixon decreased to $0 as of
June 30, 2017 , a discount of $14,197 from its amortized cost, compared to the $2,421 unrealized depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for Pacific World Corporation (“Pacific World”) changed to incorporate an enterprise value
waterfall approach. As a result of this change as well as the impairment of Term Loan B, the fair value of our investment in Pacific World decreased to $179,009 as
of June 30, 2017 , a discount of $30,216 from its amortized cost, compared to the $20,797 unrealized depreciation recorded at June 30, 2016 .
155
During the year ended June 30, 2017 , the valuation methodology for Pinnacle (US) Acquisition Co. Limited (“Pinnacle”) changed to incorporate an enterprise
value waterfall approach. As a result of the company’s performance and possible impairment of the company’s debt, the fair value of our investment in Pinnacle
decreased to $5,150 as of June 30, 2017 , a discount of $1,797 from its amortized cost, compared to the $1,493 unrealized depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for PrimeSport, Inc. (“Primesport”) changed to incorporate an enterprise value waterfall
approach. As a result of the company’s performance, the fair value of our investment in Primesport decreased to $103,897 as of June 30, 2017 , a discount of
$23,741 from its amortized cost, compared to no unrealized appreciation or depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for United Sporting Company, Inc. (“USC”) changed to remove the discounted cash flow yield
analysis approach and incorporate an enterprise value waterfall approach. As a result of the company’s performance and an impairment of the company’s debt, the
fair value of our investment in USC decreased to $83,225 as of June 30, 2017 , a discount of $57,622 from its amortized cost, compared to the $4,179 unrealized
depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017 , the valuation methodology for USES Corp. (“USES”) changed to remove the discounted cash flow yield analysis approach.
As a result of the company’s performance the fair value of our investment in USES decreased to $12,517 as of June 30, 2017 , a discount of $51,655 from its
amortized cost, compared to the $21,440 unrealized depreciation recorded at June 30, 2016 .
During the year ended June 30, 2017, four of our CLO investments were deemed to have an other-than-temporary loss. In accordance with ASC 325-40, Beneficial
Interest in Securitized Financial Assets, we recorded a total loss of $17,242 related to these investments for the amount our amortized cost exceeded fair value as of
the respective determination dates. During the year ended June 30, 2016, there was no OTTI assessed for any CLO investment within our portfolio.
During the year ended June 30, 2017 , we provided $75,591 of debt and $25,200 of equity financing to NPRC for the acquisition of real estate properties and
$13,553 of equity financing to NPRC to fund capital expenditures for existing properties. In addition, during the year ended June 30, 2017 , we received partial
repayments of $32,954 of our loans previously outstanding and $42,059 as a return of capital on our equity investment.
During the year ended June 30, 2017 , we provided $100,429 and $23,077 of debt and equity financing, respectively, to NPRC and its wholly-owned subsidiaries to
support the online consumer lending initiative. In addition, during the year ended June 30, 2017 , we received partial repayments of $89,055 of our loans
previously outstanding with NPRC and its wholly-owned subsidiaries and $10,864 as a return of capital on our equity investment in NPRC.
The online consumer loan investments held by certain of NPRC’s wholly-owned subsidiaries are unsecured obligations of individual borrowers that are issued in
amounts ranging from $1 to $50, with fixed terms ranging from 24 to 84 months. As of June 30, 2017 , the outstanding investment in online consumer loans by
certain of NPRC’s wholly-owned subsidiaries was comprised of 102,602 individual loans and one securitization equity residual, and had an aggregate fair value of
$648,277. The average outstanding individual loan balance is approximately $6 and the loans mature on dates ranging from July 1, 2017 to June 28, 2024 with a
weighted-average outstanding term of 31 months as of June 30, 2017 . Fixed interest rates range from 4.0% to 36.0% with a weighted-average current interest rate
of 23.9%. As of June 30, 2017 , our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair value of $362,967 .
As of June 30, 2017 , based on outstanding principal balance, 6.3% of the portfolio was invested in super prime loans (borrowers with a Fair Isaac Corporation
(“FICO”) score, of 720 or greater), 18.0% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 75.7% of the portfolio in near prime
loans (borrowers with a FICO score of 580 to 659).
Loan Type
Outstanding Principal
Balance
Fair Value
Weighted Average Interest
Rate*
Super Prime
Prime
Near Prime
$
41,293 $
117,505
495,467
40,264
112,159
465,293
11.8%
15.8%
26.9%
*Weighted by outstanding principal balance of the online consumer loans.
156
As of June 30, 2017 , our investment in NPRC and its wholly-owned subsidiaries had an amortized cost of $790,296 and a fair value of $987,304 , including our
investment in online consumer lending as discussed above. The fair value of $624,337 related to NPRC’s real estate portfolio was comprised of thirty-seven multi-
families properties, twelve self-storage units, eight student housing properties and three commercial properties. The following table shows the location, acquisition
date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as of June 30, 2017 .
No.
Property Name
City
Acquisition
Date
Purchase
Price
Mortgage
Outstanding
Filet of Chicken
5100 Live Oaks Blvd, LLC
Lofton Place, LLC
Arlington Park Marietta, LLC
NPRC Carroll Resort, LLC
Cordova Regency, LLC
Crestview at Oakleigh, LLC
Inverness Lakes, LLC
Kings Mill Pensacola, LLC
Plantations at Pine Lake, LLC
Verandas at Rocky Ridge, LLC
Matthews Reserve II, LLC
City West Apartments II, LLC
Vinings Corner II, LLC
Forest Park, GA
10/24/2012 $
7,400 $
Tampa, FL
Tampa, FL
Marietta, GA
1/17/2013
4/30/2013
5/8/2013
63,400
26,000
14,850
—
46,700
20,350
9,650
Pembroke Pines, FL
6/24/2013
225,000
178,970
Pensacola, FL
Pensacola, FL
Mobile, AL
Pensacola, FL
Tallahassee, FL
Birmingham, AL
Matthews, NC
Orlando, FL
Smyrna, GA
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/15/2013
11/19/2013
11/19/2013
11/19/2013
13,750
17,500
29,600
20,750
18,000
15,600
22,063
23,562
35,691
36,590
73,078
25,957
11,501
5,098
13,116
14,354
17,224
38,000
6,930
8,500
13,025
1,719
1,405
5,804
4,800
7,281
4,642
4,458
8,927
2,363
85,500
12,600
11,500
26,500
11,000
11,375
13,845
24,700
17,550
14,092
10,205
19,934
23,293
32,943
29,809
62,441
22,906
11,145
4,771
13,121
13,176
15,606
27,639
4,786
7,959
8,608
—
—
4,350
3,600
5,460
3,480
3,345
6,695
1,775
74,169
13,055
13,502
23,256
14,480
Uptown Park Apartments II, LLC
Altamonte Springs, FL
11/19/2013
St. Marin Apartments II, LLC
Atlanta Eastwood Village LLC
Atlanta Monterey Village LLC
Atlanta Hidden Creek LLC
Atlanta Meadow Springs LLC
Atlanta Meadow View LLC
Atlanta Peachtree Landing LLC
APH Carroll Bartram Park, LLC
Plantations at Hillcrest, LLC
Crestview at Cordova, LLC
Coppell, TX
Stockbridge, GA
Jonesboro, GA
Morrow, GA
College Park, GA
College Park, GA
Fairburn, GA
Jacksonville, FL
Mobile, AL
Pensacola, FL
APH Carroll Atlantic Beach, LLC
Atlantic Beach, FL
Taco Bell, OK
Taco Bell, MO
23 Mile Road Self Storage, LLC
36th Street Self Storage, LLC
Ball Avenue Self Storage, LLC
Ford Road Self Storage, LLC
Yukon, OK
Marshall, MO
Chesterfield, MI
Wyoming, MI
Grand Rapids, MI
Westland, MI
Ann Arbor Kalamazoo Self Storage, LLC
Ann Arbor, MI
Ann Arbor Kalamazoo Self Storage, LLC
Ann Arbor, MI
Ann Arbor Kalamazoo Self Storage, LLC
Kalamazoo, MI
Canterbury Green Apartments Holdings LLC Fort Wayne, IN
11/19/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/12/2013
12/31/2013
1/17/2014
1/17/2014
1/31/2014
6/4/2014
6/4/2014
8/19/2014
8/19/2014
8/19/2014
8/29/2014
8/29/2014
8/29/2014
8/29/2014
9/29/2014
Abbie Lakes OH Partners, LLC
Canal Winchester, OH
9/30/2014
Kengary Way OH Partners, LLC
Reynoldsburg, OH
9/30/2014
Lakeview Trail OH Partners, LLC
Canal Winchester, OH
9/30/2014
Lakepoint OH Partners, LLC
Pickerington, OH
9/30/2014
157
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
No.
Property Name
Sunbury OH Partners, LLC
Heatherbridge OH Partners, LLC
Jefferson Chase OH Partners, LLC
Goldenstrand OH Partners, LLC
Jolly Road Self Storage, LLC
City
Columbus, OH
Blacklick, OH
Blacklick, OH
Hilliard, OH
Okemos, MI
Eaton Rapids Road Self Storage, LLC
Lansing West, MI
Haggerty Road Self Storage, LLC
Novi, MI
Waldon Road Self Storage, LLC
Tyler Road Self Storage, LLC
SSIL I, LLC
Vesper Tuscaloosa, LLC
Vesper Iowa City, LLC
Vesper Corpus Christi, LLC
Vesper Campus Quarters, LLC
Vesper College Station, LLC
Vesper Kennesaw, LLC
Vesper Statesboro, LLC
Vesper Manhattan KS, LLC
JSIP Union Place, LLC
9220 Old Lantern Way, LLC
Lake Orion, MI
Ypsilanti, MI
Aurora, IL
Tuscaloosa, AL
Iowa City, IA
Corpus Christi, TX
Corpus Christi, TX
College Station, TX
Kennesaw, GA
Statesboro, GA
Manhattan, KS
Franklin, MA
Laurel, MD
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
Acquisition
Date
Purchase
Price
Mortgage
Outstanding
9/30/2014
9/30/2014
9/30/2014
10/29/2014
1/16/2015
1/16/2015
1/16/2015
1/16/2015
1/16/2015
11/5/2015
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
9/28/2016
12/7/2016
13,000
18,416
13,551
7,810
7,492
1,741
6,700
6,965
3,507
34,500
54,500
32,750
14,250
18,350
41,500
57,900
7,500
23,250
64,750
14,115
18,328
17,200
9,600
5,620
1,305
5,025
5,225
2,630
26,450
41,250
24,825
10,800
14,175
32,058
44,727
5,292
15,921
51,800
1/30/2017
187,250
153,580
$ 1,600,720 $
1,312,667
On August 12, 2015, we sold 780 of our small business whole loans (with a cost of $30,968) purchased from OnDeck to Jefferies Asset Funding LLC for proceeds
of $26,619, net of related transaction expenses, and a trust certificate representing a 41.54% interest in the MarketPlace Loan Trust, Series 2015-OD2. We realized
a loss of $775 on the sale.
On September 30, 2015, we restructured our investment in Arctic Energy. Concurrent with the restructuring, we exchanged $31,640 senior secured loan and
$20,230 subordinated loan for Class D and Class E equity in Arctic Energy.
On October 30, 2015, we restructured our investment in CP Energy. Concurrent with the restructuring, we exchanged our $86,965 senior secured loan and $15,924
subordinated loan for Series B Redeemable Preferred Stock in CP Energy.
On October 30, 2015, we restructured our investment in Freedom Marine Solutions, LLC (“Freedom Marine”). Concurrent with the restructuring, we exchanged
our $32,500 senior secured loans for additional membership interest in Freedom Marine.
On November 16, 2015 and November 25, 2015, we sold our $14,755 debt investment in American Gilsonite Company. We realized a loss of $4,127 on the sale.
On January 21, 2016, we sold 100% of our CIFC Funding 2011-I, Ltd. Class E and Class D notes with a cost basis of $29,004.
We realized a gain of $3,911 on the sale.
On February 3, 2016, lenders foreclosed on Targus Group International, Inc., and our $21,613 first lien term loan was extinguished and exchanged for 1,262,737
common units representing 12.63% equity ownership in Targus Cayman HoldCo Limited, the parent company of Targus International, LLC (“Targus”). On
February 17, 2016, we provided additional debt financing to support the recapitalization of Targus. As part of the recapitalization, we invested an additional $1,263
in a new senior secured Term Loan A notes and were allocated $3,788 in new senior secured Term Loan B notes. During the same period, Targus was written-
down for tax purposes and a realized loss of $14,194 was realized for the amount that the amortized cost exceeded the fair value.
During the three months ended March 31, 2016, we sold our $10,100 debt investment in ICON Health and Fitness, Inc. We realized a loss of $1,053 on the sale.
158
On March 22, 2016 and March 24, 2016, USC partially repaid the $17,391 loan receivable to us.
During the three months ended March 31, 2016, New Century Transportation, Inc. (“NCT”) was written-off for tax purposes and a loss of $187 was realized.
On April 29, 2016, we invested an additional $25,000 of Senior Secured Term Loan A and $25,000 of Senior Secured Term Loan B debt investments in Trinity
Services Group, Inc. (“Trinity”).
On April 29, 2016, through our delayed draw term loan commitment with Instant Web, LLC, we funded $8,000 of Senior Secured Term Loan A and $8,000 of
Senior Secured Term Loan B.
During the period from May 3, 2016 through May 10, 2016, we collectively sold 72.10% of the outstanding principal balance of the Senior Secured Term Loan A
investment in Trinity for $25,000. There was no gain or loss realized on the sale.
On May 31, 2016, we sold our investment in Harbortouch Payments, LLC (“Harbortouch”) for total consideration of $328,032, including fees and escrowed
amounts. Prior to the sale, $154,382 of Senior Secured Term Loan B loan outstanding was converted to preferred equity. We received a repayment of $146,989
loans receivable to us and $157,639 of proceeds related to the equity investment. We recorded a realized loss of $5,419 related to the sale. We also received a
$5,145 prepayment premium for early repayment of the outstanding loans, which was recorded as interest income in the year ended June 30, 2016 and a $12,909
advisory fee for the transaction, which was recorded as other income in the year ended June 30, 2016. In addition, there is $5,350 being held in escrow which will
be recognized as additional realized gain if and when it is received. Concurrent with the sale, we made a $27,500 second lien secured investment in Harbortouch,
which was later repaid on October 13, 2016.
On July 1, 2016, BNN Holdings Corp. was sold. The sale provided net proceeds for our minority position of $2,365, resulting in a realized gain of $137. During
the three months ended December 31, 2016 we received remaining escrow proceeds, realizing an additional gain of $50.
On August 17, 2016, we made a $5,000 investment in BCD Acquisition, Inc. (“Big Tex”). On August 18, 2016, we sold our $5,000 investment in Big Tex and
realized a gain of $138 on the sale.
On August 19, 2016, we sold our investment in Nathan’s Famous, Inc. for net proceeds of $3,240 and realized a gain of $240 on the sale.
On September 27, 2016, we received additional bankruptcy proceeds for our previously impaired investment in NCT, and recorded a realized gain of $936,
offsetting the previously recognized loss.
On December 27, 2016, we exercised our warrants in R-V Industries, Inc. (“R-V”) to purchase additional common stock in R-V. As a result, we realized a gain of
$172 on this transaction.
On March 14, 2017, assets previously held by Ark-La-Tex were assigned to Wolf Energy Services, a new wholly-owned subsidiary of Wolf Energy Holdings, in
exchange for a full reduction of Ark-La-Tex’s Senior Secured Term Loan A and a partial reduction of the Senior Secured Term Loan B cost basis, in total equal to
$22,145. The cost basis of the transferred assets is equal to the appraised fair value of assets at the time of transfer.
On April 3, 2017, AFI Shareholder, LLC was sold. The sale provided net proceeds for our minority position of $965, resulting in a realized gain of $693.
On June 3, 2017, SB Forging Company II, Inc. (f/k/a Gulf Coast Machine & Supply Company) (“Gulfco”) sold all of its assets to a third party, for total
consideration of $10,250, including escrowed amounts. The proceeds from the sale were primarily used to repay a $6,115 third party revolving credit facility, and
the remainder was used to pay other legal and administrative costs incurred by Gulfco. As no proceeds were allocated to Prospect, our debt and equity investment
in Gulfco was written-off for tax purposes and we recorded a realized loss of $66,103. Gulfco holds $2,050 in escrow related to the sale, which will be distributed
to Prospect once released to Gulfco, and will be recognized as a realized gain if and when it is received.
On June 30, 2017, Mineral Fusion Natural Brands was sold. The sale provided net proceeds for our minority position of $490, resulting in a realized gain of the
same amount.
On June 30, 2017, we received $169 of escrow proceeds related to SB Forging, realizing a gain of the same amount .
During the three months ended June 30, 2017, Ark-La-Tex Term Loan B was partially written-off for tax purposes and a loss of $19,818 was realized.
159
During the year ended June 30, 2017, we received additional proceeds of $6,287 related to the May 31, 2016 sale of Harbortouch, $4,286 of which are from an
escrow release. We realized a gain for the same amount.
As of June 30, 2017 , $3,488,672 of our loans to portfolio companies, at fair value, bear interest at floating rates and have LIBOR floors ranging from 0.3% to
4.0%. As of June 30, 2017 , $489,007 of our loans to portfolio companies, at fair value, bear interest at fixed rates ranging from 5.0% to 20.0%. As of June 30,
2016 , $3,737,046 of our loans to portfolio companies, at fair value, bore interest at floating rates and have LIBOR floors ranging from 0.3% to 4.0%. As of
June 30, 2016 , $495,912 of our loans to portfolio companies, at fair value, bore interest at fixed rates ranging from 5.0% to 22.0%.
At June 30, 2017 , seven loan investments were on non-accrual status: Ark-La-Tex, Edmentum Ultimate Holdings, LLC Unsecured Junior PIK Note, Nixon,
Spartan Energy Services, Inc. (“Spartan”), USC, USES, and Venio LLC (“Venio”). At June 30, 2016 , seven loan investments were on non-accrual status: Ark-La-
Tex, Gulfco, Spartan, Targus, USES, Venio and Wolf Energy. Cost balances of these loans amounted to $286,388 and $234,307 as of June 30, 2017 and June 30,
2016 , respectively. The fair value of these loans amounted to $154,417 and $90,540 as of June 30, 2017 and June 30, 2016 , respectively. The fair values of these
investments represent approximately 2.5% and 1.4% of our total assets at fair value as of June 30, 2017 and June 30, 2016 , respectively.
Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 4.00%. As of
June 30, 2017 and June 30, 2016 , we had $22,925 and $40,560 , respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio
companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as of June 30, 2017 and June 30, 2016 .
During the year ended June 30, 2016 , we sold $99,377 of the outstanding principal balance of the senior secured Term Loan A investments in certain portfolio
companies. There was no gain or loss realized on the sale. No such investments were sold for the year ended June 30, 2017 . We serve as an agent for these loans
and collect a servicing fee from the counterparties on behalf of the Investment Adviser. We receive a credit for these payments as a reduction of base management
fee payable by us to the Investment Adviser. See Note 13 for further discussion.
Unconsolidated Significant Subsidiaries
Our investments are generally in small and mid-sized companies in a variety of industries. In accordance with Rules 3-09 and 4-08(g) of Regulation S-X, we must
determine which of our unconsolidated controlled portfolio companies are considered “significant subsidiaries”, if any. In evaluating these investments, there are
three tests utilized to determine if any of our controlled investments are considered significant subsidiaries: the asset test, the income test and the investment
test. Rule 3-09 of Regulation S-X requires separate audited financial statements of an unconsolidated subsidiary in an annual report if any of the three tests exceed
20%. Rule 4-08(g) of Regulation S-X requires summarized financial information in an annual report if any of the three tests exceeds 10%.
The following table summarizes the results of our analysis for the three tests for the years ended June 30, 2017, 2016 and 2015.
Asset Test
Income Test
Investment Test
Greater than 10%
but Less than 20%
Year Ended June 30, 2017
Year Ended June 30, 2016
-
-
Greater
than
20%
NPRC
First Tower Finance
USES
NPRC
First Tower Finance
Year Ended June 30, 2015
NPRC
-
NPRC
Greater than 10%
but Less than 20% Greater than 20%
Greater than 10%
but Less than 20%
Greater
than 20%
NPRC
NPRC
First Tower Finance
Harbortouch(1)
NPRC
NPRC
-
-
-
-
(1) We sold our investment in Harbortouch as of June 30, 2016, at which time separate financial statements were included in our annual report.
Income, consisting of interest, dividends, fees, other investment income and realization of gains or losses, can fluctuate upon repayment or sale of an investment or
the marking to fair value of an investment in any given year can be highly concentrated among several investments. After performing the income analysis for the
year ended June 30, 2017 , as currently promulgated by the SEC, we determined that three of our controlled investments individually generated more than 10% of
our income, primarily due to the unrealized losses that was recognized on the investments during the year ended June 30, 2017 . We do not believe that
160
the calculation promulgated by the SEC correctly identifies significant subsidiaries but have included First Tower Finance Company LLC (“First Tower Finance”),
USES and NPRC as significant subsidiaries. NPRC, an unconsolidated majority-owned portfolio company, was considered a significant subsidiary at the 20%
level as of and during the years ended June 30, 2017 and June 30, 2016. We included the audited financial statements of NPRC, and its subsidiaries, for the years
ended December 31, 2016 and 2015 as Exhibit 99.1, and unaudited financial statement for the year ended December 31, 2014 as Exhibit 99.2 to the Form 10-K
filing for the year ended June 30, 2017. First Tower Finance was considered a significant subsidiary at the 20% level for the year ended June 30, 2015, and
therefore we have included the unaudited financial statement for the year ended December 31, 2016 as Exhibit 99.3 and audited financial statements for the years
ended December 31, 2015 and 2014 as Exhibit 99.4.
The following tables show summarized financial information for USES, which met the 10% income test for the year ended June 30, 2017 :
December 31, 2016
December 31, 2015
Balance Sheet Data
Cash and cash equivalents
Accounts receivable, net
Property, plant and equipment, net
Intangibles, including goodwill
Other assets
Notes payable, due to Prospect or Affiliate
Other liabilities
Total equity
$
168 $
15,609
25,727
15,959
1,700
61,726
6,469
(9,032)
319
17,443
14,162
36,302
9,031
58,950
29,440
(11,133)
Summary of Operations
Total revenue
Total expenses
Net (loss) income
Year Ended December 31,
2016
2015
2014
68,287
92,496
(24,209)
106,248
130,416
(24,168)
102,695
138,336
(35,641)
The SEC has requested comments on the proper mechanics of how the calculations related to Rules 3-09 and 4-08(g) of Regulation S-X should be completed.
There is currently diversity in practice for the calculations. We expect that the SEC will clarify the calculation methods in the future.
Note 4. Revolving Credit Facility
On August 29, 2014, we renegotiated our previous credit facility and closed an expanded five and a half year revolving credit facility (the “2014 Facility” or the
“Revolving Credit Facility”). The lenders have extended commitments of $885,000 under the 2014 Facility as of June 30, 2017 . The 2014 Facility includes an
accordion feature which allows commitments to be increased up to $1,500,000 in the aggregate. The revolving period of the 2014 Facility extends through
March 2019, with an additional one year amortization period (with distributions allowed) after the completion of the revolving period. During such one year
amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one year amortization period, the
remaining balance will become due, if required by the lenders.
The 2014 Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate
payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The 2014 Facility also contains certain requirements
relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in
the early termination of the 2014 Facility. The 2014 Facility also requires the maintenance of a minimum liquidity requirement. As of June 30, 2017 , we were in
compliance with the applicable covenants.
Interest on borrowings under the 2014 Facility is one-month LIBOR plus 225 basis points. Additionally, the lenders charge a fee on the unused portion of the 2014
Facility equal to either 50 basis points if at least 35% of the credit facility is drawn or 100 basis points otherwise. The 2014 Facility requires us to pledge assets as
collateral in order to borrow under the credit facility.
161
As of June 30, 2017 and June 30, 2016 , we had $665,409 and $538,456 , respectively, available to us for borrowing under the Revolving Credit Facility, of which
nothing was outstanding at either date. As additional eligible investments are transferred to PCF and pledged under the Revolving Credit Facility, PCF will
generate additional availability up to the current commitment amount of $885,000 . As of June 30, 2017 , the investments, including cash and money market funds,
used as collateral for the Revolving Credit Facility had an aggregate fair value of $1,618,986 , which represents 26.3% of our total investments, including cash and
money market funds. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and as such, these investments are not available to our
general creditors. The release of any assets from PCF requires the approval of the facility agent.
In connection with the origination and amendments of the Revolving Credit Facility, we incurred $12,405 of new fees and $3,539 were carried over for continuing
participants from the previous facility, all of which are being amortized over the term of the facility in accordance with ASC 470-50. As of June 30, 2017 , $4,779
remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $12,173 , $13,213 and $14,424 , respectively, of interest costs, unused fees and amortization of
financing costs on the Revolving Credit Facility as interest expense.
Note 5. Convertible Notes
On December 21, 2010, we issued $150,000 aggregate principal amount of convertible notes that matured on December 15, 2015 (the “2015 Notes”). The 2015
Notes bore interest at a rate of 6.25% per year, payable semi-annually on June 15 and December 15 of each year, beginning June 15, 2011. Total proceeds from the
issuance of the 2015 Notes, net of underwriting discounts and offering costs, were $145,200. On December 15, 2015, we repaid the outstanding principal amount
of the 2015 Notes, plus interest. No gain or loss was realized on the transaction.
On February 18, 2011, we issued $172,500 aggregate principal amount of convertible notes that mature on August 15, 2016 (the “2016 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2016 Notes bore interest at a rate of 5.50% per year, payable semi-annually on February 15 and
August 15 of each year, beginning August 15, 2011. Total proceeds from the issuance of the 2016 Notes, net of underwriting discounts and offering costs, were
$167,325. Between January 30, 2012 and February 2, 2012, we repurchased $5,000 aggregate principal amount of the 2016 Notes at a price of 97.5, including
commissions. The transactions resulted in our recognizing $10 of loss in the year ended June 30, 2012. On August 15, 2016, we repaid the outstanding principal
amount of the 2016 Notes, plus interest. No gain or loss was realized on the transaction.
On April 16, 2012, we issued $130,000 aggregate principal amount of convertible notes that mature on October 15, 2017 (the “2017 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2017 Notes bear interest at a rate of 5.375% per year, payable semi-annually on April 15 and
October 15 of each year, beginning October 15, 2012. Total proceeds from the issuance of the 2017 Notes, net of underwriting discounts and offering costs, were
$126,035. On March 28, 2016, we repurchased $500 aggregate principal amount of the 2017 Notes at a price of 98.25, including commissions. The transaction
resulted in our recognizing a $9 gain for the period ended March 31, 2016. On April 6, 2017, we repurchased $78,766 aggregate principal amount of the 2017
Notes at a price of 102.0, including commissions. The transaction resulted in our recognizing a $1,786 loss during the three months ended June 30, 2017.
On August 14, 2012, we issued $200,000 aggregate principal amount of convertible notes that mature on March 15, 2018 (the “2018 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2018 Notes bear interest at a rate of 5.75% per year, payable semi-annually on March 15 and
September 15 of each year, beginning March 15, 2013. Total proceeds from the issuance of the 2018 Notes, net of underwriting discounts and offering costs, were
$193,600. On April 6, 2017, we repurchased $114,581 aggregate principal amount of the 2018 Notes at a price of 103.5, including commissions. The transaction
resulted in our recognizing a $4,700 loss during the three months ended June 30, 2017.
On December 21, 2012, we issued $200,000 aggregate principal amount of convertible notes that mature on January 15, 2019 (the “2019 Notes”), unless
previously converted or repurchased in accordance with their terms. The 2019 Notes bear interest at a rate of 5.875% per year, payable semi-annually on
January 15 and July 15 of each year, beginning July 15, 2013. Total proceeds from the issuance of the 2019 Notes, net of underwriting discounts and offering costs,
were $193,600.
On April 11, 2014, we issued $400,000 aggregate principal amount of convertible notes that mature on April 15, 2020 (the “2020 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2020 Notes bear interest at a rate of 4.75% per year, payable semi-annually on April 15 and October
15 each year, beginning October 15, 2014. Total proceeds from the issuance of the 2020 Notes, net of underwriting discounts and offering costs, were $387,500.
On January 30, 2015, we repurchased $8,000 aggregate principal amount of the 2020 Notes at a price of 93.0, including commissions. As a result of this
162
transaction, we recorded a gain of $332, in the amount of the difference between the reacquisition price and the net carrying amount of the notes, net of the
proportionate amount of unamortized debt issuance costs.
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “2022 Notes”), unless previously
converted or repurchased in accordance with their terms. The 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July
15 each year, beginning July 15, 2017. Total proceeds from the issuance of the 2022 Notes, net of underwriting discounts and offering costs, were $218,010.
Certain key terms related to the convertible features for the 2017 Notes, the 2018 Notes, the 2019 Notes, the 2020 Notes and the 2022 Notes (collectively, the
“Convertible Notes”) are listed below.
Initial conversion rate(1)
Initial conversion price
Conversion rate at June 30, 2017(1)(2)
Conversion price at June 30 , 2017(2)(3)
Last conversion price calculation date
Dividend threshold amount (per share)(4)
2017 Notes
2018 Notes
2019 Notes
2020 Notes
2022 Notes
85.8442
82.3451
79.7766
80.6647
100.2305
11.65 $
12.14 $
12.54 $
12.40 $
9.98
87.7516
84.1497
79.8360
80.6670
100.2305
11.40 $
11.88 $
12.53 $
12.40 $
9.98
4/16/2017
8/14/2016
12/21/2016
4/11/2017
4/11/2017
0.101500 $
0.101600 $
0.110025 $
0.110525 $
0.083330
$
$
$
(1) Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
(2) Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
(3) The conversion price will increase only if the current monthly dividends (per share) exceed the dividend threshold amount (per share).
(4) The conversion rate is increased if monthly cash dividends paid to common shares exceed the monthly dividend threshold amount, subject to adjustment. Current dividend
rates are at or below the minimum dividend threshold amount for further conversion rate adjustments for all bonds.
Upon conversion, unless a holder converts after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive a
separate cash payment with respect to the notes surrendered for conversion representing accrued and unpaid interest to, but not including, the conversion date. Any
such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes.
No holder of Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt
would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of
1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation
shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the
Convertible Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to
100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change
repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the
present value of all remaining interest payments (without duplication of the foregoing amounts) on such Convertible Notes through and including the maturity date.
In connection with the issuance of the Convertible Notes, we incurred $31,884 of fees which are being amortized over the terms of the notes, of which $15,512
remains to be amortized and is included as a reduction within Convertible Notes on the Consolidated Statement of Assets and Liabilities as of June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $55,217 , $68,966 and $74,365 , respectively, of interest costs and amortization of financing
costs on the Convertible Notes as interest expense.
Note 6. Public Notes
On March 15, 2013, we issued $250,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “2023 Notes”). The 2023 Notes bear
interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each
163
year, beginning September 15, 2013. Total proceeds from the issuance of the 2023 Notes, net of underwriting discounts and offering costs, were $243,641.
On April 7, 2014, we issued $300,000 aggregate principal amount of unsecured notes that mature on July 15, 2019 (the “5.00% 2019 Notes”). Included in the
issuance is $45,000 of Prospect Capital InterNotes® that were exchanged for the 5.00% 2019 Notes. The 5.00% 2019 Notes bear interest at a rate of 5.00% per
year, payable semi-annually on January 15 and July 15 of each year, beginning July 15, 2014. Total proceeds from the issuance of the 5.00% 2019 Notes, net of
underwriting discounts and offering costs, were $295,998.
On December 10, 2015, we issued $160,000 aggregate principal amount of unsecured notes that mature on June 15, 2024 (the “2024 Notes”). The 2024 Notes bear
interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning March 15, 2016. Total
proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were $155,043. On June 16, 2016, we entered into an at-the-market
program with FBR Capital Markets & Co. through which we could sell, by means of at-the-market offerings, from time to time, up to $100,000 in aggregate
principal amount of our existing 2024 Notes. As of June 30, 2017 , we issued $199,281 in aggregate principal amount of our 2024 Notes for net proceeds of
$193,253 after commissions and offering costs.
The 2023 Notes, the 5.00% 2019 Notes, and the 2024 Notes (collectively, the “Public Notes”) are direct unsecured obligations and rank equally with all of our
unsecured indebtedness from time to time outstanding.
In connection with the issuance of the 2023 Notes, the 5.00% 2019 Notes, and the 2024 Notes, we incurred $13,613 of fees which are being amortized over the
term of the notes, of which $9,091 remains to be amortized and is included as a reduction within Public Notes on the Consolidated Statement of Assets and
Liabilities as of June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015, we recorded $43,898 , $36,859 and $37,063 , respectively, of interest costs and amortization of financing
costs on the Public Notes as interest expense.
Note 7. Prospect Capital InterNotes®
On February 16, 2012, we entered into a selling agent agreement (the “Selling Agent Agreement”) with Incapital LLC, as purchasing agent for our issuance and
sale from time to time of up to $500,000 of Prospect Capital InterNotes® (the “InterNotes® Offering”), which was increased to $1,500,000 in May 2014.
Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement.
These notes are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding. Each series of notes will be
issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of
issuance.
During the year ended June 30, 2017 , we issued $138,882 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $137,150 . The
following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2017 .
Tenor at
Origination
(in years)
Principal
Amount
Interest Rate
Range
Weighted
Average
Interest Rate
Maturity Date Range
5
$
138,882
4.75%–5.50%
5.08%
July 15, 2021 – June 15, 2022
During the year ended June 30, 2016 , we issued $88,435 aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $87,141 . These
notes were issued with stated interest rates ranging from 4.63% to 6.00% with a weighted average interest rate of 5.18% . These notes mature between July 15,
2020 and December 15, 2025 . The following table summarizes the Prospect Capital InterNotes® issued during the year ended June 30, 2016 .
Tenor at
Origination
(in years)
5
6.5
7
10
Principal
Amount
Interest Rate
Range
$
51,503
4.63%–6.00%
35,155
5.10%–5.25%
990
787
5.63%–6.00%
5.13%–6.00%
$
88,435
Weighted
Average
Interest Rate
5.12%
5.25%
5.77%
5.33%
164
Maturity Date Range
July 15, 2020 – June 15, 2021
January 15, 2022 – May 15, 2022
November 15, 2022 – December 15, 2022
November 15, 2025 – December 15, 2025
During the year ended June 30, 2017 , we redeemed $49,497 aggregate principal amount of Prospect Capital InterNotes® at par
with a weighted average interest rate of 4.87% in order to replace debt with shorter maturity dates. During the year ended June 30, 2017 , we repaid $8,880
aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. As
a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital
InterNotes® in the year ended June 30, 2017 was $525. The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2017 .
Tenor at
Origination
(in years)
4
5
5.2
5.3
5.4
5.5
6
6.5
7
7.5
10
12
15
18
20
25
30
Principal
Amount
Interest Rate
Range
$
39,038
3.75%–4.00%
354,805
4.25%–5.50%
4,440
2,686
5,000
4.63%
4.63%
4.75%
109,068
4.25%–5.00%
2,182
4.88%
40,702
5.10%–5.50%
191,356
4.00%–6.55%
1,996
5.75%
37,509
4.27%–7.00%
2,978
6.00%
17,245
5.25%–6.00%
21,532
4.13%–6.25%
4,248
5.63%–6.00%
34,218
6.25%–6.50%
111,491
5.50%–6.75%
$
980,494
Weighted
Average
Interest Rate
3.92%
5.00%
4.63%
4.63%
4.75%
4.67%
4.88%
5.24%
5.38%
5.75%
6.20%
6.00%
5.36%
5.47%
5.84%
6.39%
6.22%
165
Maturity Date Range
November 15, 2017 – May 15, 2018
July 15, 2018 – June 15, 2022
August 15, 2020 – September 15, 2020
September 15, 2020
August 15, 2019
February 15, 2019 – November 15, 2020
April 15, 2021 – May 15, 2021
February 15, 2020 – May 15, 2022
June 15, 2019 – December 15, 2022
February 15, 2021
March 15, 2022 – December 15, 2025
November 15, 2025 – December 15, 2025
May 15, 2028 – November 15, 2028
December 15, 2030 – August 15, 2031
November 15, 2032 – October 15, 2033
August 15, 2038 – May 15, 2039
November 15, 2042 – October 15, 2043
During the year ended June 30, 2016 , we repaid $7,069 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s
Option, as defined in the InterNotes® Offering prospectus. As a result of these transactions, we recorded a loss in the amount of the difference between the
reacquisition price and the net carrying amount of the notes, net of the proportionate amount of unamortized debt issuance costs. The net gain on the
extinguishment of Prospect Capital InterNotes® in the year ended June 30, 2016 was $215.
The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2016 .
Tenor at
Origination
(in years)
3
3.5
4
5
5.2
5.3
5.4
5.5
6
6.5
7
7.5
10
12
15
18
20
25
30
Principal
Amount
Interest Rate
Range
$
5,710
3,109
4.00%
4.00%
45,690
3.75%–4.00%
259,191
4.25%–5.75%
4,440
2,686
5,000
4.63%
4.63%
4.75%
109,808
4.25%–5.00%
2,197
3.38%
40,867
5.10%–5.50%
192,076
4.00%–6.55%
1,996
5.75%
37,533
3.62%–7.00%
2,978
6.00%
17,325
5.25%–6.00%
22,303
4.13%–6.25%
4,462
5.63%–6.00%
35,110
6.25%–6.50%
116,327
5.50%–6.75%
$
908,808
Weighted
Average
Interest Rate
4.00%
4.00%
3.92%
4.95%
4.63%
4.63%
4.75%
4.65%
3.38%
5.24%
5.13%
5.75%
6.11%
6.00%
5.36%
5.53%
5.89%
6.39%
6.23%
Maturity Date Range
October 15, 2016
April 15, 2017
November 15, 2017 – May 15, 2018
July 15, 2018 – June 15, 2021
August 15, 2020 – September 15, 2020
September 15, 2020
August 15, 2019
February 15, 2019 – November 15, 2020
April 15, 2021 – May 15, 2021
February 15, 2020 – May 15, 2022
June 15, 2019 – December 15, 2022
February 15, 2021
March 15, 2022 – December 15, 2025
November 15, 2025 – December 15, 2025
May 15, 2028 – November 15, 2028
December 15, 2030 – August 15, 2031
November 15, 2032 – October 15, 2033
August 15, 2038 – May 15, 2039
November 15, 2042 – October 15, 2043
In connection with the issuance of Prospect Capital InterNotes ® , we incurred $24,284 of fees which are being amortized over the term of the notes, of which
$14,240 remains to be amortized and is included as a reduction within Prospect Capital InterNotes ® on the Consolidated Statement of Assets and Liabilities as of
June 30, 2017 .
During the years ended June 30, 2017, 2016 and 2015 , we recorded $53,560 , $48,681 and $44,808 , respectively, of interest costs and amortization of financing
costs on the Prospect Capital InterNotes ® as interest expense.
166
Note 8. Fair Value and Maturity of Debt Outstanding
The following table shows our outstanding debt as of June 30, 2017 .
Revolving Credit Facility (2)
$
— $
4,779 $
— (3) $
—
1ML+2.25% (6)
Principal
Outstanding
Unamortized
Discount & Debt
Issuance Costs
Net Carrying
Value
Fair Value
(1)
Effective Interest
Rate
2017 Notes
2018 Notes
2019 Notes
2020 Notes
2022 Notes
Convertible Notes
5.00% 2019 Notes
2023 Notes
2024 Notes
Public Notes
50,734
85,419
200,000
392,000
225,000
953,153
300,000
250,000
199,281
749,281
77
394
1,846
6,458
6,737
1,705
4,087
5,189
50,657
85,025
198,154
385,542
218,263
937,641
298,295
245,913
194,092
738,300
51,184
87,660
206,614
394,689
223,875
964,022
308,439
258,045
207,834
774,318
(4)
(4)
(4)
(4)
(4)
(4)
(4)
(4)
5.91% (7)
6.42% (7)
6.51% (7)
5.38% (7)
5.63% (7)
5.29% (7)
6.22% (7)
6.72% (7)
Prospect Capital InterNotes ®
980,494
14,240
966,254
1,003,852
(5)
5.55% (8)
Total
$
2,682,928
$
2,642,195
$
2,742,192
(1) As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair
value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of June 30, 2017 .
(2) The maximum draw amount of the Revolving Credit facility as of June 30, 2017 is $885,000 .
(3) Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Note 2 for accounting policy details.
(4) We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5) The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread.
(6) Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7) The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs. For the 2024 Notes, the
rate presented is a combined effective interest rate of the 2024 Notes and 2024 Notes Follow-on Program.
(8) For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are
amortized on a straight-line method over the stated life of the obligation, are weighted against the average year-to-date principal balance.
167
The following table shows our outstanding debt as of June 30, 2016 .
Revolving Credit Facility (2)
$
— $
7,525 $
— (3) $
—
1ML+2.25% (6)
Principal
Outstanding
Unamortized
Discount & Debt
Issuance Costs
Net Carrying
Value
Fair Value
(1)
Effective Interest
Rate
2016 Notes
2017 Notes
2018 Notes
2019 Notes
2020 Notes
Convertible Notes
2023 Notes
5.00% 2019 Notes
2024 Notes
Public Notes
167,500
129,500
200,000
200,000
392,000
1,089,000
250,000
300,000
161,380
711,380
141
852
2,162
2,952
8,532
4,670
2,476
4,866
167,359
128,648
197,838
197,048
383,468
167,081
130,762
204,000
202,000
376,881
1,074,361
1,080,724
245,330
297,524
156,514
699,368
252,355
302,442
159,250
714,047
(4)
(4)
(4)
(4)
(4)
(4)
(4)
(4)
6.18% (7)
5.91% (7)
6.42% (7)
6.51% (7)
5.38% (7)
6.22% (7)
5.29% (7)
6.52% (7)
Prospect Capital InterNotes ®
908,808
15,598
893,210
894,840
(5)
5.51% (8)
Total
$
2,709,188
$
2,666,939
$
2,689,611
(1) As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair
value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of June 30, 2016 .
(2) The maximum draw amount of the Revolving Credit facility as of June 30, 2016 is $885,000 .
(3) Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Note 2 for accounting policy details.
(4) We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5) The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread.
(6) Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7) The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs. For the 2024 Notes, the
rate presented is a combined effective interest rate of the 2024 Notes and 2024 Notes Follow-on Program.
(8) For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are
amortized on a straight-line method over the stated life of the obligation, are weighted against the average year-to-date principal balance.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of
June 30, 2017 .
Revolving Credit Facility
Convertible Notes
Public Notes
Prospect Capital InterNotes®
Total Contractual Obligations
Payments Due by Period
Total
Less than 1
Year
1 – 3 Years
3 – 5 Years
After 5 Years
$
— $
— $
— $
953,153
749,281
980,494
136,153
—
39,038
592,000
300,000
325,661
— $
—
—
399,490
$
2,682,928 $
175,191 $
1,217,661 $
399,490 $
—
225,000
449,281
216,305
890,586
168
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of
June 30, 2016 .
Revolving Credit Facility
Convertible Notes
Public Notes
Prospect Capital InterNotes ®
Total Contractual Obligations
Payments Due by Period
Total
Less than 1
Year
1 – 3 Years
3 – 5 Years
After 5 Years
$
— $
— $
— $
— $
1,089,000
167,500
529,500
711,380
908,808
—
8,819
—
257,198
392,000
300,000
360,599
$
2,709,188 $
176,319 $
786,698 $
1,052,599 $
—
—
411,380
282,192
693,572
Note 9. Stock Repurchase Program, Equity Offerings, Offering Expenses, and Distributions
On August 24, 2011, our Board of Directors approved a share repurchase plan (the “Repurchase Program”) under which we may repurchase up to $100,000 of our
common stock at prices below our net asset value per share. Prior to any repurchase, we are required to notify shareholders of our intention to purchase our
common stock. Our last notice was delivered with our annual proxy mailing on September 21, 2016 and our most recent notice was delivered with a shareholder
letter mailing on August 2, 2017. This notice extends for six months after the date that notice is delivered.
We did not repurchase any shares of our common stock for the year ended June 30, 2017 .
During the year ended June 30, 2016 , we repurchased 4,708,750 shares of our common stock pursuant to the Repurchase Program. Our NAV per share was
increased by approximately $0.02 for the year ended June 30, 2016 as a result of the share repurchases. The following table summarizes our share repurchases
under our Repurchase Program for the year ended June 30, 2016 .
Repurchases of Common Stock
Year Ended June 30, 2016
Dollar amount repurchased
Shares Repurchased
Weighted average price per share
Weighted average discount to June 30, 2015 Net Asset Value
$
$
34,140
4,708,750
7.25
30%
There were no repurchases made for the years ended June 30, 2017 and 2015 under our Repurchase Program.
As of June 30, 2017 , the approximate dollar value of shares that may yet be purchased under the plan is $65,860 .
Excluding dividend reinvestments, during the years ended June 30, 2017 and June 30, 2016 , we did not issue any shares of our common stock. Excluding dividend
reinvestments, we issued 14,845,556 shares of our common stock during the year ended June 30, 2015. The following table summarizes our issuances of common
stock during the year ended June 30, 2015.
Issuances of Common Stock
During the year ended June 30, 2015:
September 11, 2014 – November 3, 2014(1)
November 17, 2014 – December 3, 2014(1)
Number of
Shares Issued
Gross
Proceeds
Underwriting
Fees
Offering
Expenses
Average
Offering Price
9,490,975 $
95,149 $
5,354,581
51,678
474 $
268
175 $
469
10.03
9.65
(1) Shares were issued in connection with our at-the-market offering program which we enter into from time to time with various counterparties.
Our shareholders’ equity accounts as of June 30, 2017 , June 30, 2016 and June 30, 2015 reflect cumulative shares issued, net of shares repurchased, as of those
respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the
underwriters, our dividend reinvestment plan and in connection with the acquisition of certain controlled portfolio companies. When our common stock is issued,
the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
On November 3, 2016, our Registration Statement on Form N-2 was declared effective by the SEC. Under this Shelf Registration Statement, we can issue up to
$4,691,212 of additional debt and equity securities in the public market as of June 30, 2017 .
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During the years ended June 30, 2017 and June 30, 2016 , we distributed approximately $358,987 and $356,110 , respectively, to our stockholders. The following
table summarizes our distributions declared and payable for the year ended June 30, 2016 and June 30, 2017 .
Declaration Date
Record Date
Payment Date
Amount Per Share
Amount Distributed (in
thousands)
5/6/2015
5/6/2015
8/24/2015
8/24/2015
11/4/2015
11/4/2015
11/4/2015
2/9/2016
2/9/2016
2/9/2016
5/9/2016
5/9/2016
5/9/2016
5/9/2016
8/25/2016
8/25/2016
11/8/2016
11/8/2016
11/8/2016
2/7/2017
2/7/2017
2/7/2017
5/9/2017
5/9/2017
7/31/2015
8/31/2015
9/30/2015
10/30/2015
11/30/2015
12/31/2015
1/29/2016
2/29/2016
3/31/2016
4/29/2016
5/31/2016
6/30/2016
8/20/2015 $
0.083330 $
9/17/2015
10/22/2015
11/19/2015
12/24/2015
1/21/2016
2/18/2016
3/24/2016
4/21/2016
5/19/2016
6/23/2016
7/21/2016
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
29,909
29,605
29,601
29,600
29,611
29,616
29,641
29,663
29,674
29,702
29,730
29,758
Total declared and payable for the year ended June 30, 2016 $
356,110
7/29/2016
8/31/2016
9/30/2016
10/31/2016
11/30/2016
12/30/2016
1/31/2017
2/28/2017
3/31/2017
4/28/2017
5/31/2017
8/18/2016 $
0.083330 $
9/22/2016
10/20/2016
11/17/2016
12/22/2016
1/19/2017
2/16/2017
3/23/2017
4/20/2017
5/18/2017
6/22/2017
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
0.083330
6/30/2017
7/20/2017
Total declared and payable for the year ended June 30, 2017 $
0.083330
29,783
29,809
29,837
29,863
29,890
29,915
29,940
29,963
29,989
29,994
29,999
30,005
358,987
Dividends and distributions to common stockholders are recorded on the ex-dividend date. As such, the table above includes distributions with record dates during
years ended June 30, 2017 and June 30, 2016 . It does not include distributions previously declared to stockholders of record on any future dates, as those amounts
are not yet determinable. The following dividends were previously declared and will be recorded and payable subsequent to June 30, 2017 :
•
•
$0.08333 per share for July 2017 to holders of record on July 31, 2017 with a payment date of August 24, 2017.
$0.08333 per share for August 2017 to holders of record on August 31, 2017 with a payment date of September 21, 2017.
During the years ended June 30, 2017 and June 30, 2016 , we issued 2,969,702 and 2,725,222 shares of our common stock, respectively, in connection with the
dividend reinvestment plan.
On February 9, 2016, we amended our dividend reinvestment plan that provided for reinvestment of our dividends or distributions on behalf of our stockholders,
unless a stockholder elects to receive cash, to add the ability of stockholders to purchase additional shares by making optional cash investments. Under the revised
dividend reinvestment and direct stock repurchase plan, stockholders may elect to purchase additional shares through our transfer agent in the open market or in
negotiated transactions.
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During the year ended June 30, 2017 , Prospect officers purchased 2,104,740 shares of our stock, or 0.6% of total outstanding shares as of June 30, 2017 , both
through the open market transactions and shares issued in connection with our dividend reinvestment plan.
As of June 30, 2017 , we have reserved 81,780,516 shares of our common stock for issuance upon conversion of the Convertible Notes (see Note 5).
Note 10. Other Income
Other income consists of structuring fees, overriding royalty interests, revenue receipts related to net profit interests, deal deposits, administrative agent fees, and
other miscellaneous and sundry cash receipts. The following table shows income from such sources during the years ended June 30, 2017, 2016 and 2015.
Year Ended June 30,
2017
2016
2015
Structuring and amendment fees (refer to Note 3)
$
20,419 $
26,207 $
28,562
Royalty and Net Revenue interests
Administrative agent fees
Total Other Income
5,547
684
6,853
794
5,219
666
$
26,650 $
33,854 $
34,447
Note 11. Net Increase in Net Assets per Share
The following information sets forth the computation of net increase in net assets resulting from operations per share during the years ended June 30, 2017, 2016
and 2015.
Net increase in net assets resulting from operations
Weighted average common shares outstanding
Net increase in net assets resulting from operations per
share
$
$
Year Ended June 30,
2017
2016
2015
252,906 $
103,362 $
346,339
358,841,714
356,134,297
353,648,522
0.70 $
0.29 $
0.98
Note 12. Income Taxes
While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is August 31 of each year. The information presented in this
footnote is based on our tax year end for each period presented, unless otherwise specified.
For income tax purposes, dividends paid and distributions made to shareholders are reported as ordinary income, capital gains, non-taxable return of capital, or a
combination thereof. The tax character of dividends paid to shareholders during the tax years ended August 31, 2016, 2015 and 2014 were as follows:
Ordinary income
Capital gain
Return of capital
Tax Year Ended August 31,
2016
2015
2014
$
355,985 $
413,640 $
413,051
—
—
—
—
—
—
Total distributions paid to shareholders
$
355,985 $
413,640 $
413,051
We generate certain types of income that may be exempt from U.S. withholding tax when distributed to non-U.S. shareholders. Under IRC Section 871(k), a RIC is
permitted to designate distributions of qualified interest income and short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S.
shareholders with proper documentation. For the 2017 calendar year, 59.35% of our distributions as of June 30, 2017 qualified as interest related dividends which
are exempt from U.S. withholding tax applicable to non U.S. shareholders.
For the tax year ending August 31, 2017, the tax character of dividends paid to shareholders through June 30, 2017 is expected to be ordinary income. Because of
the difference between our fiscal and tax year ends, the final determination of the tax character of dividends will not be made until we file our tax return for the tax
year ending August 31, 2017.
171
Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent
differences in the recognition of income and expenses, and generally excludes net unrealized gains or losses, as unrealized gains or losses are generally not
included in taxable income until they are realized. The following reconciles the net increase in net assets resulting from operations to taxable income for the tax
years ended August 31, 2016, 2015 and 2014:
Tax Year Ended August 31,
2016
2015
2014
Net increase in net assets resulting from operations
$
262,831 $
360,572 $
317,671
Net realized loss on investments
Net unrealized losses (gains) on investments
Other temporary book-to-tax differences
Permanent differences
22,666
73,181
(56,036)
2,489
164,230
(157,745)
98,289
2,436
28,244
24,638
(9,122)
(4,317)
Taxable income before deductions for distributions
$
305,131 $
467,782 $
357,114
Capital losses in excess of capital gains earned in a tax year may generally be carried forward and used to offset capital gains, subject to certain limitations. The
Regulated Investment Company Modernization Act (the “RIC Modernization Act”) was enacted on December 22, 2010. Under the RIC Modernization Act, capital
losses incurred by taxpayers in taxable years beginning after the date of enactment will be allowed to be carried forward indefinitely and are allowed to retain their
character as either short-term or long-term losses. As such, the capital loss carryforwards generated by us after the August 31, 2011 tax year will not be subject to
expiration. Any losses incurred in post-enactment tax years will be required to be utilized prior to the losses incurred in pre-enactment tax years. As of August 31,
2016, we had capital loss carryforwards of approximately $314,625 available for use in later tax years. Of the amount available as of August 31, 2016, $32,612 and
$46,156 will expire on August 31, 2017 and 2018, respectively, and $235,857 is not subject to expiration. The unused balance each year will be carried forward
and utilized as gains are realized, subject to limitations. While our ability to utilize losses in the future depends upon a variety of factors that cannot be known in
advance, some of our capital loss carryforwards may become permanently unavailable due to limitations by the Code.
For the tax year ended August 31, 2016, we had cumulative taxable income in excess of cumulative distributions of $52,759 for which we elected a spillback
dividend.
As of June 30, 2017 , the cost basis of investments for tax purposes was $5,999,218 resulting in estimated gross unrealized gains and losses of $337,903 and
$498,816, respectively. As of June 30, 2016, the cost basis of investments for tax purposes was $6,175,709 resulting in estimated gross unrealized gains and losses
of $192,035 and $470,036, respectively. Due to the difference between our fiscal year end and tax year end, the cost basis of our investments for tax purposes as of
June 30, 2017 and June 30, 2016 was calculated based on the book cost of investments as of June 30, 2017 and June 30, 2016, respectively, with cumulative book-
to-tax adjustments for investments through August 31, 2016 and 2015, respectively.
In general, we may make certain adjustments to the classification of net assets as a result of permanent book-to-tax differences, which may include merger-related
items, differences in the book and tax basis of certain assets and liabilities, and nondeductible federal excise taxes, among other items. During the tax year ended
August 31, 2016, we decreased overdistributed net investment income by $2,489, increased accumulated net realized loss on investments by $1,296 and decreased
capital in excess of par value by $1,193. During the tax year ended August 31, 2015, we decreased overdistributed net investment income by $2,435, increased
accumulated net realized loss on investments by $8,542 and increased capital in excess of par value by $6,107. Due to the difference between our fiscal and tax
year end, the reclassifications for the taxable year ended August 31, 2016 is being recorded in the fiscal year ending June 30, 2017 and the reclassifications for the
taxable year ended August 31, 2015 were recorded in the fiscal year ended June 30, 2016.
Note 13. Related Party Agreements and Transactions
Investment Advisory Agreement
We have entered into an investment advisory and management agreement with the Investment Adviser (the “Investment Advisory Agreement”) under which the
Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services
to, us. Under the terms of the Investment Advisory Agreement, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of
the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make
(including performing due diligence on our prospective portfolio companies); and (iii) closes and monitors investments we make.
The Investment Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as
its services to us are not impaired. For providing these services the Investment Adviser receives
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a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our
total assets. For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base
management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately
adjusted for any share issuances or repurchases during the current calendar quarter.
The total gross base management fee incurred to the favor of the Investment Adviser was $124,077 , $128,416 and $134,760 during the years ended June 30, 2017,
2016 and 2015, respectively.
The Investment Adviser has entered into a servicing agreement with certain institutions that purchased loans with us, where we serve as the agent and collect a
servicing fee on behalf of the Investment Adviser. During the years ended June 30, 2017, 2016 and 2015 (beginning with the quarter ended June 30, 2015), we
received payments of $1,203 , $1,893 and $170, respectively, from these institutions, on behalf of the Investment Adviser, for providing such services under the
servicing agreement. We were given a credit for these payments, which reduced the base management fees to $122,874 , $126,523 and $134,590 for the years
ended June 30, 2017, 2016 and 2015, respectively.
The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment
income for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any
other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting
fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base
management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and
outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest
feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received
in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital gains or losses. Pre-
incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is
compared to a “hurdle rate” of 1.75% per quarter (7.00% annualized).
The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base
management fee. We pay the Investment Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as
follows:
•
•
•
No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds
the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate);
and
20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter
(8.75% annualized assuming a 7.00% annualized hurdle rate).
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current
quarter.
173
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of
the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all
realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser,
we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each
investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted
against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital
gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment
when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less
than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the
differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar
year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee
involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate
unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount
of any capital gains incentive fees paid since inception.
The total income incentive fee incurred was $76,520 , $92,782 and $90,687 during the years ended June 30, 2017, 2016 and 2015, respectively. No capital gains
incentive fee was incurred during the years ended June 30, 2017, 2016 and 2015.
Administration Agreement
We have also entered into an administration agreement (the “Administration Agreement”) with Prospect Administration under which Prospect Administration,
among other things, provides (or arranges for the provision of) administrative services and facilities for us. For providing these services, we reimburse Prospect
Administration for our allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement,
including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and his staff, including the internal legal staff.
Under this agreement, Prospect Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such
facilities. Prospect Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being
responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Prospect
Administration assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and
dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services
rendered to us by others. Under the Administration Agreement, Prospect Administration also provides on our behalf managerial assistance to those portfolio
companies to which we are required to provide such assistance (see Managerial Assistance section below). The Administration Agreement may be terminated by
either party without penalty upon 60 days’ written notice to the other party. Prospect Administration is a wholly-owned subsidiary of the Investment Adviser.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless
disregard of its duties and obligations, Prospect Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other
person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and
amounts reasonably paid in settlement) arising from the rendering of Prospect Administration’s services under the Administration Agreement or otherwise as
administrator for us. Our payments to Prospect Administration are reviewed quarterly by our Board of Directors.
The allocation of gross overhead expense from Prospect Administration was $22,882, $20,313 and $21,991 for the years ended June 30, 2017, 2016 and 2015,
respectively. Prospect Administration received estimated payments of $8,760, $7,445 and $7,014 directly from our portfolio companies and certain funds managed
by the Investment Adviser for legal, tax and portfolio level accounting services during the years ended June 30, 2017, 2016 and 2015, respectively. We were given
a credit for these payments as a reduction of the administrative services cost payable by us to Prospect Administration. Had Prospect Administration not received
these payments, Prospect Administration’s charges for its administrative services would have increased by these amounts. During the year ended June 30, 2017 ,
other operating expenses in the amount of $876 incurred by us, which were attributable to CCPI Inc. (“CCPI”), have been reimbursed by CCPI and are reflected as
an offset to our overhead allocation. No such reimbursements or expenses occurred during the years ended June 30, 2016 or June 30, 2015. During the year ended
June 30, 2016, we renegotiated the managerial assistance agreement with First Tower LLC (“First Tower”) and reversed $1,200 of previously accrued managerial
assistance at First Tower Delaware, $600 of which was expensed during the three months ended June 30, 2015, as the fee was paid by First Tower, which
decreased our overhead expense. During the year ended June 30, 2016, we also
174
incurred $379 of overhead expense related to our consolidated entity SB Forging. Net overhead during the years ended June 30, 2017, 2016 and 2015 totaled
$13,246 , $12,647 and $14,977 , respectively.
Managerial Assistance
As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significant managerial assistance. “Making available
significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or
business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control,
either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us to controlled and non-controlled
portfolio companies will vary according to the particular needs of each portfolio company. Examples of such activities include (i) advice on recruiting, hiring,
management and termination of employees, officers and directors, succession planning and other human resource matters; (ii) advice on capital raising, capital
budgeting, and capital expenditures; (iii) advice on advertising, marketing, and sales; (iv) advice on fulfillment, operations, and execution; (v) advice on managing
relationships with unions and other personnel organizations, financing sources, vendors, customers, lessors, lessees, lawyers, accountants, regulators and other
important counterparties; (vi) evaluating acquisition and divestiture opportunities, plant expansions and closings, and market expansions; (vii) participating in audit
committee, nominating committee, board and management meetings; (viii) consulting with and advising board members and officers of portfolio companies (on
overall strategy and other matters); and (ix) providing other organizational, operational, managerial and financial guidance.
Prospect Administration, when performing a managerial assistance agreement executed with each portfolio company to which we provide managerial assistance,
arranges for the provision of such managerial assistance on our behalf. When doing so, Prospect Administration utilizes personnel of our Investment Adviser. We,
on behalf of Prospect Administration, invoice portfolio companies receiving and paying for managerial assistance, and we remit to Prospect Administration its cost
of providing such services, including the charges deemed appropriate by our Investment Adviser for providing such managerial assistance. No income is
recognized by Prospect.
During the years ended June 30, 2017, 2016 and 2015, we received payments of $6,923, $6,102 and $5,126, respectively, from our portfolio companies for
managerial assistance and subsequently remitted these amounts to Prospect Administration. During the year ended June 30, 2016 , we reversed $1,200 of
managerial assistance expense related to our consolidated entity First Tower Delaware which was included within allocation from Prospect Administration on our
Consolidated Statement of Operations for the year ended June 30, 2015 . The $1,200 was subsequently paid to Prospect Administration by First Tower LLC, the
operating company. See Note 14 for further discussion.
Co-Investments
On February 10, 2014, we received an exemptive order from the SEC (the “Order”) that gave us the ability to negotiate terms other than price and quantity of co-
investment transactions with other funds managed by the Investment Adviser or certain affiliates, including Priority Income Fund, Inc. and Pathway Energy
Infrastructure Fund, Inc., subject to the conditions included therein. Under the terms of the relief permitting us to co-invest with other funds managed by our
Investment Adviser or its affiliates, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions
in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and
fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent
with the interests of our stockholders and is consistent with our investment objective and strategies. In certain situations where co-investment with one or more
funds managed by the Investment Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the
same issuer, the personnel of the Investment Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make
these determinations based on policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably
among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. Moreover, except in certain circumstances, when
relying on the Order, we will be unable to invest in any issuer in which one or more funds managed by the Investment Adviser or its affiliates has previously
invested.
We reimburse CLO investment valuation services fees initially incurred by Priority Income Fund, Inc. During the years ended June 30, 2017, 2016 and 2015, we
recognized expenses that were reimbursed for valuation services of $117, $113 and $72, respectively. Conversely, Priority Income Fund, Inc. and Pathway Energy
Infrastructure Fund, Inc. reimburse us for software fees, expenses which were initially incurred by Prospect. As of June 30, 2017, we accrued a receivable from
Priority Income Fund, Inc. and Pathway Energy Infrastructure Fund, Inc. for software fees of $14 that will be reimbursed to us. No such payable was recorded as of
June 30, 2016 or June 30, 2015.
175
As of June 30, 2017 , we had co-investments with Priority Income Fund, Inc. in the following CLO funds: Apidos CLO XXII, Babson CLO Ltd. 2014-III, Carlyle
Global Market Strategies CLO 2016-3, Ltd., Cent CLO 21 Limited, CIFC Funding 2014-IV Investor, Ltd., CIFC Funding 2016-I, Ltd., Galaxy XVII CLO, Ltd.,
Halcyon Loan Advisors Funding 2014-2 Ltd., Halcyon Loan Advisors Funding 2015-3 Ltd., HarbourView CLO VII, Ltd., Jefferson Mill CLO Ltd., Mountain
View CLO IX Ltd., Octagon Investment Partners XVIII, Ltd., Symphony CLO XIV Ltd., Voya IM CLO 2014-1 Ltd., Voya CLO 2016-3, Ltd., Voya CLO 2017-3,
Ltd. and Washington Mill CLO Ltd; however HarbourView CLO VII, Ltd. and Octagon Investment Partners XVIII, Ltd. are not considered co-investments
pursuant to the Order as they were purchased on the secondary market.
As of June 30, 2017 , we had a co-investment with Pathway Energy Infrastructure Fund, Inc. in Carlyle Global Market Strategies CLO 2014-4, Ltd.; however, this
investment is not considered a co-investment pursuant to the Order as it was purchased on the secondary market.
Note 14. Transactions with Controlled Companies
The descriptions below detail the transactions which Prospect Capital Corporation (“Prospect”) has entered into with each of our controlled companies. Certain of
the controlled entities discussed below were consolidated effective July 1, 2014 (see Note 1). As such, transactions with these Consolidated Holding Companies
are presented on a consolidated basis.
Airmall Inc.
Prospect owned 100% of the equity of AMU Holdings Inc. (“AMU”), a Consolidated Holding Company. AMU owned 98% of Airmall Inc. (f/k/a Airmall USA
Holdings, Inc.) (“Airmall”). Airmall is a developer and manager of airport retail operations.
On August 1, 2014, Prospect sold its investments in Airmall for net proceeds of $51,379 and realized a loss of $3,473 on the sale. In addition, there is $6,000 being
held in escrow, of which 98% is due to Prospect, which will be recognized as an additional realized loss if it is not received. Included in the net proceeds were
$3,000 of structuring fees from Airmall related to the sale of the operating company which was recognized as other income during the year ended June 30, 2015.
On October 22, 2014, Prospect received a tax refund of $665 related to its investment in Airmall and realized a gain of the same amount. On March 21, 2016,
Prospect received $1,720 of the escrow proceeds which reduced the cost basis of the escrow receivable held on the balance sheet. On August 2, 2016, Prospect
received the remaining escrow proceeds of $3,916, reducing the cost basis to zero.
In addition to the repayments noted above, the following amounts were paid from Airmall to Prospect and recorded by Prospect
as repayment of loan receivable:
Year Ended June 30, 2015
$
49
The following interest payments were accrued and paid from Airmall to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
$
576
The following managerial assistance payments were paid from Airmall to Prospect and subsequently remitted to Prospect
Administration (no income was recognized by Prospect):
Year Ended June 30, 2015
$
75
The following payments were paid from Airmall to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to Airmall (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services
costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
$
730
American Property REIT Corp.
APH Property Holdings, LLC (“APH”) owned 100% of the common equity of American Property REIT Corp. (f/k/a American Property Holdings Corp.)
(“APRC”). Effective May 23, 2016, in connection with the merger of APRC and United Property REIT Corp. (“UPRC”) with and into National Property REIT
Corp. (f/k/a National Property Holdings Corp.) (“NPRC”), APH and UPH Property Holdings, LLC (“UPH”) merged with and into NPH Property Holdings, LLC
(“NPH”). Prospect owns 100% of the equity of NPH, a Consolidated Holding Company, and NPH owns 100% of the common equity of NPRC.
176
APRC was formed to hold for investment, operate, finance, lease, manage, and sell a portfolio of real estate assets and engage in any and all other activities as may
be necessary, incidental or convenient to carry out the foregoing. APRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-
family properties. APRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity (the
“JV”).
On November 26, 2014, APRC transferred its investment in APH Carroll Resort, LLC to NPRC and the investment was renamed NPRC Carroll Resort, LLC. As a
result, Prospect’s investments in APRC related to this property also transferred to NPRC. The investments transferred consisted of $10,237 of equity and $65,586
of debt. There was no gain or loss realized on the transaction.
On May 1, 2015, APRC transferred its investment in 5100 Live Oaks Blvd, LLC to NPRC. As a result, Prospect’s investments in APRC related to this property
also transferred to NPRC. The investments transferred consisted of $2,748 of equity and $29,990 of debt. There was no gain or loss realized on the transaction.
On May 6, 2015, Prospect made a $1,475 investment in APRC, of which $1,381 was a Senior Term Loan and $94 was used to
purchase additional common equity of APRC through APH. The proceeds were utilized by APRC to purchase additional ownership interest in its twelve multi-
family properties for $1,473 and pay $2 of legal services provided by attorneys at Prospect Administration. The minority interest holder also invested an additional
$17 in the JVs. The proceeds were used by the JVs to fund $1,490 of capital expenditures.
During the year ended June 30, 2015 Prospect received $8 as a return of capital on the equity investment in APRC.
On September 9, 2015, Prospect made a $799 investment in APRC used to purchase additional common equity of APRC through APH. The proceeds were utilized
by APRC to purchase additional ownership interest in its twelve multi-family properties for $799. The minority interest holder also invested an additional $12 in
the JVs. The proceeds were used by the JVs to fund $811 of capital expenditures.
On December 23, 2015, Prospect made a $1,469 investment in APRC used to purchase additional common equity of APRC through APH. The proceeds were
utilized by APRC to purchase additional ownership interest in its eleven multi-family properties for $1,468 and pay $1 of legal services provided by attorneys at
Prospect Administration. The minority interest holder also invested an additional $20 in the JVs. The proceeds were used by the JVs to fund $1,488 of capital
expenditures.
On December 31, 2015, APRC made a partial repayment on the Senior Term Loan of $9,000 and declared a dividend of $11,016 that Prospect recorded as
dividend income in connection with the sale of the Vista Palma Sola property.
On March 3, 2016, APRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $14,621.
On March 28, 2016, APRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $3,109.
On April 9, 2016, APRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $2,973.
Effective May 23, 2016, APRC and UPRC merged with and into NPRC, to consolidate all of our real estate holdings, with NPRC as the surviving entity. APRC
and UPRC have been dissolved. No gain or loss was recognized upon the merger.
The following interest payments were accrued and paid from APRC to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
14,757
7,306
—
Included above, the following payment-in-kind interest from APRC was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
4,529
558
—
177
The following net revenue interest payments were paid from APRC to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,342
899
—
The following managerial assistance payments were paid from APRC to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
590
528
—
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
86
—
The following payments were paid from APRC to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to APRC (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs
payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
301
860
—
Arctic Energy Services, LLC
Prospect owns 100% of the equity of Arctic Oilfield Equipment USA, Inc. (“Arctic Equipment”), a Consolidated Holding Company. Arctic Equipment owns 70%
of the equity of Arctic Energy Services, LLC (“Arctic Energy”), with Ailport Holdings, LLC (“Ailport”) (100% owned and controlled by Arctic Energy
management) owning the remaining 30% of the equity of Arctic Energy. Arctic Energy provides oilfield service personnel, well testing flowback equipment, frac
support systems and other services to exploration and development companies in the Rocky Mountains.
On September 30, 2015, we restructured our investment in Arctic Energy. Concurrent with the restructuring, we exchanged our $31,640 senior secured loan and
$20,230 subordinated loan for Class D and Class E equity in Arctic Energy.
During the three months ended December 31, 2016, Arctic Energy and CP Well Testing, LLC, a wholly owned subsidiary of CP Energy Services, Inc., entered into
a loan agreement with each other. CP Well Testing, LLC provided a $1,200 senior secured loan to Arctic Energy, for the purpose of funding ongoing operations.
The following interest payments were accrued and paid from Arctic Energy to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
6,721
1,123
—
The following managerial assistance payments were paid from Arctic Energy to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
100
50
—
178
The following managerial assistance recognized had not yet been paid by Arctic Energy to Prospect and was included by Prospect within other receivables and due
to Prospect Administration:
June 30, 2016
June 30, 2017
$
50
150
CCPI Inc.
Prospect owns 100% of the equity of CCPI Holdings Inc. (“CCPI Holdings”), a Consolidated Holding Company. CCPI Holdings owns 94.95% of the equity of
CCPI Inc. (“CCPI”), with CCPI management owning the remaining 5.05% of the equity. CCPI owns 100% of each of CCPI Europe Ltd. and MEFEC B.V., and
45% of Gulf Temperature Sensors W.L.L.
During the year ended June 30, 2015, CCPI repurchased 30 shares of its common stock from a former CCPI executive, decreasing the number of shares
outstanding and increasing Prospect’s ownership to 94.95%.
In June 2015, CCPI engaged Prospect to provide certain investment banking and financial advisory services in connection with
a possible transaction. As compensation for the services provided, Prospect received $525 of advisory fees from CCPI which was recognized as other income
during the year ended June 30, 2015.
During the three months ended September 30, 2015, CCPI repurchased 86 shares of its common stock from former CCPI executives. Additionally, certain CCPI
executives exercised their option rights, purchasing 246 shares of CCPI common stock. These transactions increased the number of common shares outstanding by
160 shares and thus decreased Prospect’s ownership to 93.99%.
As of June 30, 2016, after the departure of a former CCPI executive, Prospect’s ownership of CCPI increased to 94.59%.
During the three months ended June 30, 2017, Prospect recognized $153 in other income related to amendment fee income.
The following amounts were paid from CCPI to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
450
4,450
450
The following cash distributions were declared and paid from CCPI to Prospect and recognized as a return of capital by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
1,918
—
During the year ended June 30, 2017, Prospect reclassified $123 of return of capital received from CCPI in prior periods as dividend income.
The following dividends were declared and paid from CCPI to Prospect and recognized as dividend income by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
3,196
123
All dividends were paid from earnings and profits of CCPI.
The following interest payments were accrued and paid from CCPI to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
3,332
3,123
2,992
179
Included above, the following payment-in-kind interest from CCPI was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
599
475
—
The following managerial assistance payments were paid from CCPI to Prospect and subsequently remitted to Prospect Administration (no income was recognized
by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
240
240
240
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
60
60
The following payments were paid from CCPI to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to CCPI (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs payable
by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
96
—
The following amounts were due from CCPI to Prospect for reimbursement of expenses paid by Prospect on behalf of CCPI and were included by Prospect within
other receivables:
June 30, 2016
June 30, 2017
$
2
1
CP Energy Services Inc.
Prospect owns 100% of the equity of CP Holdings of Delaware LLC (“CP Holdings”), a Consolidated Holding Company. CP Holdings owns 82.3% of the equity
of CP Energy Services Inc. (“CP Energy”), and the remaining 17.7% of the equity is owned by CP Energy management. As of June 30, 2014, CP Energy owned
directly or indirectly 100% of each of CP Well Testing Services, LLC (f/k/a CP Well Testing Holding Company LLC) (“CP Well Testing”); CP Well Testing, LLC
(“CP Well”); Fluid Management Services, Inc. (f/k/a Fluid Management Holdings, Inc.) (“Fluid Management”); Fluid Management Services LLC (f/k/a Fluid
Management Holdings LLC); Wright Transport, Inc. (f/k/a Wright Holdings, Inc.); Wright Foster Disposals, LLC; Foster Testing Co., Inc.; ProHaul Transports,
LLC; Artexoma Logistics, LLC; and Wright Trucking, Inc. Effective December 31, 2014, CP Energy underwent a corporate reorganization in order to consolidate
certain of its wholly-owned subsidiaries. As of June 30, 2015, CP Energy owned directly or indirectly 100% of each of CP Well; Wright Foster Disposals, LLC;
Foster Testing Co., Inc.; ProHaul Transports, LLC; and Wright Trucking, Inc. CP Energy provides oilfield flowback services and fluid hauling and disposal
services through its subsidiaries.
During the year ended June 30, 2015, certain members of CP Energy management exercised options to purchase common stock, decreasing our ownership to
82.3%.
On October 30, 2015, we restructured our investment in CP Energy. Concurrent with the restructuring, we exchanged our $86,965 senior secured loan and $15,924
subordinated loan for Series B Convertible Preferred Stock in CP Energy.
During the three months ended December 31, 2016, Arctic Energy and CP Well entered into a loan agreement with each other. CP Well provided a $1,200 senior
secured loan to Arctic Energy, for the purpose of funding ongoing operations.
The following interest payments were accrued and paid from CP Well to Prospect and recognized by Prospect as interest income:
180
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
16,420
(390)
—
As of September 30, 2015, due to a pending sale transaction, we reversed $4,616 of previously recognized payment-in-kind
interest from CP Well of which we do not expect to receive.
Included above, the following payment-in-kind interest from CP Well was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
2,818
(2,819)
—
The following managerial assistance payments were paid from CP Energy to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
300
300
300
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
75
75
The following payments were paid from CP Energy to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to CP Energy (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services
costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
60
—
15
Credit Central Loan Company, LLC
Prospect owns 100% of the equity of Credit Central Holdings of Delaware, LLC (“Credit Central Delaware”), a Consolidated Holding Company. Credit Central
Delaware owns 74.93% of the equity of Credit Central Loan Company, LLC (f/k/a Credit Central Holdings, LLC) (“Credit Central”), with entities owned by Credit
Central management owning the remaining 25.07% of the equity. Credit Central owns 100% of each of Credit Central, LLC; Credit Central South, LLC; Credit
Central of Texas, LLC; and Credit Central of Tennessee, LLC. Credit Central is a branch-based provider of installment loans.
During the year ended June 30, 2015, Credit Central redeemed 24,629 shares of its membership interest from former Credit Central employees, decreasing the
number of shares outstanding and increasing Prospect’s ownership to 74.93%.
On September 28, 2016, Prospect performed a buyout of Credit Central management’s ownership stake, purchasing additional subordinated debt of $12,523 at a
discount of $7,521. Prospect also purchased $2,098 of additional shares, increasing its ownership to 99.91%.
During the year ended June 30, 2017, $923 of the aforementioned original issue discount of $7,521 accreted.
The following amounts were paid from Credit Central to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
300
323
403
181
During the year ended June 30, 2015, Prospect reclassified $159 of return of capital received from Credit Central Delaware in prior periods as dividend income.
The following interest payments were accrued and paid from Credit Central to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
7,375
7,398
9,950
Included above, the following payment-in-kind interest from Credit Central was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
300
921
2,804
The following interest income recognized had not yet been paid by Credit Central to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
21
29
The following net revenue interest payments were paid from Credit Central to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,220
2,067
—
The following managerial assistance payments were paid from Credit Central to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
700
700
700
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
175
175
The following amounts were due to Credit Central from Prospect for reimbursement of expenses paid by Credit Central on behalf of Prospect and were included by
Prospect within other liabilities:
June 30, 2016
June 30, 2017
$
3
—
Echelon Aviation LLC
Prospect owns 99.02% of the membership interests of Echelon Aviation LLC (“Echelon”). Echelon owns 60.7% of the equity of AerLift Leasing Limited
(“AerLift”).
On September 15, 2014, Echelon made an optional partial prepayment of $37,313 of the Senior Secured Revolving Credit Facility outstanding.
182
On September 30, 2014, Prospect made an additional $5,800 investment in the membership interests of Echelon.
During the year ended June 30, 2015, Echelon issued 54,482.06 Class B shares to the company’s President, decreasing Prospect’s ownership to 99.02%.
On March 28, 2016, Echelon made an optional partial prepayment of $2,954 of the Senior Secured Revolving Credit Facility outstanding.
During the three months ended March 31, 2016, Echelon issued 36,059 Class B shares to the company’s President, decreasing Prospect’s ownership to 98.97%.
On September 28, 2016, Echelon made an optional partial prepayment of $6,800 of the Senior Secured Revolving Credit Facility outstanding.
During the three months ended September 30, 2016, Echelon issued 36,275 Class B shares to the company’s President, decreasing Prospect’s ownership to
98.56%.
On December 9, 2016, Prospect made a follow-on $16,044 first lien senior secured debt and $2,830 equity investment in Echelon to support an asset acquisition,
increasing Prospect’s ownership to 98.71%. Prospect also recognized $1,121 in structuring fee income as a result of the transaction.
The following dividends were declared and paid from Echelon to Prospect and recognized as dividend income by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
7,250
200
All dividends were paid from earnings and profits of Echelon.
The following interest payments were accrued and paid from Echelon to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
6,895
5,700
5,734
The following interest income recognized had not yet been paid by Echelon to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
2,335
2,631
The following managerial assistance payments were paid from Echelon to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
313
250
250
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
63
63
183
The following payments were paid from Echelon to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to Echelon (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services
costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
211
120
217
Edmentum Ultimate Holdings, LLC
Prospect owns 37.1% of the equity of Edmentum Ultimate Holdings, LLC (“Edmentum Holdings”). Edmentum Holdings owns 100% of the equity of Edmentum,
Inc. (“Edmentum”). Edmentum is the largest all subscription based, software as a service provider of online curriculum and assessments to the U.S. education
market. Edmentum provides high-value, comprehensive online solutions that support educators to successfully transition learners from one stage to the next.
On June 9, 2015, Prospect provided additional debt and equity financing to support the recapitalization of Edmentum. As part of the recapitalization, Prospect
exchanged 100% of the $50,000 second lien term loan previously outstanding for $26,365 of junior paid in kind (“PIK”) notes and 370,964.14 Class A common
units representing 37.1% equity ownership in Edmentum Holdings. In addition, Prospect invested $5,875 in senior PIK notes and committed $7,834 as part of a
second lien revolving credit facility, of which $4,896 was funded at closing. On June 9, 2015, our investment in Edmentum was written-down for tax purposes and
a loss of $22,116 was therefore realized for the amount that the amortized cost exceeded the fair value, reducing the amortized cost to $37,216.
During the year ended June 30, 2016, Prospect funded an additional $6,424 in the second lien revolving credit facility.
During the year ended June 30, 2017, Prospect funded an additional $7,835 in the second lien revolving credit facility.
The following amounts were paid from Edmentum to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
4,896
6,424
The following interest payments were accrued and paid from Edmentum to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
3,650
1,726
Included above, the following payment-in-kind interest from Edmentum was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
2,934
2,057
The following interest income recognized had not yet been paid by Edmentum to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
639
167
184
Energy Solutions Holdings Inc.
Prospect owns 100% of the equity of Energy Solutions Holdings Inc. (f/k/a Gas Solutions Holdings Inc.) (“Energy Solutions”), a Consolidated Holding
Company. Energy Solutions owns 100% of each of Change Clean Energy Company, LLC (f/k/a Change Clean Energy Holdings, LLC) (“Change Clean”);
Freedom Marine Solutions, LLC (f/k/a Freedom Marine Services Holdings, LLC) (“Freedom Marine”); and Yatesville Coal Company, LLC (f/k/a Yatesville Coal
Holdings, LLC) (“Yatesville”). Change Clean owns 100% of each of Change Clean Energy, LLC and Down East Power Company, LLC, and 50.1% of BioChips
LLC. Freedom Marine owns 100% of each of Vessel Company, LLC (f/k/a Vessel Holdings, LLC) (“Vessel”); Vessel Company II, LLC (f/k/a Vessel Holdings II,
LLC) (“Vessel II”); and Vessel Company III, LLC (f/k/a Vessel Holdings III, LLC) (“Vessel III”). Yatesville owns 100% of North Fork Collieries, LLC.
Energy Solutions owns interests in companies operating in the energy sector. These include companies operating offshore supply vessels, ownership of a non-
operating biomass electrical generation plant and several coal mines. Energy Solutions subsidiaries formerly owned interests in gathering and processing business
in east Texas.
Transactions between Prospect and Freedom Marine are separately discussed below under “Freedom Marine Solutions, LLC.”
During the three months ended December 31, 2014, Prospect determined that our remaining investments in Change Clean and
Yatesville were impaired and recorded a realized loss of $1,449, reducing the amortized cost to zero.
On August 6, 2015, Prospect dissolved the following entities: Change Clean Energy Company, LLC, Change Clean Energy, LLC, Down East Power Company,
LLC and BioChips LLC.
First Tower Finance Company LLC
Prospect owns 100% of the equity of First Tower Holdings of Delaware LLC (“First Tower Delaware”), a Consolidated Holding Company. First Tower Delaware
owns 80.1% of First Tower Finance Company LLC (f/k/a First Tower Holdings LLC) (“First Tower Finance”). First Tower Finance owns 100% of First Tower,
LLC (“First Tower”), a multiline specialty finance company.
During the three months ended December 31, 2015, Prospect made an additional $8,005 investment split evenly between equity and the second lien term loan to
First Tower.
During the three months ended December 31, 2016, Prospect made an additional $8,005 equity investment to First Tower.
The following amounts were paid from First Tower to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
679
2,220
The following interest payments were accrued and paid from First Tower to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
52,900
56,698
51,116
Included above, the following payment-in-kind interest from First Tower was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
332
861
7,572
During the year ended June 30, 2015, Prospect reclassified $1,929 of return of capital received from First Tower in prior
periods as dividend income.
185
The following interest income recognized had not yet been paid by First Tower to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
156
123
During the year ended June 30, 2016, the managerial assistance agreement between First Tower Delaware and Prospect Administration was amended and $1,200
of managerial assistance expense was reversed at Prospect. First Tower replaced First Tower Delaware in the managerial assistance agreement with Prospect
Administration as of December 14, 2015.
The following managerial assistance payments were accrued and paid from First Tower Delaware to Prospect Administration and recognized by Prospect as an
expense:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
2,400
(600)
—
The following managerial assistance payments were paid from First Tower to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
1,200
1,800
The following managerial assistance payments received by Prospect have not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
600
600
The following amounts were due from First Tower to Prospect for reimbursement of expenses paid by Prospect on behalf of First Tower and were included by
Prospect within other receivables:
June 30, 2016
June 30, 2017
$
2
1
Freedom Marine Solutions, LLC
As discussed above, Prospect owns 100% of the equity of Energy Solutions, a Consolidated Holding Company. Energy Solutions owns 100% of Freedom Marine.
Freedom Marine owns 100% of each of Vessel, Vessel II, and Vessel III.
As of July 1, 2014, the cost basis of Prospect’s total debt and equity investment in Freedom Marine was $39,811, which consisted of the following: $3,500 senior
secured note to Vessel; $12,504 senior secured note to Vessel II; $16,000 senior secured note to Vessel III; and $7,807 of equity.
On December 29, 2014, Freedom Marine reached a settlement for and received $5,174, net of third party obligations, related to
the contingent earn-out from the sale of Gas Solutions in January 2012 which was retained by Freedom Marine. This is a final
settlement and no further payments are expected from the sale.
On October 30, 2015, we restructured our investment in Freedom Marine. Concurrent with the restructuring, we exchanged our $32,500 senior secured loans for
additional membership interest in Freedom Marine.
On January 7, 2016 and April 11, 2016, Prospect purchased an additional $400 and $600, respectively, in membership interests in Freedom Marine to support its
ongoing operations and liquidity needs.
On August 11, 2016, Prospect purchased an additional $601 in membership interests in Freedom Marine to support its ongoing operations and liquidity needs.
186
During the year ended June 30, 2017, Prospect purchased an additional $1,200 in membership interests in Freedom Marine to support its ongoing operations and
liquidity needs.
The following interest payments were accrued and paid from Vessel to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
639
159
—
The following interest payments were accrued and paid from Vessel II to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,713
427
—
The following interest payments were accrued and paid from Vessel III to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
2,109
526
—
The following managerial assistance payments were paid from Freedom Marine to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
300
75
—
The following managerial assistance recognized had not yet been paid by Freedom Marine to Prospect and was included by Prospect within other receivables and
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
225
525
The following payments were paid from Freedom Marine to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services
provided directly to Freedom Marine (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the
administrative services costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
115
65
—
Harbortouch Payments, LLC
Prospect owned 100% of the equity of Harbortouch Holdings of Delaware Inc. (“Harbortouch Delaware”), a Consolidated Holding Company. Harbortouch
Delaware owned 100% of the Class C voting units of Harbortouch Payments, LLC (“Harbortouch”), which provide for a 53.5% residual profits allocation.
Harbortouch management owns 100% of the Class B and D voting units of Harbortouch, which provide for a 46.5% residual profits allocation. Harbortouch owns
100% of Credit Card Processing USA, LLC. Harbortouch is a provider of transaction processing services and point-of sale equipment used by merchants across the
United States.
On September 30, 2014, Prospect made a new $26,431 senior secured term loan to Harbortouch to support an acquisition. As part of the transaction, Prospect
received $529 of structuring fees (which was recognized by Prospect as structuring fee income) and $50 of amendment fees (which was recognized by Prospect as
amendment fee income).
On December 19, 2014, Prospect made an additional $1,291 equity investment in Harbortouch Class C voting units. This amount was deferred consideration
stipulated in the original agreement.
187
On May 31, 2016, we sold our investment in Harbortouch for total consideration of $328,032, including fees and escrowed amounts. Prior to the sale, $154,382 of
Senior Secured Term Loan B loan outstanding was converted to preferred equity. We received a repayment of $146,989 loans receivable to us and $157,639 of
proceeds related to the equity investment. We recorded a realized loss of $5,419 related to the sale. We also received a $5,145 prepayment premium for early
repayment of the outstanding loans, which was recorded as interest income in the year ended June 30, 2016 and a $12,909 advisory fee for the transaction, which
was recorded as other income in the year ended June 30, 2016. In addition, there is $5,350 being held in escrow which will be recognized as additional realized
gain if and when it is received. Concurrent with the sale, we made a $27,500 second lien secured investment in Harbortouch, which was later repaid on October 13,
2016.
In addition to the repayments noted above, the following amounts were paid from Harbortouch to Prospect and recorded by Prospect as repayment of loan
receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
5,371
4,865
—
The following cash distributions were declared and paid from Harbortouch to Prospect and recognized as a return of capital by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
55
50
—
The following interest payments were accrued and paid from Harbortouch to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
29,834
28,274
—
Included above, the following payment-in-kind interest from Harbortouch was capitalized and recognized by Prospect as
interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
7,652
9,503
—
The following managerial assistance payments were paid from Harbortouch to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
500
458
—
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
83
—
The following payments were paid from Harbortouch to Prospect Administration as reimbursement for legal, tax and portfolio
level accounting services provided directly to Harbortouch (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a
reduction of the administrative services costs payable by Prospect to Prospect Administration):
188
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
46
351
308
MITY, Inc.
Prospect owns 100% of the equity of MITY Holdings of Delaware Inc. (“MITY Delaware”), a Consolidated Holding Company. MITY Delaware holds 94.99% of
the equity of MITY, Inc. (f/k/a MITY Enterprises, Inc.) (“MITY”), with management of MITY owning the remaining 5.01% of the equity of MITY. MITY owns
100% of each of MITY-Lite, Inc. (“MITY-Lite”); Broda USA, Inc. (f/k/a Broda Enterprises USA, Inc.) (“Broda USA”); and Broda Enterprises ULC (“Broda
Canada”). MITY is a designer, manufacturer and seller of multipurpose room furniture and specialty healthcare seating products.
During the year ended June 30, 2015, Prospect funded $2,500 of MITY’s senior secured revolving facility, which MITY fully
repaid during that time.
During the three months ended March 31, 2016, Prospect’s ownership in MITY increased to 95.83% resulting from a stock repurchase of a key executive’s shares.
During the three months ended December 31, 2016, Prospect formed a separate legal entity, MITY FSC, Inc., (“MITY FSC”) in which Prospect owns 96.88% of
the equity, and MITY-Lite management owns the remaining portion. MITY FSC does not have material operations. This entity earns commission payments from
MITY-Lite based on its sales to foreign customers, and distribute it to its shareholders based on pro-rata ownership. During the three months ended December 31,
2016, we received $406 of such commission, which we recognized as other income.
On January 17, 2017, Prospect invested an additional $8,000 of Senior Secured Note A and $8,000 of Senior Secured Term Loan B debt investments in MITY to
fund an acquisition. Prospect recognized structuring fee income of $480 from this additional investment.
The following dividends were declared and paid from MITY to Prospect and recognized by Prospect as divided income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
711
468
All dividends were paid from earnings and profits of MITY.
The following interest payments were accrued and paid from MITY to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
5,146
5,196
6,284
Included above, the following payment-in-kind interest from MITY was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
532
139
—
The following interest income recognized had not yet been paid by MITY to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
440
21
189
The following interest payments were accrued and paid from Broda Canada to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
637
566
564
The following interest income recognized had not yet been paid by Broda Canada to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
48
46
During the year ended June 30, 2015, there was an unfavorable fluctuation in the foreign currency exchange rate and Prospect recognized $5 of realized loss
related to its investment in Broda Canada. During the year ended June 30, 2016, there was a favorable fluctuation in the foreign currency exchange rate and
Prospect recognized $13 of realized gain related to its investment in Broda Canada. During the year ended June 30, 2017, there was a favorable fluctuation in the
foreign currency exchange rate and Prospect recognized $16 of realized gain related to its investment in Broda Canada.
The following managerial assistance payments were paid from MITY to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
310
300
300
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
—
75
The following managerial assistance recognized had not yet been paid by MITY to Prospect and was included by Prospect within other receivables and due to
Prospect Administration:
June 30, 2016
June 30, 2017
$
75
—
The following payments were paid from MITY to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to MITY (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs
payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
121
60
224
National Property REIT Corp.
Prospect owns 100% of the equity of NPH, a Consolidated Holding Company. NPH owns 100% of the common equity of NPRC. Effective May 23, 2016, in
connection with the merger of APRC and United Property REIT Corp. UPRC with and into NPRC, APH and UPH merged with and into NPH.
NPRC is a Maryland corporation and a qualified REIT for federal income tax purposes. In order to qualify as a REIT, NPRC issued 125 shares of Series A
Cumulative Non-Voting Preferred Stock to 125 accredited investors. The preferred stockholders are entitled to receive cumulative dividends semi-annually at an
annual rate of 12.5% and do not have the ability to participate in the management or operation of NPRC.
190
NPRC was formed to hold for investment, operate, finance, lease, manage, and sell a portfolio of real estate assets and engage in any and all other activities as may
be necessary, incidental or convenient to carry out the foregoing. NPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-
family properties. NPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity (the
“JV”). Additionally, through its wholly-owned subsidiaries, NPRC invests in online consumer loans.
On October 23, 2014, UPRC transferred its investment in Michigan Storage, LLC to NPRC. As a result, Prospect’s investments
in UPRC related to these properties also transferred to NPRC. The investments transferred consisted of $1,281 of equity and
$9,444 of debt. There was no gain or loss realized on the transaction.
On November 26, 2014, APRC transferred its investment in APH Carroll Resort, LLC to NPRC and the investment was renamed NPRC Carroll Resort, LLC. As a
result, Prospect’s investments in APRC related to this property also transferred to NPRC. The investments transferred consisted of $10,237 of equity and $65,586
of debt. There was no gain or loss realized on the transaction.
On January 16, 2015, Prospect made a $13,871 investment in NPRC, of which $11,810 was a Senior Term Loan directly to NPRC and $2,061 was used to
purchase additional common equity of NPRC through NPH. The proceeds were utilized by NPRC to purchase additional ownership interest in Michigan Storage,
LLC (which was originally purchased by UPRC and transferred to NPRC, as discussed below) for $13,854, with $17 retained by NPRC for working capital. The
minority interest holder also invested an additional $2,445 in the JV. With additional debt financing of $12,602, the total proceeds were used by the JV to purchase
five additional properties for $26,405. The remaining proceeds were used to pay $276 of structuring fees to Prospect (which was recognized by Prospect as
structuring fee income), $1,762 of third party expenses, $65 in pre-funded capital expenditures, and $393 of prepaid assets.
On March 17, 2015, Prospect entered into a new credit agreement with ACL Loan Holdings, Inc. (“ACLLH”), a wholly-owned
subsidiary of NPRC, to form two new tranches of senior secured term loans, Term Loan A and Term Loan B, with the same terms as the existing NPRC Term
Loan A and Term Loan B due to Prospect. The agreement was effective as of June 30, 2014. On June 30, 2014, ACLLH made a non-cash return of capital
distribution of $22,390 to NPRC and NPRC transferred and assigned to ACLLH a senior secured Term Loan A due to Prospect.
On May 1, 2015, APRC transferred its investment in 5100 Live Oaks Blvd, LLC to NPRC. As a result, Prospect’s investments in APRC related to this property
also transferred to NPRC. The investments transferred consisted of $2,748 of equity and $29,990 of debt. There was no gain or loss realized on the transaction.
On May 6, 2015, Prospect made a $252 investment in NPRC, of which $236 was a Senior Term Loan and $16 was used to purchase additional common equity of
NPRC through NPH. The proceeds were utilized by NPRC to purchase additional ownership interest in 5100 Live Oaks Blvd, LLC for $252. The minority interest
holder also invested an additional $6 in the JV. The proceeds were used by the JV to fund $258 of capital expenditures.
On June 2, 2015, Prospect amended the credit agreement with NPRC to form two new tranches of senior secured term loans, Term Loan C and Term Loan D, with
the same terms as the existing ACLLH Term Loan A and Term Loan B due to Prospect. The amendment was effective as of April 1, 2015.
During the year ended June 30, 2015, Prospect made thirty-six follow-on investments in NPRC totaling $224,200 to support the
online consumer lending initiative. Prospect invested $52,350 of equity through NPH and $171,850 of debt directly to NPRC and its wholly-owned subsidiaries. In
addition, during the year ended June 30, 2015, Prospect received partial repayments of $32,883 of the loans previously outstanding and $5,577 as a return of capital
on the equity investment in NPRC.
On September 9, 2015, Prospect made a $159 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest in its multi-family property for $159. The minority interest holder also invested an additional $4 in the JVs.
The proceeds were used by the JVs to fund $163 of capital expenditures.
On November 5, 2015 Prospect made a $9,017 investment in NPRC used to purchase additional common equity in NPRC through NPH. The proceeds were
utilized by NPRC to purchase an 80.0% ownership interest in SSIL I, LLC for $9,017. The JV was purchased for $34,500 which included debt financing and
minority interest of $26,450 and $2,254, respectively. The remaining proceeds were used to pay $180 of structuring fees to Prospect (which was recognized by
Prospect as structuring fee income), $1,243 of escrows and reserves, $1,243 of third party expenses, $42 of legal services provided by attorneys at Prospect
Administration, and $513 of capital expenditures.
191
On November 12, 2015, NPRC used supplemental debt proceeds obtained by their JVs to make a partial repayment on the Senior Term Loan of $22,098.
On November 19, 2015, Prospect made a $695 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were
utilized by NPRC to purchase additional ownership interest in its multi-family properties for $690 and pay $5 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $76 in the JVs. The proceeds were used by the JVs to fund $766 of capital expenditures.
On November 25, 2015, Prospect made a $323 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were
utilized by NPRC to purchase additional ownership interest in its multi-family properties for $321 and pay $2 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $19 in the JVs. The proceeds were used by the JVs to fund $340 of capital expenditures.
On December 23, 2015, Prospect made a $499 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were
utilized by NPRC to purchase additional ownership interest in its multi-family property for $499. The minority interest holder also invested an additional $12 in the
JVs. The proceeds were used by the JVs to fund $511 of capital expenditures.
On December 30, 2015, NPRC used supplemental debt proceeds obtained by its’ JVs to make a partial repayment on the Senior Term Loan of $9,821.
On January 20, 2016, NPRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $6,774.
On February 10, 2016, Prospect made a $354 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest Carroll Management Group, LLC for $352. The minority interest holder also invested an additional $22 in the
JVs. The proceeds were used by the JVs to fund $376 of capital expenditures.
On February 24, 2016, NPRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $24,579.
On April 19, 2016, Prospect made a $1,404 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest in NPH McDowell, LLC for $1,402 and pay $2 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $155 in the JVs. The proceeds were used by the JVs to fund $1,557 of capital expenditures.
Effective May 23, 2016, APRC and UPRC merged with and into NPRC, to consolidate all of our real estate holdings, with NPRC as the surviving entity. APRC
and UPRC have been dissolved. No gain or loss was recognized upon the merger.
On July 22, 2016 Prospect made a $2,700 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized by
NPRC to purchase additional ownership interest in twelve multi-family properties for $2,698 and pay $2 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $49 in the JVs. The proceeds were used by the JVs to fund $2,747 of capital expenditures.
On August 4, 2016, Prospect made a $393 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized by
NPRC to purchase additional ownership interest in four multi-family properties for $392 and pay $1 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $21 in the JVs. The proceeds were used by the JVs to fund $413 of capital expenditures.
On September 1, 2016, we made an investment into American Consumer Lending Limited (“ACLL”), a wholly-owned subsidiary of NPRC, under the ACLL
credit agreement, for senior secured term loans, Term Loan C, with the same terms as the existing ACL Loan Holdings, Inc. (“ACLLH”) Term Loan C due to us.
On September 28, 2016 Prospect made a $46,381 investment in NPRC, of which $35,295 was a Senior Term Loan and $11,086 was used to purchase additional
common equity of NPRC through NPH. The proceeds were utilized by NPRC to purchase a 64.2% ownership interest in Vesper Portfolio JV, LLC for $46,324 and
to pay $57 for tax and legal services provided by professionals at Prospect Administration. The JV was purchased for $250,000 which included debt financing and
minority interest of $192,382 and $25,817, respectively. The remaining proceeds were used to pay $1,060 of structuring fees to Prospect (which was recognized by
Prospect as structuring fee income), $2,131 of third party expenses, $4,911 of pre-funded capex, and $5,310 of prepaid assets, with $1,111 retained by the JV for
working capital.
192
On October 21, 2016 Prospect made a $514 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest in four multi-family properties for $512 and pay $2 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $33 in the JVs. The proceeds were used by the JVs to fund $545 of capital expenditures.
On November 17, 2016, NPRC used sale and supplemental loan proceeds to make a partial repayment on the Senior Term Loan of $19,149 and a return of capital
on Prospects’ equity investment in NPRC of $9,204.
On November 23, 2016, Prospect made a $2,860 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were
utilized by NPRC to purchase additional ownership interest in seven multi-family properties for $2,859 and pay $1 of legal services provided by attorneys at
Prospect Administration. The minority interest holder also invested an additional $231 in the JVs. The proceeds were used by the JVs to fund $3,090 of capital
expenditures.
On December 7, 2016 Prospect made a $13,046 investment in NPRC, of which $9,653 was a Senior Term Loan and $3,393 was used to purchase additional
common equity of NPRC through NPH. The proceeds were utilized by NPRC to purchase an 85% ownership interest in JSIP Union Place, LLC for $13,026 and to
pay $20 of legal services provided by attorneys at Prospect Administration. The JV was purchased for $64,750 which included debt financing and minority interest
of $51,800 and $2,299, respectively. The remaining proceeds were used to pay $261 of structuring fees to Prospect (which was recognized by Prospect as
structuring fee income), $1,078 of third party expenses, $5 of pre-funded capital expenditures, and $458 of prepaid assets, with $573 retained by the JV for
working capital.
On January 30, 2017 Prospect made a $41,365 investment in NPRC, of which $30,644 was a Senior Term Loan and $10,721 was used to purchase additional
common equity of NPRC through NPH. The proceeds were utilized by NPRC to purchase a 92.5% ownership interest in 9220 Old Lantern Way LLC for $41,333
and to pay $32 of legal services provided by attorneys at Prospect Administration. The JV was purchased for $187,250 which included debt financing and minority
interest of $153,580 and $3,351, respectively. The remaining proceeds were used to pay $827 of structuring fees to Prospect (which was recognized by Prospect as
structuring fee income), $4,415 of third party expenses, $1,857 of pre-funded capital expenditures, and $3,540 of prepaid assets, with $375 retained by the JV for
working capital.
On February 27, 2017 NPRC used sale and supplemental loan proceeds to make a partial repayment on the Senior Term Loan of $18,000 and a return of capital on
Prospects’ equity investment in NPRC of $11,648. In connection to the partial repayment of the Senior Term Loan, NPRC paid a prepayment premium of $180 to
Prospect (which was recognized by Prospect as interest income).
On March 7, 2017, Prospect made a $289 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized by
NPRC to purchase additional ownership interest in SSIL I, LLC for $288. The minority interest holder also invested an additional $72 in the JV. The proceeds
were used by the JV to fund $360 of capital expenditures.
On March 16, 2017, Prospect made a $4,273 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest in eight multi-family properties for $4,272 and pay $1 of legal services provided by attorneys at Prospect
Administration. The proceeds were used by the JV to fund $4,272 of capital expenditures.
On April 3, 2017, Prospect made a $418 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized by
NPRC to purchase additional ownership interest in three multi-family properties for $417 and pay $1 of legal services provided by attorneys at Prospect
Administration. The minority interest holder also invested an additional $24 in the JV. The proceeds were used by the JV to fund $441 of capital expenditures.
On April 21, 2017, Prospect made a $2,106 investment in NPRC used to purchase additional common equity of NPRC through NPH. The proceeds were utilized
by NPRC to purchase additional ownership interest in Vesper Portfolio JV, LLC for $2,105 and pay $1 of legal services provided by attorneys at Prospect
Administration. The proceeds were used by the JV to fund $2,105 of capital expenditures.
On June 30, 2017 NPRC used sale proceeds to make a partial repayment on the Senior Term Loan of $5,750 and a return of capital on Prospects’ equity investment
in NPRC of $11,261. In connection to the partial repayment of the Senior Term Loan, NPRC paid a prepayment premium of $58 to Prospect (which was
recognized by Prospect as interest income).
193
During the year ended June 30, 2017 , we provided $100,429 and $23,077 of debt and equity financing, respectively, to NPRC and its wholly-owned subsidiaries to
support the online consumer lending initiative. In addition, during the year ended June 30, 2017 , we received partial repayments of $89,055 of our loans
previously outstanding with NPRC and its wholly-owned subsidiaries and $10,864 as a return of capital on our equity investment in NPRC.
The following interest payments were accrued and paid by NPRC to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
23,869
40,147
60,707
Included above, the following payment-in-kind interest from NPRC was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
3,056
703
—
The following interest income recognized had not yet been paid by NPRC to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
174
147
The following interest payments were accrued and paid by ACLLH to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
6,742
22,543
13,895
Included above, the following payment-in-kind interest from ACLLH was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
816
—
—
The following interest income recognized had not yet been paid by ACLLH to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
44
27
The following interest payments were accrued and paid by ACLL to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
7,940
The following interest income recognized had not yet been paid by ACLL to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
—
39
194
The following prepayment penalty payments were paid from NPRC to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
2,235
The following net revenue interest payments were paid from NPRC to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
The following structuring fees were paid from NPRC to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
The following structuring fees were paid from ACLLH to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,683
2,712
5,532
—
180
2,147
—
2,483
1,507
The following managerial assistance payments were paid from NPRC to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
510
593
1,300
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
210
325
The following payments were paid from NPRC to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to NPRC (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs
payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,164
2,363
6,241
The following amounts were due from NPRC to Prospect for reimbursement of expenses paid by Prospect on behalf of NPRC and included by Prospect within
other receivables:
June 30, 2016
June 30, 2017
$
—
6
The following amounts were due from ACLLH to Prospect for reimbursement of expenses paid by Prospect on behalf of ACLLH and included by Prospect within
other receivables:
June 30, 2016
June 30, 2017
$
—
1
195
Nationwide Loan Company LLC
Prospect owns 100% of the membership interests of Nationwide Acceptance Holdings LLC (“Nationwide Holdings”),
a Consolidated Holding
Company. Nationwide Holdings owns 93.79% of the equity of Nationwide Loan Company LLC (f/k/a Nationwide Acceptance LLC) (“Nationwide”), with
members of Nationwide management owning the remaining 6.21% of the equity.
On June 1, 2015, Nationwide completed a corporate reorganization. As part of the reorganization, Nationwide Acceptance LLC
was renamed Nationwide Loan Company LLC (continues as “Nationwide”) and formed two new wholly-owned subsidiaries:
Pelican Loan Company LLC (“Pelican”) and Nationwide Consumer Loans LLC. Nationwide assigned 100% of the equity interests in its other subsidiaries to
Pelican which, in turn, assigned these interests to Nationwide Acceptance LLC (“New Nationwide”), the new operating company wholly-owned by Pelican. New
Nationwide also assumed the existing senior subordinated term loan due to Prospect.
During the year ended June 30, 2015, Prospect made additional equity investments totaling $2,814 in Nationwide. Nationwide
management invested an additional $186 of equity in Nationwide, and Prospect’s ownership in Nationwide did not change.
During the three months ended December 31, 2015, Prospect made additional investments totaling $1,876 in the senior subordinated term loan to Nationwide.
On March 31, 2016, Prospect made an additional equity investment totaling $1,407, and Prospect’s ownership in Nationwide did not change.
On August 31, 2016, Prospect made an additional $123 investment in the senior subordinated term loan to Nationwide. Prospect also made an additional equity
investment totaling $92, increasing Prospect’s ownership in Nationwide to 94.48%.
On May 31, 2017, Prospect made an additional equity investment totaling $1,889, and Prospect’s ownership in Nationwide did not change.
The following dividends were declared and paid from Nationwide to Prospect and recognized as dividend income by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
4,425
3,963
4,310
All dividends were paid from earnings and profits of Nationwide.
The following amounts were paid from Nationwide to Prospect and recognized by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
300
—
The following interest payments were accrued and paid from Nationwide to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
3,005
3,212
3,406
Included above, the following payment-in-kind interest from Nationwide was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
300
—
196
The following interest income recognized had not yet been paid by Nationwide to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
9
9
The following managerial assistance payments were paid from Nationwide to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
400
400
400
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
100
100
The following payments were paid from Nationwide to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to Nationwide (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative
services costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
4
—
—
The following amounts were due to Nationwide from Prospect for reimbursement of expenses paid by Nationwide on behalf of Prospect and were included by
Prospect within other liabilities:
June 30, 2016
June 30, 2017
$
4
—
NMMB, Inc.
Prospect owns 100% of the equity of NMMB Holdings, Inc. (“NMMB Holdings”), a Consolidated Holding Company. NMMB Holdings owns 96.33% of the fully-
diluted equity of NMMB, Inc. (f/k/a NMMB Acquisition, Inc.) (“NMMB”), with NMMB management owning the remaining 3.67% of the equity. NMMB owns
100% of Refuel Agency, Inc. (“Refuel Agency”). Refuel Agency owns 100% of Armed Forces Communications, Inc. (“Armed Forces”). NMMB is an advertising
media buying business.
On October 1, 2014, Prospect made an additional $383 equity investment in NMMB Series B Preferred Stock, increasing Prospect’s ownership to 93.13%. During
the year ended June 30, 2015, NMMB repurchased 460 shares of its common stock from a former NMMB executive, decreasing the number of shares outstanding
and increasing Prospect’s ownership to 96.33%.
The following amounts were paid from Armed Forces to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
100
The following interest payments were accrued and paid from NMMB to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
525
529
527
197
The following interest income recognized had not yet been paid by NMMB to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
1
1
The following interest payments were accrued and paid from Armed Forces to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
996
996
991
The following interest income recognized had not yet been paid by Armed Forces to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
3
3
The following managerial assistance payments were paid from NMMB to Prospect and subsequently remitted to Prospect
Administration (no income was recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
213
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
—
100
The following managerial assistance recognized had not yet been paid by NMMB to Prospect and was included by Prospect within other receivables and due to
Prospect Administration:
June 30, 2016
June 30, 2017
$
1,100
1,288
The following amounts were due from NMMB to Prospect for reimbursement of expenses paid by Prospect on behalf of NMMB and were included by Prospect
within other receivables:
June 30, 2016
June 30, 2017
$
2
—
R-V Industries, Inc.
Prospect owns 88.27% of the fully-diluted equity of R-V Industries, Inc. (“R-V”), with R-V management owning the remaining 11.73% of the equity. As of June
30, 2011, Prospect’s equity investment cost basis was $1,682 and $5,087 for warrants and common stock, respectively.
On December 24, 2016, Prospect exercised its warrant to purchase 200,000 common shares of R-V. Prospect recorded a realized gain of $172 from this
redemption. Prospect’s ownership remains unchanged at 88.27%.
During the three months ended December 31, 2016, Prospect provided certain financial advisory services to R-V related to a possible transaction. Prospect
recognized $124 in advisory fee income resulting from these services.
198
The following amounts were paid from R-V to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,175
614
—
The following dividends were declared and paid from R-V to Prospect and recognized as dividend income by Prospect:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
298
299
149
All dividends were paid from earnings and profits of R-V.
During the year ended June 30, 2017, cash distributions of $76 that were declared and paid from R-V to Prospect were recognized as a return of capital by
Prospect.
The following interest payments were accrued and paid from R-V to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
3,018
2,908
2,877
The following managerial assistance payments were paid from R-V to Prospect and subsequently remitted to Prospect Administration (no income was recognized
by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
180
180
165
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
45
45
The following payments were paid from R-V to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to R-V (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs payable
by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
13
2
29
The following amounts were due to R-V from Prospect for reimbursement of expenses paid by R-V on behalf of Prospect and were included by Prospect within
other liabilities:
June 30, 2016
June 30, 2017
$
1
—
SB Forging Company, Inc.
As of June 30, 2014, Prospect owned 79.53% of the fully-diluted common, 85.76% of the Series A Preferred and 100% of the Series B Preferred equity of ARRM
Services, Inc. (f/k/a ARRM Holdings, Inc.) (“ARRM”). ARRM owned 100% of the equity of Ajax Rolled Ring & Machine, LLC (f/k/a Ajax Rolled Ring &
Machine, Inc.) (“Ajax”). Ajax forges large seamless steel rings on two forging mills in the company’s York, South Carolina facility. The rings are used in a range
of industrial applications, including in construction equipment and power turbines. Ajax also provides machining and other ancillary services.
199
On October 10, 2014, ARRM sold Ajax to a third party and repaid the $19,337 loan receivable to Prospect. Prospect recorded a realized loss of $21,001 related to
the sale. Concurrent with the sale, Prospect’s ownership increased to 100% of the outstanding equity of ARRM Services, Inc. which was renamed SB Forging
Company, Inc. (“SB Forging”). As such, Prospect began consolidating SB Forging on October 11, 2014. As a result, any transactions between SB Forging and
Prospect are eliminated in consolidation. In addition, there is $3,000 being held in escrow of which $802 was received on May 6, 2015 for which Prospect realized
a gain of the same amount. Prospect received $2,000 of structuring fees from Ajax related to the sale of the operating company which was recognized as other
income during the year ended June 30, 2015.
On May 31, 2016, $1,750 of the escrow proceeds were received. Prospect realized a gain of the same amount.
During the three months ended June 30, 2017 , Prospect incurred $53 of additional overhead expense related to SB Forging ,which will be given to us as a credit
for services payable to Prospect Administration in the June 2017 quarter.
The following payments were paid from SB Forging to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to SB Forging (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services
costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,485
—
598
SB Forging Company II, Inc. (f/k/a Gulf Coast Machine & Supply Company)
Prospect owns 100% of the preferred equity of Gulf Coast Machine & Supply Company (“Gulf Coast”). Gulf Coast is a provider of value-added forging solutions
to energy and industrial end markets.
During the years ended June 30, 2015 and June 30, 2016 , Prospect made additional $8,500 and $9,500, respectively, investments in the first lien term loan to Gulf
Coast to fund capital improvements to key forging equipment and other liquidity needs.
During the year ended June 30, 2017, Prospect made additional investments of $8,750 in the first lien term loan to Gulf Coast to fund capital improvements to key
forging equipment and other liquidity needs.
On June 3, 2017, Gulf Coast sold all of its assets to a third party, for total consideration of $10,250, including escrowed amounts. The proceeds from the sale were
primarily used to repay a $6,115 third party revolving credit facility, and the remainder was used to pay other legal and administrative costs incurred by Gulfco. As
no proceeds were allocated to Prospect, our debt and equity investment in Gulfco was written-off for tax purposes and we recorded a realized loss of $66,103.
Gulfco holds $2,050 in escrow related to the sale, which will be distributed to Prospect once released to Gulfco, and will be recognized as a realized gain if and
when it is received. On June 28, 2017, Gulf Coast was renamed to SB Forging Company II, Inc.
The following amounts were paid from Gulf Coast to Prospect and recorded by Prospect as repayment of loan receivable:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
1,075
3,022
The following interest payments were accrued and paid from Gulf Coast to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,370
—
—
The following payments were paid from Gulf Coast to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to Gulf Coast (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services
costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
503
200
United Property REIT Corp.
UPH owned 100% of the common equity of UPRC. Effective May 23, 2016, in connection with the merger of UPRC and APRC with and into NPRC, UPH and
APH merged with and into NPH. Prospect owns 100% of the equity of NPH, a Consolidated Holding Company, and NPH owns 100% of the common equity of
NPRC.
UPRC was formed to hold for investment, operate, finance, lease, manage, and sell a portfolio of real estate assets and engage in any and all other activities as may
be necessary, incidental or convenient to carry out the foregoing. UPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-
family properties. UPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity (the
“JV”).
On August 19, 2014 and August 27, 2014, Prospect made a combined $11,046 investment in UPRC, of which $9,389 was a Senior Term Loan directly to UPRC
and $1,657 was used to purchase additional common equity of UPRC through UPH. On October 1, 2015, UPRC distributed $376 to Prospect as a return of capital.
The net proceeds were utilized by UPRC to purchase an 85.0% ownership interest in Michigan Storage, LLC for $10,579, with $42 retained by UPRC for working
capital and $49 restricted for future property acquisitions. The JV was purchased for $38,275 which included debt financing and minority interest of $28,705 and
$1,867, respectively. The remaining proceeds were used to pay $210 of structuring fees to Prospect (which was recognized by Prospect as structuring fee income),
$2,589 of third party expenses, and $77 for legal services provided by attorneys at Prospect Administration. The investment was subsequently contributed to
NPRC.
On September 29, 2014, Prospect made a $22,618 investment in UPRC, of which $19,225 was a Senior Term Loan and $3,393
was used to purchase additional common equity of UPRC through UPH. The proceeds were utilized by UPRC to purchase a 92.5% ownership interest in
Canterbury Green Apartments Holdings, LLC for $22,036, with $582 retained by UPRC for working capital. The JV was purchased for $85,500 which included
debt financing and minority interest of $65,825 and $1,787, respectively. The remaining proceeds were used to pay $432 of structuring fees to Prospect (which was
recognized by Prospect as structuring fee income), $2,135 of third party expenses, $82 for legal services provided by attorneys at Prospect Administration, and
$1,249 of prepaid assets, with $250 retained by the JV for working capital.
On September 30, 2014 and October 29, 2014, Prospect made a combined $22,688 investment in UPRC, of which $19,290 was
a Senior Term Loan and $3,398 was used to purchase additional common equity of UPRC through UPH. The proceeds were
utilized by UPRC to purchase a 66.2% ownership interest in Columbus OH Apartment Holdco, LLC for $21,992 and to pay $241 of structuring fees to Prospect
(which was recognized by Prospect as structuring fee income), with $455 retained by UPRC for working capital. The JV was purchased for $114,377 which
included debt financing and minority interest of $97,902 and $11,250, respectively. The remaining proceeds were used to pay $440 of structuring fees to Prospect
(which was recognized by Prospect as structuring fee income), $7,711 of third party expenses, $180 for legal services provided by attorneys at Prospect
Administration, $6,778 in pre-funded capital expenditures, and $1,658 of prepaid assets.
On October 23, 2014, UPRC transferred its investment in Michigan Storage, LLC to NPRC. As a result, Prospect’s investments
in UPRC related to these properties also transferred to NPRC. The investments transferred consisted of $1,281 of equity and
$9,444 of debt. There was no gain or loss realized on the transaction.
On November 12, 2014, Prospect made a $669 investment in UPRC, of which $569 was a Senior Term Loan and $100 was used to purchase additional common
equity of UPRC through UPH. The proceeds were utilized by UPRC to purchase additional ownership interest in South Atlanta Portfolio Holding Company, LLC
for $667, with $2 retained by UPRC for working capital. The minority interest holder also invested an additional $53 in the JV. The proceeds were used by the JV
to fund $707 of capital expenditures and pay $13 of structuring fees to Prospect (which was recognized by Prospect as structuring fee income).
On April 27, 2015, Prospect made a $733 investment in UPRC, of which $623 was a Senior Term Loan and $110 was used to
purchase additional common equity of UPRC through UPH. The proceeds were utilized by UPRC to purchase additional ownership interest in South Atlanta
Portfolio Holding Company, LLC for $731 and pay $2 of legal services provided by attorneys at Prospect Administration. The minority interest holder also
invested an additional $59 in the JV. The proceeds were used by the JV to fund $775 of capital expenditures and pay $15 of structuring fees to Prospect (which was
recognized by Prospect as structuring fee income).
On May 19, 2015, Prospect made a $4,730 investment in UPRC, of which $3,926 was a Senior Term Loan and $804 was used to purchase additional common
equity of UPRC through UPH. The proceeds were utilized by UPRC to purchase additional ownership interest in Columbus OH Apartment Holdco, LLC for
$4,658, with $72 retained by UPRC for working capital. The proceeds were used by the JV to fund $4,565 of capital expenditures and pay $93 of structuring fees
to Prospect (which was recognized by Prospect as structuring fee income).
201
On July 9, 2015, Prospect made a $2,044 investment in UPRC, of which $1,738 was a Senior Term Loan and $306 was used to purchase additional common equity
of UPRC through UPH. The proceeds were utilized by UPRC to purchase additional ownership interest in Canterbury Green Apartment Holdings, LLC for $2042,
and pay $2 of legal services provided by attorneys at Prospect Administration. The proceeds were used by the JV to fund $2,167 of capital expenditures and pay
$40 of structuring fees to Prospect (which was recognized by Prospect as structuring fee income).
On November 25, 2015, Prospect made a $3,433 investment in UPRC, of which $2,746 was a Senior Term Loan and $687 was used to purchase additional
common equity of UPRC through UPH. The proceeds were utilized by UPRC to purchase additional ownership interest in Columbus OH Apartment Holdco, LLC
for $3,274, and pay $2 of legal services provided by attorneys at Prospect Administration with $158 retained by UPRC for working capital. The proceeds were
used by the JV to fund $3,209 of capital expenditures and pay $65 of structuring fees to Prospect (which was recognized by Prospect as structuring fee income).
On March 9, 2016, Prospect made a $777 investment in UPRC used to purchase additional common equity of UPRC through UPH. The proceeds were utilized by
UPRC to purchase additional ownership interest in South Atlanta Portfolio Holding Company, LLC for $775, and pay $2 of legal services provided by attorneys at
Prospect. The minority interest holder also invested an additional $62 in the JVs. The proceeds were used by the JV to fund $836 of capital expenditures.
On March 9, 2016, Prospect made a $1,277 investment in UPRC used to purchase additional common equity of UPRC through UPH. The proceeds were utilized
by UPRC to purchase additional ownership interest in Canterbury Green Apartments Holdings, LLC for $1,277. The minority interest holder also invested an
additional $104 in the JVs. The proceeds were used by the JV to fund $1,381 of capital expenditures.
On April 6, 2016, UPRC used supplemental proceeds to make a partial repayment on the Senior Term Loan of $7,567.
Effective May 23, 2016, APRC and UPRC merged with and into NPRC, to consolidate all of our real estate holdings, with NPRC as the surviving entity. APRC
and UPRC have been dissolved. No gain or loss was recognized upon the merger.
The following interest payments were accrued and paid by UPRC to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
5,893
6,777
—
Included above, the following payment-in-kind interest from UPRC was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
162
—
—
The following net revenue interest payments were paid from UPRC to Prospect and recognized by Prospect as other income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
901
1,173
—
The following managerial assistance payments were paid from UPRC to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
200
179
—
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
29
—
202
The following payments were paid from UPRC to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided directly
to UPRC (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative services costs
payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
262
788
—
USES Corp.
On June 15, 2016, we provided additional $1,300 debt financing to USES Corp. (“USES”) and its subsidiaries in the form of additional Term Loan A debt and, in
connection with such Term Loan A debt financing, USES issued to us 99,900 shares of its common stock. On June 29, 2016, we provided additional $2,200 debt
financing to USES and its subsidiaries in the form of additional Term Loan A debt and, in connection with such Term Loan A debt financing, USES issued to us
169,062 shares of its common stock. As a result of such debt financing and recapitalization, as of June 29, 2016, we held 268,962 shares of USES common stock
representing a 99.96% common equity ownership interest in USES. As such, USES became a controlled company on June 30, 2016.
During the year ended June 30, 2017, Prospect provided additional $2,599 debt financing to USES and its subsidiaries in the form of additional Term Loan A debt .
During the three months ended June 30, 2017, we entered into a participation agreement with USES management, and sold $154 of Prospect's investment in the
Term Loan A debt.
The following managerial assistance recognized had not yet been paid by USES to Prospect and was included by Prospect within other receivables and due to
Prospect Administration:
June 30, 2016
June 30, 2017
$
—
325
Valley Electric Company, Inc.
Prospect owns 100% of the common stock of Valley Electric Holdings I, Inc. (“Valley Holdings I”), a Consolidated Holding Company. Valley Holdings I owns
100% of Valley Electric Holdings II, Inc. (“Valley Holdings II”), a Consolidated Holding Company. Valley Holdings II owns 94.99% of Valley Electric Company,
Inc. (“Valley Electric”), with Valley Electric management owning the remaining 5.01% of the equity. Valley Electric owns 100% of the equity of VE Company,
Inc., which owns 100% of the equity of Valley Electric Co. of Mt. Vernon, Inc. (“Valley”), a leading provider of specialty electrical services in the state of
Washington and among the top 50 electrical contractors in the United States.
The following interest payments were accrued and paid from Valley Electric to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
3,905
4,252
4,518
Included above, the following payment-in-kind interest from Valley Electric was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,794
1,509
1,822
The following interest income recognized had not yet been paid by Valley Electric to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
12
13
203
The following interest payments were accrued and paid from Valley to Prospect and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
1,086
1,111
1,111
Included above, the following payment-in-kind interest from Valley was capitalized and recognized by Prospect as interest income:
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
259
90
—
The following interest income recognized had not yet been paid by Valley to Prospect and was included by Prospect within interest receivable:
June 30, 2016
June 30, 2017
$
3
3
The following managerial assistance payments were paid from Valley to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
300
300
300
The following managerial assistance payments received by Prospect had not yet been remitted to Prospect Administration and were included by Prospect within
due to Prospect Administration:
June 30, 2016
June 30, 2017
$
75
—
The following managerial assistance recognized had not yet been paid by MITY to Prospect and was included by Prospect within other receivables and due to
Prospect Administration:
June 30, 2016
June 30, 2017
$
—
75
The following payments were paid from Valley Electric to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services
provided directly to Valley Electric (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the
administrative services costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
18
9
—
The following amounts were due from Valley to Prospect for reimbursement of expenses paid by Prospect on behalf of Valley and were included by Prospect
within other receivables:
June 30, 2016
June 30, 2017
$
—
3
Wolf Energy, LLC
Prospect owns 100% of the equity of Wolf Energy Holdings Inc. (“Wolf Energy Holdings”), a Consolidated Holding Company. Wolf Energy Holdings owns 100%
of each of Appalachian Energy LLC (f/k/a Appalachian Energy Holdings, LLC) (“AEH”); Coalbed, LLC (“Coalbed”); and Wolf Energy, LLC (“Wolf Energy”).
AEH owns 100% of C&S Operating, LLC.
204
Wolf Energy Holdings is a holding company formed to hold 100% of the outstanding membership interests of each of AEH and Coalbed. The membership
interests and associated operating company debt of AEH and Coalbed, which were previously owned by Manx Energy, Inc. (“Manx”), were assigned to Wolf
Energy Holdings effective June 30, 2012. The purpose of assignment was to remove those activities from Manx deemed non-core by the Manx convertible debt
investors who were not interested in funding those operations. On June 30, 2012, AEH and Coalbed loans with a cost basis of $7,991 were assigned by Prospect to
Wolf Energy Holdings from Manx.
During the three months ended September 30, 2014, Prospect determined that our investment in AEH was impaired and recorded a realized loss of $2,050,
reducing the amortized cost to zero. On November 21, 2014, Coalbed merged with and into Wolf Energy, with Wolf Energy as the surviving entity. During the
three months ended December 31, 2014, Prospect determined that our investment in the Coalbed debt assumed by Wolf Energy was impaired and recorded a
realized loss of $5,991, reducing the amortized cost to zero.
During the year ended June 30, 2015, Wolf Energy Holdings received a tax refund of $173 related to its investment in C&J and
Prospect realized a gain of the same amount.
On March 14, 2017, $22,145 of assets previously held by Ark-La-Tex Wireline Services, LLC (“Ark-La-Tex”) were assigned to Wolf Energy Services Company,
LLC, (“Wolf Energy Services”) a wholly-owned subsidiary of Wolf Energy Holdings. During the three months ended March 31, 2017, Wolf Energy Services
received $2,768 from the partial sale of these transferred assets. During the three months ended June 30, 2017 Wolf Energy Services received $12,576 from the
sale of assets.
The following managerial assistance payments were paid from Wolf Energy to Prospect and subsequently remitted to Prospect Administration (no income was
recognized by Prospect):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
124
41
The following managerial assistance recognized had not yet been paid by Wolf Energy to Prospect and was included by Prospect within other receivables and due
to Prospect Administration:
June 30, 2016
June 30, 2017
$
14
14
The following payments were paid from Wolf Energy to Prospect Administration as reimbursement for legal, tax and portfolio level accounting services provided
directly to Wolf Energy (no direct income was recognized by Prospect, but Prospect was given credit for these payments as a reduction of the administrative
services costs payable by Prospect to Prospect Administration):
Year Ended June 30, 2015
Year Ended June 30, 2016
Year Ended June 30, 2017
$
—
—
243
205
Note 15. Litigation
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters
may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such matters as may arise will be subject to various
uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. We are not aware of any
material legal proceedings as of June 30, 2017 . Our Investment Adviser and Administrator were named as defendants in a lawsuit filed on April 21, 2016 by a
purported shareholder of Prospect in the United States District Court for the Southern District of New York under the caption Paskowitz v. Prospect Capital
Management and Prospect Administration. The complaint alleged that the defendants received purportedly excessive management and administrative services fees
from us in violation of Section 36(b) of the 1940 Act. The plaintiff sought to recover on behalf of us damages in an amount not specified in the complaint. On June
30, 2016, the Investment Adviser and the Administrator filed a motion to dismiss the complaint in its entirety. On January 24, 2017, the court granted the motion to
dismiss, finding that the shareholder’s complaint failed to state a cause of action and entering judgment dismissing the action. On February 21, 2017, the
shareholder filed a notice of appeal to the United States Court of Appeals for the Second Circuit of the district court’s judgment dismissing the action. On May 15,
2017, the United States Court of Appeals for the Second Circuit entered an order dismissing the shareholder’s appeal with prejudice, in accordance with the
parties’ stipulation filed May 12, 2017.
Note 16. Financial Highlights
The following is a schedule of financial highlights for each of the five years ended in the period ended June 30, 2017:
Per Share Data
Net asset value at beginning of year
$
Net investment income(1)
Net realized and change in unrealized
(losses) gains(1)
Net increase from operations
Distributions of net investment income
Common stock transactions(2)
Net asset value at end of year
Per share market value at end of year
Total return based on market value(3)
Total return based on net asset value(3)
Shares of common stock outstanding at
end of year
Weighted average shares of common
stock outstanding
Ratios/Supplemental Data
Net assets at end of year
Portfolio turnover rate
Ratio of operating expenses to average
net assets
Ratio of net investment income to
average net assets
2017
2016
2015
2014
2013
Year Ended June 30,
$
$
$
(4)
9.62
0.85
(0.15)
0.70
(1.00)
—
9.32
8.12
16.80%
8.98%
10.31
1.04
(0.75)
0.29
(1.00)
0.02
9.62
$
$
10.56
1.03
(0.05)
0.98
(1.19)
(0.04)
$
10.31
$
10.72
1.19
(0.13)
1.06
(1.32)
0.10
10.56
$
$
7.82
$
7.37
$
10.63
$
21.84%
7.15%
(20.84%)
11.47%
10.88%
10.97%
10.83
1.57
(0.50)
1.07
(1.28)
0.10
10.72
10.80
6.24%
10.91%
360,076,933
357,107,231
359,090,759
342,626,637
247,836,965
358,841,714
356,134,297
353,648,522
300,283,941
207,069,971
$
$
$
3,354,952
$
3,435,917
$ 3,703,049
$
3,618,182
$
2,656,494
23.65%
15.98%
21.89%
15.21%
29.24%
11.57%
11.95%
11.66%
11.11%
11.50%
8.96%
10.54%
9.87%
11.18%
14.86%
(1) Per share data amount is based on the weighted average number of common shares outstanding for the year/period presented (except for dividends to shareholders
which is based on actual rate per share).
206
(2) Common stock transactions include the effect of our issuance of common stock in public offerings (net of underwriting and offering costs), shares issued in connection
with our dividend reinvestment plan, shares issued to acquire investments and shares repurchased below net asset value pursuant to our Repurchase Program.
(3) Total return based on market value is based on the change in market price per share between the opening and ending market prices per share in each period and
assumes that dividends are reinvested in accordance with our dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset
value per share between the opening and ending net asset values per share in each period and assumes that dividends are reinvested in accordance with our dividend
reinvestment plan.
(4) Amount is less than $0.01.
Note 17. Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected financial data for each quarter within the three years ended June 30, 2017 .
Investment
Income
Net Investment
Income
Net Realized and
Unrealized (Losses) Gains
Net Increase (Decrease) in
Net Assets
from Operations
Quarter Ended
Total
Per Share
(1)
Total
Per Share(1)
Total
Per Share
(1)
Total
Per Share
(1)
September 30,
2014
December 31,
2014
March 31, 2015
June 30, 2015
September 30,
2015
December 31,
2015
March 31, 2016
June 30, 2016
September 30,
2016
December 31,
2016
March 31, 2017
June 30, 2017
$ 202,021 $
0.59 $
94,463 $
0.28 $
(10,355) $
(0.04) $
84,108 $
198,883
191,350
198,830
0.56
0.53
0.55
91,325
87,441
89,518
0.26
0.24
0.25
(5,355)
(5,949)
5,251
(0.02)
(0.01)
0.01
85,970
81,492
94,769
0.24
0.24
0.23
0.26
$ 200,251 $
0.56 $
91,242 $
0.26 $
(63,425) $
(0.18) $
27,817 $
0.08
209,191
189,493
193,038
0.59
0.53
0.54
100,893
87,626
91,367
0.28
0.25
0.26
(196,013)
(12,118)
3,790
(0.55)
(0.03)
0.01
(95,120)
75,508
95,157
$ 179,832 $
0.50 $
78,919 $
0.22 $
2,447 $
0.01 $
81,366 $
183,480
171,032
166,702
0.51
0.48
0.46
84,405
73,080
69,678
0.24
0.20
0.19
16,475
(53,588)
(18,510)
0.04
100,880
(0.15)
(0.05)
19,492
51,168
(0.27)
0.21
0.27
0.23
0.28
0.05
0.14
(1) Per share amounts are calculated using the weighted average number of common shares outstanding for the period presented. As such, the sum of the quarterly per share
amounts above will not necessarily equal the per share amounts for the fiscal year.
Note 18. Subsequent Events
We have provided notice to call on July 11, 2017 with settlement on August 15, 2017, $41,441 of our Prospect Capital InterNotes® at par maturing between
February 15, 2018 and February 15, 2019, with a weighted average rate of 4.83%.
On July 19, 2017, we received $17,926 and $22,167 as a partial return of capital on our investments in Voya CLO 2012-2, Ltd. and Voya CLO 2012-3, Ltd.,
respectively.
During the period from July 19, 2017 through August 16, 2017, we made a $11,000 follow-on first lien senior debt investment in RGIS Services, LLC.
On July 25, 2017, EZShield Parent, Inc. repaid the $14,963 Senior Secured Term Loan A and $15,000 Senior Secured Term Loan B receivable to us.
On July 28, 2017, Global Employment Solutions, Inc. repaid the $48,131 loan receivable to us.
On August 7, 2017, Water Pik, Inc. repaid the $13,739 loan receivable to us.
We have provided notice to call on August 11, 2017 with settlement on September 15, 2017, $48,539 of our Prospect Capital InterNotes® at par maturing between
March 15, 2018 and September 15, 2019, with a weighted average rate of 4.89%.
On August 14, 2017, we announced the then current conversion rate on the 2018 Notes as 84.1497 shares of common stock per
$1 principal amount of the 2018 Notes converted, which is equivalent to a conversion price of approximately $11.88.
207
During the period from July 10, 2017 through August 24, 2017, we made one follow-on investments in NPRC totaling $8,382 to support the online consumer
lending initiative. We invested $2,934 of equity through NPH and $5,448 of debt directly to NPRC and its wholly-owned subsidiaries. In addition, we received a
partial repayment of $4,034 of our loans previously outstanding with NPRC. We also provided $450 of debt and $2,603 of equity financing to NPRC which was
used to fund capital expenditures for existing properties.
During the period from July 1, 2017 through August 28, 2017 we issued $18,392 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of
$18,126. In addition, we sold $3,047 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $3,003 with expected closing on August 31,
2017.
On August 28, 2017, we announced the declaration of monthly dividends in the following amounts and with the following dates:
•
•
$0.06 per share for September 2017 to holders of record on September 29, 2017 with a payment date of October 19, 2017.
$0.06 per share for October 2017 to holders of record on October 31, 2017 with a payment date of November 22, 2017.
208
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2017 , we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the
1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls
and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However,
in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can
provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of such possible controls and procedures.
Report of Management on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the
effectiveness of internal control over financial reporting as of June 30, 2017 . Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial statements.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017 based upon criteria in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our
assessment, management determined that the Company’s internal control over financial reporting was effective as of June 30, 2017 based on the criteria on Internal
Control—Integrated Framework (2013) issued by COSO. There were no changes in our internal control over financial reporting during the quarter ended June 30,
2017 that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Our management’s assessment of the effectiveness of our internal control over financial reporting as of June 30, 2017 has been audited by BDO USA, LLP, an
independent registered public accounting firm, as stated in their report which appears herein.
See notes to consolidated financial statements.
209
Board of Directors and Stockholders
Prospect Capital Corporation
New York, New York
Report of Independent Registered Public Accounting Firm
We have audited Prospect Capital Corporation’s internal control over financial reporting as of June 30, 2017 , based on criteria established in Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Prospect Capital
Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying “Item 9A, Report of Management on Internal Control Over Financial Reporting.” Our responsibility
is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
In our opinion, Prospect Capital Corporation maintained, in all material respects, effective internal control over financial reporting as of June 30, 2017 , based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of assets
and liabilities of Prospect Capital Corporation, including the consolidated schedules of investments, as of June 30, 2017 and 2016, and the related consolidated
statements of operations, changes in net assets, and cash flows for each of the three years in the period ended June 30, 2017 , and the financial highlights for each
of the five years in the period ended June 30, 2017 , and our report dated August 28, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
BDO USA, LLP
New York, New York
August 28, 2017
210
Item 9B. Other Information
Not applicable.
Item 10. Directors, Executive Officers and Corporate Governance
Section 16(a) Beneficial Ownership Reporting Compliance
PART III
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors and executive officers, and persons who own more than 10%
of the Company’s common stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. To the Company’s
knowledge, during the fiscal year ended June 30, 2017 , the Company’s officers, directors and greater than 10% stockholders had complied with all Section 16(a)
filing requirements.
The information required by Item 10 is hereby incorporated by reference from our 2017 Proxy Statement.
Code of Ethics
We, Prospect Capital Management and Prospect Administration have each adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act that establishes
procedures for personal investments and restricts certain personal securities transactions. Personnel subject to each code may invest in securities for their personal
investment accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with the code’s requirements.
For information on how to obtain a copy of each code of ethics, see “Available Information” in Part I of this Annual Report.
Item 11. Executive Compensation
The information required by Item 11 is hereby incorporated by reference from our 2017 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by Item 12 is hereby incorporated by reference from our 2017 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by Item 13 is hereby incorporated by reference from our 2017 Proxy Statement.
Item 14. Principal Accountant Fees and Services
The information required by Item 14 is hereby incorporated by reference from our 2017 Proxy Statement.
211
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this Annual Report:
1. Financial Statements – See the Index to Consolidated Financial Statements in Item 8 of this report.
PART IV
2. Financial Statement Schedules – The financial statements of National Property REIT Corp. required by Rule 3-09 of Regulation S-X will be provided as
Exhibit 99.1 and Exhibit 99.2 to this report. The financial statements of First Tower Finance Company LLC required by Rule 3-09 of Regulation S-X will be
provided as Exhibit 99.3 and Exhibit 99.4 to this report.
3. Exhibits – The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (according to the
number assigned to them in Item 601 of Regulation S-K):
Exhibit No.
3.1
Articles of Amendment and Restatement(1)
3.2
Amended and Restated Bylaws(3)
4.1
Form of Share Certificate(2)
4.2
Form of Indenture(9)
4.3
Indenture dated as of December 21, 2010 relating to the 6.25% Senior Convertible Notes, by and between the Registrant
and American Stock Transfer & Trust Company, LLC, as Trustee and Form of 6.25% Senior Convertible Note due
2015(7)
4.4
Indenture dated as of February 18, 2011 relating to the 5.50% Senior Convertible Notes, by and between the Registrant
and American Stock Transfer & Trust Company, LLC, as Trustee(8)
4.5
Form of 5.50% Senior Convertible Note due 2016(6)
4.6
Indenture dated as of February 16, 2012, by and between the Registrant and American Stock Transfer & Trust
Company, LLC, as Trustee(10)
4.7
First Supplemental Indenture dated as of March 1, 2012, to the Indenture dated as of February 16, 2012, by and between
the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee and Form of 7.00% Prospect Capital
InterNote® due 2022(10)
4.8
Second Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and
between the Registrant and American Stock Transfer & Trust Company, LLC, as Trustee(11)
4.9
Joinder Supplemental Indenture dated as of March 8, 2012, to the Indenture dated as of February 16, 2012, by and among
the Registrant, American Stock Transfer & Trust Company, LLC, as Original Trustee, and U.S. Bank National
Association, as Series Trustee and Form of 6.900% Prospect Capital InterNote® due 2022(11)
4.10 Agreement of Resignation, Appointment and Acceptance dated as of March 12, 2012, by and among the Registrant,
American Stock Transfer & Trust Company, LLC, as Retiring Trustee, and U.S. Bank National Association, as Successor
Trustee (the “U.S. Bank Indenture”)(12)
4.11
Third Supplemental Indenture dated as of April 5, 2012, to the U.S. Bank Indenture and Form of 6.850% Prospect Capital
InterNote® due 2022(14)
4.12
Fourth Supplemental Indenture dated as of April 12, 2012, to the U.S. Bank Indenture and Form of 6.700% Prospect
Capital InterNote® due 2022(15)
4.13
Indenture dated as of April 16, 2012 relating to the 5.375% Senior Convertible Notes, by and between the Registrant and
American Stock Transfer & Trust Company, as Trustee(16)
4.14
Form of 5.375% Senior Convertible Note due 2017(17)
4.15
Fifth Supplemental Indenture dated as of April 26, 2012, to the U.S. Bank Indenture and Form of 6.500% Prospect
Capital InterNote® due 2022(18)
4.16
Indenture dated as of August 14, 2012 relating to the 5.75% Senior Convertible Notes, by and between the Registrant and
American Stock Transfer & Trust Company, as Trustee(19)
4.17
Form of 5.75% Senior Convertible Note due 2018(20)
4.18 Nineteenth Supplemental Indenture dated as of September 27, 2012, to the U.S. Bank Indenture and Form of 5.850%
Prospect Capital InterNote® due 2019(21)
4.19
Twentieth Supplemental Indenture dated as of October 4, 2012, to the U.S. Bank Indenture and Form of 5.700% Prospect
Capital InterNote® due 2019(22)
212
Exhibit No.
4.20
Twenty-First Supplemental Indenture dated as of November 23, 2012, to the U.S. Bank Indenture and Form of 5.125%
Prospect Capital InterNote® due 2019(23)
4.21
Twenty-Second Supplemental Indenture dated as of November 23, 2012, to the U.S. Bank Indenture and Form of 6.625%
Prospect Capital InterNote® due 2042(23)
4.22
Twenty-Third Supplemental Indenture dated as of November 29, 2012, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2019(24)
4.23
Twenty-Fourth Supplemental Indenture dated as of November 29, 2012, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2032(24)
4.24
Twenty-Fifth Supplemental Indenture dated as of November 29, 2012, to the U.S. Bank Indenture and Form of 6.500%
Prospect Capital InterNote® due 2042(24)
4.25
Twenty-Sixth Supplemental Indenture dated as of December 6, 2012, to the U.S. Bank Indenture and Form of 4.875%
Prospect Capital InterNote® due 2019(25)
4.26
Twenty-Eighth Supplemental Indenture dated as of December 6, 2012, to the U.S. Bank Indenture and Form of 6.375%
Prospect Capital InterNote® due 2042(25)
4.27
Twenty-Ninth Supplemental Indenture dated as of December 13, 2012, to the U.S. Bank Indenture and Form of 4.750%
Prospect Capital InterNote® due 2019(26)
4.28
Thirty-First Supplemental Indenture dated as of December 13, 2012, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2042(26)
4.29
Thirty-Second Supplemental Indenture dated as of December 20, 2012, to the U.S. Bank Indenture and Form of 4.625%
Prospect Capital InterNote® due 2019(27)
4.30
Thirty-Fourth Supplemental Indenture dated as of December 20, 2012, to the U.S. Bank Indenture and Form of 6.125%
Prospect Capital InterNote® due 2042(27)
4.31
Indenture dated as of December 21, 2012, by and between the Registrant and American Stock Transfer & Trust
Company, as Trustee and Form of Global Note 5.875% Convertible Senior Note Due 2019(28)
4.32
Thirty-Fifth Supplemental Indenture dated as of December 28, 2012, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2019(29)
4.33
Thirty-Sixth Supplemental Indenture dated as of December 28, 2012, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2030(29)
4.34
Thirty-Seventh Supplemental Indenture dated as of December 28, 2012, to the U.S. Bank Indenture and Form of 6.000%
Prospect Capital InterNote® due 2042(29)
4.35
Thirty-Eighth Supplemental Indenture dated as of January 4, 2013, to the U.S. Bank Indenture and Form of 4.375%
Prospect Capital InterNote® due 2020(30)
4.36
Thirty-Ninth Supplemental Indenture dated as of January 4, 2013, to the U.S. Bank Indenture and Form of 4.875%
Prospect Capital InterNote® due 2031(30)
4.37
Fortieth Supplemental Indenture dated as of January 4, 2013, to the U.S. Bank Indenture and Form of 5.875% Prospect
Capital InterNote® due 2043(30)
4.38
Forty-First Supplemental Indenture dated as of January 10, 2013, to the U.S. Bank Indenture and Form of 4.250%
Prospect Capital InterNote® due 2020(31)
4.39
Forty-Second Supplemental Indenture dated as of January 10, 2013, to the U.S. Bank Indenture and Form of 4.750%
Prospect Capital InterNote® due 2031(31)
4.40
Forty-Third Supplemental Indenture dated as of January 10, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2043(31)
4.41
Forty-Fourth Supplemental Indenture dated as of January 17, 2013, to the U.S. Bank Indenture and Form of 4.125%
Prospect Capital InterNote® due 2020(32)
4.42
Forty-Fifth Supplemental Indenture dated as of January 17, 2013, to the U.S. Bank Indenture and Form of 4.625%
Prospect Capital InterNote® due 2031(32)
4.43
Forty-Sixth Supplemental Indenture dated as of January 17, 2013, to the U.S. Bank Indenture and Form of 5.625%
Prospect Capital InterNote® due 2043(32)
4.44
Forty-Seventh Supplemental Indenture dated as of January 25, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(33)
4.45
Forty-Eighth Supplemental Indenture dated as of January 25, 2013, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2031(33)
213
Exhibit No.
4.46
Forty-Ninth Supplemental Indenture dated as of January 25, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(33)
4.47
Fiftieth Supplemental Indenture dated as of January 31, 2013, to the U.S. Bank Indenture and Form of 4.000% Prospect
Capital InterNote® due 2020(34)
4.48
Fifty-First Supplemental Indenture dated as of January 31, 2013, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2031(34)
4.49
Fifty-Second Supplemental Indenture dated as of January 31, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(34)
4.50
Fifty-Third Supplemental Indenture dated as of February 7, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(35)
4.51
Fifty-Fourth Supplemental Indenture dated as of February 7, 2013, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2031(35)
4.52
Fifty-Fifth Supplemental Indenture dated as of February 7, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(35)
4.53
Fifty-Sixth Supplemental Indenture dated as of February 22, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(36)
4.54
Fifty-Seventh Supplemental Indenture dated as of February 22, 2013, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2031(36)
4.55
Fifty-Eighth Supplemental Indenture dated as of February 22, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(36)
4.56
Fifty-Ninth Supplemental Indenture dated as of February 28, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(37)
4.57
Sixtieth Supplemental Indenture dated as of February 28, 2013, to the U.S. Bank Indenture and Form of 4.500% Prospect
Capital InterNote® due 2031(37)
4.58
Sixty-First Supplemental Indenture dated as of February 28, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(37)
4.59
Sixty-Second Supplemental Indenture dated as of March 7, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(38)
4.60
Sixty-Third Supplemental Indenture dated as of March 7, 2013, to the U.S. Bank Indenture and Form of 4.500% Prospect
Capital InterNote® due 2031(38)
4.61
Sixty-Fourth Supplemental Indenture dated as of March 7, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(38)
4.62
Sixty-Fifth Supplemental Indenture dated as of March 14, 2013, to the U.S. Bank Indenture and Form of 4.000% Prospect
Capital InterNote® due 2020(39)
4.63
Sixty-Sixth Supplemental Indenture dated as of March 14, 2013, to the U.S. Bank Indenture and Form of 4.125% to
6.000% Prospect Capital InterNote® due 2031(39)
4.64
Sixty-Seventh Supplemental Indenture dated as of March 14, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(39)
4.65
Sixty-Eighth Supplemental Indenture dated as of March 14, 2013, to the U.S. Bank Indenture and Form of Floating
Prospect Capital InterNote® due 2023(39)
4.66
Supplemental Indenture dated as of March 15, 2013, to the U.S. Bank Indenture(40)
4.67
Form of Global Note 5.875% Senior Note due 2023(41)
4.68
Sixty-Ninth Supplemental Indenture dated as of March 21, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(42)
4.69
Seventieth Supplemental Indenture dated as of March 21, 2013, to the U.S. Bank Indenture and Form of 4.125% to
6.000% Prospect Capital InterNote® due 2031(42)
4.70
Seventy-First Supplemental Indenture dated as of March 21, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(42)
4.71
Seventy-Second Supplemental Indenture dated as of March 21, 2013, to the U.S. Bank Indenture and Form of Floating
Prospect Capital InterNote® due 2023(42)
4.72
Seventy-Third Supplemental Indenture dated as of March 28, 2013, to the U.S. Bank Indenture and Form of 4.000%
Prospect Capital InterNote® due 2020(43)
214
Exhibit No.
4.73
Seventy-Fourth Supplemental Indenture dated as of March 28, 2013, to the U.S. Bank Indenture and Form of 4.125% to
6.000% Prospect Capital InterNote® due 2031(43)
4.74
Seventy-Fifth Supplemental Indenture dated as of March 28, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2043(43)
4.75
Seventy-Sixth Supplemental Indenture dated as of March 28, 2013, to the U.S. Bank Indenture and Form of Floating
Prospect Capital InterNote® due 2023(43)
4.76
Seventy-Seventh Supplemental Indenture dated as of April 4, 2013, to the U.S. Bank Indenture and Form of 4.500%
Prospect Capital InterNote® due 2020(44)
4.77
Seventy-Eighth Supplemental Indenture dated as of April 4, 2013, to the U.S. Bank Indenture and Form of 4.625% to
6.500% Prospect Capital InterNote® due 2031(44)
4.78
Seventy-Ninth Supplemental Indenture dated as of April 4, 2013, to the U.S. Bank Indenture and Form of 6.000%
Prospect Capital InterNote® due 2043(44)
4.79
Eightieth Supplemental Indenture dated as of April 4, 2013, to the U.S. Bank Indenture and Form of Floating Prospect
Capital InterNote® due 2023(44)
4.80
Eighty-First Supplemental Indenture dated as of April 11, 2013, to the U.S. Bank Indenture and Form of 4.500% Prospect
Capital InterNote® due 2020(45)
4.81
Eighty-Second Supplemental Indenture dated as of April 11, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2031(45)
4.82
Eighty-Third Supplemental Indenture dated as of April 11, 2013, to the U.S. Bank Indenture and Form of 6.000%
Prospect Capital InterNote® due 2043(45)
4.83
Eighty-Fourth Supplemental Indenture dated as of April 11, 2013, to the U.S. Bank Indenture and Form of Floating
Prospect Capital InterNote® due 2023(45)
4.84
Eighty-Fifth Supplemental Indenture dated as of April 18, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(46)
4.85
Eighty-Sixth Supplemental Indenture dated as of April 18, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2031(46)
4.86
Eighty-Seventh Supplemental Indenture dated as of April 18, 2013, to the U.S. Bank Indenture and Form of 6.000%
Prospect Capital InterNote® due 2043(46)
4.87
Eighty-Eighth Supplemental Indenture dated as of April 25, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(47)
4.88
Eighty-Ninth Supplemental Indenture dated as of April 25, 2013, to the U.S. Bank Indenture and Form of 5.500%
Prospect Capital InterNote® due 2031(47)
4.89 Ninetieth Supplemental Indenture dated as of April 25, 2013, to the U.S. Bank Indenture and Form of 6.000% Prospect
Capital InterNote® due 2043(47)
4.90 Ninety-First Supplemental Indenture dated as of May 2, 2013, to the U.S. Bank Indenture and Form of 5.000% Prospect
Capital InterNote® due 2020(48)
4.91 Ninety-Second Supplemental Indenture dated as of May 2, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2031(48)
4.92 Ninety-Third Supplemental Indenture dated as of May 2, 2013, to the U.S. Bank Indenture and Form of 6.250% Prospect
Capital InterNote® due 2043(48)
4.93 Ninety-Fourth Supplemental Indenture dated as of May 9, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(49)
4.94 Ninety-Fifth Supplemental Indenture dated as of May 9, 2013, to the U.S. Bank Indenture and Form of 5.750% Prospect
Capital InterNote® due 2031(49)
4.95 Ninety-Sixth Supplemental Indenture dated as of May 9, 2013, to the U.S. Bank Indenture and Form of 6.250% Prospect
Capital InterNote® due 2043(49)
4.96 Ninety-Seventh Supplemental Indenture dated as of May 23, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(50)
4.97 Ninety-Eighth Supplemental Indenture dated as of May 23, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2031(50)
4.98 Ninety-Ninth Supplemental Indenture dated as of May 23, 2013, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2043(50)
215
Exhibit No.
4.99 One Hundredth Supplemental Indenture dated as of May 23, 2013, to the U.S. Bank Indenture and Form of 5.000% to
7.000% Prospect Capital InterNote® due 2028(50)
4.100 One Hundred-First Supplemental Indenture dated as of May 31, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(51)
4.101 One Hundred-Second Supplemental Indenture dated as of May 31, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2031(51)
4.102 One Hundred-Third Supplemental Indenture dated as of May 31, 2013, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2043(51)
4.103 One Hundred-Fourth Supplemental Indenture dated as of June 6, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(52)
4.104 One Hundred-Fifth Supplemental Indenture dated as of June 6, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2031(52)
4.105 One Hundred-Sixth Supplemental Indenture dated as of June 6, 2013, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2043(52)
4.106 One Hundred-Seventh Supplemental Indenture dated as of June 6, 2013, to the U.S. Bank Indenture and Form of 5.000%
to 7.000% Prospect Capital InterNote® due 2028(52)
4.107 One Hundred-Eighth Supplemental Indenture dated as of June 13, 2013, to the U.S. Bank Indenture and Form of 5.000%
Prospect Capital InterNote® due 2020(53)
4.108 One Hundred-Ninth Supplemental Indenture dated as of June 13, 2013, to the U.S. Bank Indenture and Form of 5.750%
Prospect Capital InterNote® due 2031(53)
4.109 One Hundred-Tenth Supplemental Indenture dated as of June 13, 2013, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2043(53)
4.110 One Hundred-Eleventh Supplemental Indenture dated as of June 20, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2020(54)
4.111 One Hundred-Twelfth Supplemental Indenture dated as of June 20, 2013, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2031(54)
4.112 One Hundred-Thirteenth Supplemental Indenture dated as of June 20, 2013, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2043(54)
4.113 One Hundred-Fifteenth Supplemental Indenture dated as of June 27, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2031(55)
4.114 One Hundred-Sixteenth Supplemental Indenture dated as of June 27, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2043(55)
4.115 One Hundred-Seventeenth Supplemental Indenture dated as of July 5, 2013, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(56)
4.116 One Hundred-Eighteenth Supplemental Indenture dated as of July 5, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2031(56)
4.117 One Hundred-Nineteenth Supplemental Indenture dated as of July 5, 2013, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2043(56)
4.118 One Hundred-Twentieth Supplemental Indenture dated as of July 5, 2013, to the U.S. Bank Indenture and Form of
6.750% Prospect Capital InterNote® due 2043(56)
4.119 One Hundred Twenty-First Supplemental Indenture dated as of July 11, 2013, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(57)
4.120 One Hundred Twenty-Second Supplemental Indenture dated as of July 11, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2031(57)
4.121 One Hundred Twenty-Third Supplemental Indenture dated as of July 11, 2013, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2043(57)
4.122 One Hundred Twenty-Fourth Supplemental Indenture dated as of July 11, 2013, to the U.S. Bank Indenture and Form of
6.750% Prospect Capital InterNote® due 2043(57)
4.123 One Hundred Twenty-Fifth Supplemental Indenture dated as of July 18, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2020(58)
4.124 One Hundred Twenty-Sixth Supplemental Indenture dated as of July 18, 2013, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2031(58)
216
Exhibit No.
4.125 One Hundred Twenty-Seventh Supplemental Indenture dated as of July 18, 2013, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2043(58)
4.126 One Hundred Twenty-Eighth Supplemental Indenture dated as of July 18, 2013, to the U.S. Bank Indenture and Form of
6.750% Prospect Capital InterNote® due 2043(58)
4.127 One Hundred Twenty-Ninth Supplemental Indenture dated as of July 25, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2020(59)
4.128 One Hundred Thirtieth Supplemental Indenture dated as of July 25, 2013, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2031(59)
4.129 One Hundred Thirty-First Supplemental Indenture dated as of July 25, 2013, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2043(59)
4.130 One Hundred Thirty-Second Supplemental Indenture dated as of July 25, 2013, to the U.S. Bank Indenture and Form of
6.750% Prospect Capital InterNote® due 2043(59)
4.131 One Hundred Thirty-Third Supplemental Indenture dated as of August 1, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2019(60)
4.132 One Hundred Thirty-Fourth Supplemental Indenture dated as of August 1, 2013, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2021(60)
4.133 One Hundred Thirty-Fifth Supplemental Indenture dated as of August 1, 2013, to the U.S. Bank Indenture and Form of
6.125% Prospect Capital InterNote® due 2031(60)
4.134 One Hundred Thirty-Sixth Supplemental Indenture dated as of August 1, 2013, to the U.S. Bank Indenture and Form of
6.625% Prospect Capital InterNote® due 2043(60)
4.135 One Hundred Thirty-Seventh Supplemental Indenture dated as of August 8, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(61)
4.136 One Hundred Thirty-Eighth Supplemental Indenture dated as of August 8, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(61)
4.137 One Hundred Thirty-Ninth Supplemental Indenture dated as of August 8, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2031(61)
4.138 One Hundred Fortieth Supplemental Indenture dated as of August 8, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2043(61)
4.139 One Hundred Forty-First Supplemental Indenture dated as of August 15, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(62)
4.140 One Hundred Forty-Second Supplemental Indenture dated as of August 15, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(62)
4.141 One Hundred Forty-Third Supplemental Indenture dated as of August 15, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2028(62)
4.142 One Hundred Forty-Fourth Supplemental Indenture dated as of August 15, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(62)
4.143 One Hundred Forty-Fifth Supplemental Indenture dated as of August 22, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(63)
4.144 One Hundred Forty-Sixth Supplemental Indenture dated as of August 22, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(63)
4.145 One Hundred Forty-Seventh Supplemental Indenture dated as of August 22, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2028(63)
4.146 One Hundred Forty-Eighth Supplemental Indenture dated as of August 22, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(63)
4.147 One Hundred Forty-Ninth Supplemental Indenture dated as of September 6, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(64)
4.148 One Hundred Fiftieth Supplemental Indenture dated as of September 6, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(64)
4.149 One Hundred Fifty-First Supplemental Indenture dated as of September 6, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2028(64)
4.150 One Hundred Fifty-Second Supplemental Indenture dated as of September 6, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2038(64)
217
Exhibit No.
4.151 One Hundred Fifty-Third Supplemental Indenture dated as of September 12, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(65)
4.152 One Hundred Fifty-Fourth Supplemental Indenture dated as of September 12, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(65)
4.153 One Hundred Fifty-Fifth Supplemental Indenture dated as of September 12, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2033(65)
4.154 One Hundred Fifty-Sixth Supplemental Indenture dated as of September 12, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2043(65)
4.155 One Hundred Fifty-Seventh Supplemental Indenture dated as of September 19, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(66)
4.156 One Hundred Fifty-Eighth Supplemental Indenture dated as of September 19, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(66)
4.157 One Hundred Fifty-Ninth Supplemental Indenture dated as of September 19, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2033(66)
4.158 One Hundred Sixtieth Supplemental Indenture dated as of September 19, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2043(66)
4.159 One Hundred Sixty-First Supplemental Indenture dated as of September 26, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(67)
4.160 One Hundred Sixty-Second Supplemental Indenture dated as of September 26, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(67)
4.161 One Hundred Sixty-Third Supplemental Indenture dated as of September 26, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2033(67)
4.162 One Hundred Sixty-Fourth Supplemental Indenture dated as of September 26, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2043(67)
4.163 One Hundred Sixty-Fifth Supplemental Indenture dated as of October 3, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(68)
4.164 One Hundred Sixty-Sixth Supplemental Indenture dated as of October 3, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(68)
4.165 One Hundred Sixty-Seventh Supplemental Indenture dated as of October 3, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2033(68)
4.166 One Hundred Sixty-Eighth Supplemental Indenture dated as of October 3, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2043(68)
4.167 One Hundred Sixty-Ninth Supplemental Indenture dated as of October 10, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(69)
4.168 One Hundred Seventieth Supplemental Indenture dated as of October 10, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(69)
4.169 One Hundred Seventy-First Supplemental Indenture dated as of October 10, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2033(69)
4.170 One Hundred Seventy-Second Supplemental Indenture dated as of October 10, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2043(69)
4.171 One Hundred Seventy-Third Supplemental Indenture dated as of October 18, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(70)
4.172 One Hundred Seventy-Fourth Supplemental Indenture dated as of October 18, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(70)
4.173 One Hundred Seventy-Fifth Supplemental Indenture dated as of October 18, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2033(70)
4.174 One Hundred Seventy-Sixth Supplemental Indenture dated as of October 18, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2043(70)
4.175 One Hundred Seventy-Seventh Supplemental Indenture dated as of October 24, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2016(71)
4.176 One Hundred Seventy-Eighth Supplemental Indenture dated as of October 24, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(71)
218
Exhibit No.
4.177 One Hundred Seventy-Ninth Supplemental Indenture dated as of October 24, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(71)
4.178 One Hundred Eightieth Supplemental Indenture dated as of October 24, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2033(71)
4.179 One Hundred Eighty-First Supplemental Indenture dated as of October 24, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2043(71)
4.180 One Hundred Eighty-Second Supplemental Indenture dated as of October 31, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2017(72)
4.181 One Hundred Eighty-Third Supplemental Indenture dated as of October 31, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(72)
4.182 One Hundred Eighty-Fourth Supplemental Indenture dated as of October 31, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(72)
4.183 One Hundred Eighty-Fifth Supplemental Indenture dated as of October 31, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2028(72)
4.184 One Hundred Eighty-Sixth Supplemental Indenture dated as of October 31, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(72)
4.185 One Hundred Eighty-Seventh Supplemental Indenture dated as of November 7, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2017(73)
4.186 One Hundred Eighty-Eighth Supplemental Indenture dated as of November 7, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(73)
4.187 One Hundred Eighty-Ninth Supplemental Indenture dated as of November 7, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(73)
4.188 One Hundred Ninetieth Supplemental Indenture dated as of November 7, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2028(73)
4.189 One Hundred Ninety-First Supplemental Indenture dated as of November 7, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2038(73)
4.190 One Hundred Ninety-Second Supplemental Indenture dated as of November 15, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2017(74)
4.191 One Hundred Ninety-Third Supplemental Indenture dated as of November 15, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(74)
4.192 One Hundred Ninety-Fourth Supplemental Indenture dated as of November 15, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(74)
4.193 One Hundred Ninety-Fifth Supplemental Indenture dated as of November 15, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2028(74)
4.194 One Hundred Ninety-Sixth Supplemental Indenture dated as of November 15, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2038(74)
4.195 One Hundred Ninety-Seventh Supplemental Indenture dated as of November 21, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2017(75)
4.196 One Hundred Ninety-Eighth Supplemental Indenture dated as of November 21, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(75)
4.197 One Hundred Ninety-Ninth Supplemental Indenture dated as of November 21, 2013, to the U.S. Bank Indenture and
Form of 5.500% Prospect Capital InterNote® due 2020(75)
4.198 Two Hundredth Supplemental Indenture dated as of November 21, 2013, to the U.S. Bank Indenture and Form of 6.000%
Prospect Capital InterNote® due 2028(75)
4.199 Two Hundred First Supplemental Indenture dated as of November 21, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(75)
4.200 Two Hundred Second Supplemental Indenture dated as of November 29, 2013, to the U.S. Bank Indenture and Form of
4.000% Prospect Capital InterNote® due 2017(76)
4.201 Two Hundred Third Supplemental Indenture dated as of November 29, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(76)
4.202 Two Hundred Fourth Supplemental Indenture dated as of November 29, 2013, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2020(76)
219
Exhibit No.
4.203 Two Hundred Fifth Supplemental Indenture dated as of November 29, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(76)
4.204 Two Hundred Sixth Supplemental Indenture dated as of November 29, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(76)
4.205 Two Hundred Seventh Supplemental Indenture dated as of December 5, 2013, to the U.S. Bank Indenture and Form of
4.000% Prospect Capital InterNote® due 2017(77)
4.206 Two Hundred Eighth Supplemental Indenture dated as of December 5, 2013, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2018(77)
4.207 Two Hundred Tenth Supplemental Indenture dated as of December 5, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(77)
4.208 Two Hundred Eleventh Supplemental Indenture dated as of December 5, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(77)
4.209 Two Hundred Twelfth Supplemental Indenture dated as of December 12, 2013, to the U.S. Bank Indenture and Form of
4.000% Prospect Capital InterNote® due 2017(78)
4.210 Two Hundred Thirteenth Supplemental Indenture dated as of December 12, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(78)
4.211 Two Hundred Fifteenth Supplemental Indenture dated as of December 12, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(78)
4.212 Two Hundred Sixteenth Supplemental Indenture dated as of December 12, 2013, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2038(78)
4.213 Two Hundred Seventeenth Supplemental Indenture dated as of December 19, 2013, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2017(79)
4.214 Two Hundred Eighteenth Supplemental Indenture dated as of December 19, 2013, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2018(79)
4.215 Two Hundred Twentieth Supplemental Indenture dated as of December 19, 2013, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(79)
4.216 Two Hundred Twenty-First Supplemental Indenture dated as of December 19, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2038(79)
4.217 Two Hundred Twenty-Second Supplemental Indenture dated as of December 27, 2013, to the U.S. Bank Indenture and
Form of 4.000% Prospect Capital InterNote® due 2017(80)
4.218 Two Hundred Twenty-Third Supplemental Indenture dated as of December 27, 2013, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2018(80)
4.219 Two Hundred Twenty-Fifth Supplemental Indenture dated as of December 27, 2013, to the U.S. Bank Indenture and
Form of 6.000% Prospect Capital InterNote® due 2025(80)
4.220 Two Hundred Twenty-Sixth Supplemental Indenture dated as of December 27, 2013, to the U.S. Bank Indenture and
Form of 6.500% Prospect Capital InterNote® due 2038(80)
4.221 Two Hundred Twenty-Seventh Supplemental Indenture dated as of January 3, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(81)
4.222 Two Hundred Twenty-Eighth Supplemental Indenture dated as of January 3, 2014, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2019(81)
4.223 Two Hundred Twenty-Ninth Supplemental Indenture dated as of January 3, 2014, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(81)
4.224 Two Hundred Thirtieth Supplemental Indenture dated as of January 3, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(81)
4.225 Two Hundred Thirty-First Supplemental Indenture dated as of January 3, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(81)
4.226 Two Hundred Thirty-Second Supplemental Indenture dated as of January 9, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(82)
4.227 Two Hundred Thirty-Third Supplemental Indenture dated as of January 9, 2014, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2019(82)
4.228 Two Hundred Thirty-Fourth Supplemental Indenture dated as of January 9, 2014, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(82)
220
Exhibit No.
4.229 Two Hundred Thirty-Fifth Supplemental Indenture dated as of January 9, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(82)
4.230 Two Hundred Thirty-Sixth Supplemental Indenture dated as of January 9, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(82)
4.231 Two Hundred Thirty-Seventh Supplemental Indenture dated as of January 16, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(83)
4.232 Two Hundred Thirty-Eighth Supplemental Indenture dated as of January 16, 2014, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2019(83)
4.233 Two Hundred Thirty-Ninth Supplemental Indenture dated as of January 16, 2014, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(83)
4.234 Two Hundred Fortieth Supplemental Indenture dated as of January 16, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(83)
4.235 Two Hundred Forty-First Supplemental Indenture dated as of January 16, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(83)
4.236 Two Hundred Forty-Second Supplemental Indenture dated as of January 24, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(84)
4.237 Two Hundred Forty-Third Supplemental Indenture dated as of January 24, 2014, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2019(84)
4.238 Two Hundred Forty-Fourth Supplemental Indenture dated as of January 24, 2014, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(84)
4.239 Two Hundred Forty-Fifth Supplemental Indenture dated as of January 24, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(84)
4.240 Two Hundred Forty-Sixth Supplemental Indenture dated as of January 24, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(84)
4.241 Two Hundred Forty-Seventh Supplemental Indenture dated as of January 30, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(85)
4.242 Two Hundred Forty-Eighth Supplemental Indenture dated as of January 30, 2014, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2019(85)
4.243 Two Hundred Forty-Ninth Supplemental Indenture dated as of January 30, 2014, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(85)
4.244 Two Hundred Fiftieth Supplemental Indenture dated as of January 30, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(85)
4.245 Two Hundred Fifty-First Supplemental Indenture dated as of January 30, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(85)
4.246 Two Hundred Fifty-Second Supplemental Indenture dated as of February 6, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(86)
4.247 Two Hundred Fifty-Third Supplemental Indenture dated as of February 6, 2014, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2019(86)
4.248 Two Hundred Fifty-Fourth Supplemental Indenture dated as of February 6, 2014, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(86)
4.249 Two Hundred Fifty-Fifth Supplemental Indenture dated as of February 6, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(86)
4.250 Two Hundred Fifty-Sixth Supplemental Indenture dated as of February 6, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(86)
4.251 Two Hundred Fifty-Seventh Supplemental Indenture dated as of February 13, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(87)
4.252 Two Hundred Fifty-Eighth Supplemental Indenture dated as of February 13, 2014, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2019(87)
4.253 Two Hundred Fifty-Ninth Supplemental Indenture dated as of February 13, 2014, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(87)
4.254 Two Hundred Sixtieth Supplemental Indenture dated as of February 13, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(87)
221
Exhibit No.
4.255 Two Hundred Sixty-First Supplemental Indenture dated as of February 13, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(87)
4.256 Two Hundred Sixty-Seventh Supplemental Indenture dated as of February 19, 2014, to the U.S. Bank Indenture and Form
of 4.75% Prospect Capital InterNote® due 2019(88)
4.257 Two Hundred Sixty-Second Supplemental Indenture dated as of February 21, 2014, to the U.S. Bank Indenture and Form
of 4.000% Prospect Capital InterNote® due 2018(89)
4.258 Two Hundred Sixty-Third Supplemental Indenture dated as of February 21, 2014, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2019(89)
4.259 Two Hundred Sixty-Fourth Supplemental Indenture dated as of February 21, 2014, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(89)
4.260 Two Hundred Sixty-Fifth Supplemental Indenture dated as of February 21, 2014, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2026(89)
4.261 Two Hundred Sixty-Sixth Supplemental Indenture dated as of February 21, 2014, to the U.S. Bank Indenture and Form of
6.500% Prospect Capital InterNote® due 2039(89)
4.262 Two Hundred Sixty-Eighth Supplemental Indenture dated as of February 27, 2014, to the U.S. Bank Indenture and Form
of 3.750% Prospect Capital InterNote® due 2018(90)
4.263 Two Hundred Sixty-Ninth Supplemental Indenture dated as of February 27, 2014, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2019(90)
4.264 Two Hundred Seventieth Supplemental Indenture dated as of February 27, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(90)
4.265 Two Hundred Seventy-First Supplemental Indenture dated as of February 27, 2014, to the U.S. Bank Indenture and Form
of 5.750% Prospect Capital InterNote® due 2026(90)
4.266 Two Hundred Seventy-Second Supplemental Indenture dated as of February 27, 2014, to the U.S. Bank Indenture and
Form of 6.250% Prospect Capital InterNote® due 2039(90)
4.267 Two Hundred Seventy-Third Supplemental Indenture dated as March 6, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(91)
4.268 Two Hundred Seventy-Fourth Supplemental Indenture dated as of March 6, 2014, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2019(91)
4.269 Two Hundred Seventy-Fifth Supplemental Indenture dated as of March 6, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(91)
4.270 Two Hundred Seventy-Sixth Supplemental Indenture dated as of March 6, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2026(91)
4.271 Two Hundred Seventy-Seventh Supplemental Indenture dated as of March 6, 2014, to the U.S. Bank Indenture and Form
of 6.250% Prospect Capital InterNote® due 2039(91)
4.272 Supplement No. 1 to the Two Hundred Sixty-Seventh Supplemental Indenture dated as of March 11, 2014, to the U.S.
Bank Indenture and Form of 4.75% Prospect Capital InterNote® due 2019(92)
4.273 Two Hundred Seventy-Eighth Supplemental Indenture dated as March 13, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(93)
4.274 Two Hundred Seventy-Ninth Supplemental Indenture dated as of March 13, 2014, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2019(93)
4.275 Two Hundred Eightieth Supplemental Indenture dated as of March 13, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(93)
4.276 Two Hundred Eighty-First Supplemental Indenture dated as of March 13, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2026(93)
4.277 Two Hundred Eighty-Second Supplemental Indenture dated as of March 13, 2014, to the U.S. Bank Indenture and Form
of 6.250% Prospect Capital InterNote® due 2039(93)
4.278 Two Hundred Eighty-Fourth Supplemental Indenture dated as March 20, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(94)
4.279 Two Hundred Eighty-Fifth Supplemental Indenture dated as of March 20, 2014, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2019(94)
4.280 Two Hundred Eighty-Sixth Supplemental Indenture dated as of March 20, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(94)
222
Exhibit No.
4.281 Two Hundred Eighty-Seventh Supplemental Indenture dated as of March 20, 2014, to the U.S. Bank Indenture and Form
of 5.750% Prospect Capital InterNote® due 2026(94)
4.282 Two Hundred Eighty-Eighth Supplemental Indenture dated as of March 20, 2014, to the U.S. Bank Indenture and Form
of 6.250% Prospect Capital InterNote® due 2039(94)
4.283 Two Hundred Eighty-Ninth Supplemental Indenture dated as March 27, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(95)
4.284 Two Hundred Ninetieth Supplemental Indenture dated as of March 20, 2014, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2019(95)
4.285 Two Hundred Ninety-First Supplemental Indenture dated as of March 27, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(95)
4.286 Two Hundred Ninety-Second Supplemental Indenture dated as of March 27, 2014, to the U.S. Bank Indenture and Form
of 5.750% Prospect Capital InterNote® due 2026(95)
4.287 Two Hundred Ninety-Third Supplemental Indenture dated as of March 27, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(95)
4.288 Two Hundred Ninety-Fourth Supplemental Indenture dated as of April 3, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(96)
4.289 Two Hundred Ninety-Fifth Supplemental Indenture dated as of April 3, 2014, to the U.S. Bank Indenture and Form of
4.500% Prospect Capital InterNote® due 2019(96)
4.290 Two Hundred Ninety-Sixth Supplemental Indenture dated as of April 3, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(96)
4.291 Two Hundred Ninety-Seventh Supplemental Indenture dated as of April 3, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(96)
4.292 Two Hundred Ninety-Eighth Supplemental Indenture dated as of April 3, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(96)
4.293 Supplemental Indenture dated as of April 7, 2014, to the U.S. Bank Indenture and Form of 5.000% Senior Notes due
2019(97)
4.294 Two Hundred Ninety-Ninth Supplemental Indenture dated as of April 10, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(98)
4.295 Three Hundredth Supplemental Indenture dated as of April 10, 2014, to the U.S. Bank Indenture and Form of 4.250%
Prospect Capital InterNote® due 2019(98)
4.296 Three Hundred First Supplemental Indenture dated as of April 10, 2014, to the U.S. Bank Indenture and Form of 5.250%
Prospect Capital InterNote® due 2021(98)
4.297 Three Hundred Second Supplemental Indenture dated as of April 10, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(98)
4.298 Three Hundred Third Supplemental Indenture dated as of April 10, 2014, to the U.S. Bank Indenture and Form of 6.250%
Prospect Capital InterNote® due 2039(98)
4.299 Indenture dated as of April 11, 2014, by and between Prospect Capital Corporation and American Stock Transfer & Trust
Company, as Trustee and Form of Global Note of 4.75% Senior Convertible Notes Due 2020(99)
4.300 Three Hundred Fourth Supplemental Indenture dated as of April 17, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(100)
4.301 Three Hundred Fifth Supplemental Indenture dated as of April 17, 2014, to the U.S. Bank Indenture and Form of 4.250%
Prospect Capital InterNote® due 2019(100)
4.302 Three Hundred Sixth Supplemental Indenture dated as of April 17, 2014, to the U.S. Bank Indenture and Form of 5.250%
Prospect Capital InterNote® due 2021(100)
4.303 Three Hundred Seventh Supplemental Indenture dated as of April 17, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(100)
4.304 Three Hundred Eighth Supplemental Indenture dated as of April 17, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(100)
4.305 Three Hundred Ninth Supplemental Indenture dated as of April 24, 2014, to the U.S. Bank Indenture and Form of 3.750%
Prospect Capital InterNote® due 2018(101)
4.306 Three Hundred Tenth Supplemental Indenture dated as of April 24, 2014, to the U.S. Bank Indenture and Form of
4.500% Prospect Capital InterNote® due 2019(101)
223
Exhibit No.
4.307 Three Hundred Eleventh Supplemental Indenture dated as of April 24, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(101)
4.308 Three Hundred Twelfth Supplemental Indenture dated as of April 24, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(101)
4.309 Three Hundred Thirteenth Supplemental Indenture dated as of April 24, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(101)
4.310 Three Hundred Fourteenth Supplemental Indenture dated as of May 1, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(102)
4.311 Three Hundred Fifteenth Supplemental Indenture dated as of May 1, 2014, to the U.S. Bank Indenture and Form of
4.500% Prospect Capital InterNote® due 2019(102)
4.312 Three Hundred Sixteenth Supplemental Indenture dated as of May 1, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(102)
4.313 Three Hundred Seventeenth Supplemental Indenture dated as of May 1, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(102)
4.314 Three Hundred Eighteenth Supplemental Indenture dated as of May 1, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(102)
4.315 Three Hundred Nineteenth Supplemental Indenture dated as of May 8, 2014, to the U.S. Bank Indenture and Form of
3.750% Prospect Capital InterNote® due 2018(103)
4.316 Three Hundred Twentieth Supplemental Indenture dated as of May 8, 2014, to the U.S. Bank Indenture and Form of
4.500% Prospect Capital InterNote® due 2019(103)
4.317 Three Hundred Twenty-First Supplemental Indenture dated as of May 8, 2014, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(103)
4.318 Three Hundred Twenty-Second Supplemental Indenture dated as of May 8, 2014, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2024(103)
4.319 Three Hundred Twenty-Third Supplemental Indenture dated as of May 8, 2014, to the U.S. Bank Indenture and Form of
6.250% Prospect Capital InterNote® due 2039(103)
4.320 Three Hundred Twenty-Fourth Supplemental Indenture dated as of November 17, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(110)
4.321 Three Hundred Twenty-Fifth Supplemental Indenture dated as of November 28, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(111)
4.322 Three Hundred Twenty-Sixth Supplemental Indenture dated as of December 4, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(112)
4.323 Three Hundred Twenty-Seventh Supplemental Indenture dated as of December 11, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(113)
4.324 Three Hundred Twenty-Eighth Supplemental Indenture dated as of December 18, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(114)
4.325 Three Hundred Twenty-Ninth Supplemental Indenture dated as of December 29, 2014, to the U.S. Bank Indenture and
Form of 4.250% Prospect Capital InterNote® due 2020(115)
4.326 Three Hundred Thirtieth Supplemental Indenture dated as of January 2, 2015, to the U.S. Bank Indenture and Form of
4.250% Prospect Capital InterNote® due 2020(116)
4.327 Three Hundred Thirty-First Supplemental Indenture dated as of January 8, 2015, to the U.S. Bank Indenture and Form of
4.250% Prospect Capital InterNote® due 2020(117)
4.328 Three Hundred Thirty-Second Supplemental Indenture dated as of January 15, 2015, to the U.S. Bank Indenture and
Form of 4.500% Prospect Capital InterNote® due 2020(118)
4.329 Three Hundred Thirty-Third Supplemental Indenture dated as of January 23, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(119)
4.330 Three Hundred Thirty-Fourth Supplemental Indenture dated as of January 29, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(120)
4.331 Three Hundred Thirty-Fifth Supplemental Indenture dated as of February 5, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(121)
4.332 Three Hundred Thirty-Sixth Supplemental Indenture dated as of February 20, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(122)
224
Exhibit No.
4.333 Three Hundred Thirty-Seventh Supplemental Indenture dated as of February 26, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(123)
4.334 Three Hundred Thirty-Eighth Supplemental Indenture dated as of March 5, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(124)
4.335 Three Hundred Thirty-Ninth Supplemental Indenture dated as of March 12, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(125)
4.336 Three Hundred Fortieth Supplemental Indenture dated as of March 19, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(126)
4.337 Three Hundred Forty-First Supplemental Indenture dated as of March 26, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(127)
4.338 Three Hundred Forty-Second Supplemental Indenture dated as of April 2, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(128)
4.339 Three Hundred Forty-Third Supplemental Indenture dated as of April 9, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(129)
4.340 Three Hundred Forty-Fourth Supplemental Indenture dated as of April 16, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(130)
4.341 Three Hundred Forty-Fifth Supplemental Indenture dated as of April 16, 2015, to the U.S. Bank Indenture and Form of
3.375% to 6.375% Prospect Capital InterNote® due 2021(130)
4.342 Three Hundred Forty-Sixth Supplemental Indenture dated as of April 23, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(131)
4.343 Three Hundred Forty-Seventh Supplemental Indenture dated as of April 23, 2015, to the U.S. Bank Indenture and Form
of 3.375% to 6.375% Prospect Capital InterNote® due 2021(131)
4.344 Three Hundred Forty-Eighth Supplemental Indenture dated as of April 30, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(132)
4.345 Three Hundred Forty-Ninth Supplemental Indenture dated as of April 30, 2015, to the U.S. Bank Indenture and Form of
3.375% to 6.375% Prospect Capital InterNote® due 2021(132)
4.346 Three Hundred Fiftieth Supplemental Indenture dated as of May 7, 2015, to the U.S. Bank Indenture and Form of 4.750%
Prospect Capital InterNote® due 2020(133)
4.347 Three Hundred Fifty-First Supplemental Indenture dated as of May 7, 2015, to the U.S. Bank Indenture and Form of
3.375% to 6.375% Prospect Capital InterNote® due 2021(133)
4.348 Three Hundred Fifty-Second Supplemental Indenture dated as of May 21, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(134)
4.349 Three Hundred Fifty-Third Supplemental Indenture dated as of May 29, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(135)
4.350 Three Hundred Fifty-Fourth Supplemental Indenture dated as of May 29, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2022(135)
4.351 Three Hundred Fifty-Fifth Supplemental Indenture dated as of June 4, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(136)
4.352 Three Hundred Fifty-Sixth Supplemental Indenture dated as of June 4, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2022(136)
4.353 Three Hundred Fifty-Seventh Supplemental Indenture dated as of June 11, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(137)
4.354 Three Hundred Fifty-Eighth Supplemental Indenture dated as of June 11, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2022(137)
4.355 Three Hundred Fifty-Ninth Supplemental Indenture dated as of June 18, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(138)
4.356 Three Hundred Sixtieth Supplemental Indenture dated as of June 18, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2021(138)
4.357 Three Hundred Sixty-First Supplemental Indenture dated as of June 25, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(139)
4.358 Three Hundred Sixty-Second Supplemental Indenture dated as of June 25, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2021(139)
225
Exhibit No.
4.359 Three Hundred Sixty-Third Supplemental Indenture dated as of July 2, 2015, to the U.S. Bank Indenture and Form of
4.625% Prospect Capital InterNote® due 2020(140)
4.360 Three Hundred Sixty-Fourth Supplemental Indenture dated as of July 2, 2015, to the U.S. Bank Indenture and Form of
5.100% Prospect Capital InterNote® due 2021(140)
4.361 Three Hundred Sixty-Fifth Supplemental Indenture dated as of July 9, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(141)
4.362 Three Hundred Sixty-Sixth Supplemental Indenture dated as of July 9, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2022(141)
4.363 Three Hundred Sixty-Seventh Supplemental Indenture dated as of July 16, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(142)
4.364 Three Hundred Sixty-Eighth Supplemental Indenture dated as of July 16, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2022(142)
4.365 Three Hundred Sixty-Ninth Supplemental Indenture dated as of July 23, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(143)
4.366 Three Hundred Seventieth Supplemental Indenture dated as of July 23, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2022(143)
4.367 Three Hundred Seventy-First Supplemental Indenture dated as of July 30, 2015, to the U.S. Bank Indenture and Form of
4.750% Prospect Capital InterNote® due 2020(144)
4.368 Three Hundred Seventy-Second Supplemental Indenture dated as of July 30, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(144)
4.369 Three Hundred Seventy-Third Supplemental Indenture dated as of August 6, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(145)
4.370 Three Hundred Seventy-Fourth Supplemental Indenture dated as of August 6, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(145)
4.371 Three Hundred Seventy-Fifth Supplemental Indenture dated as of August 13, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(146)
4.372 Three Hundred Seventy-Sixth Supplemental Indenture dated as of August 13, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(146)
4.373 Three Hundred Seventy-Fifth Supplemental Indenture dated as of August 20, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(147)
4.374 Three Hundred Seventy-Sixth Supplemental Indenture dated as of August 20, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(147)
4.375 Three Hundred Seventy-Ninth Supplemental Indenture dated as of August 27, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(148)
4.376 Three Hundred Eightieth Supplemental Indenture dated as of August 27, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2022(148)
4.377 Three Hundred Eighty-One Supplemental Indenture dated as of September 11, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(153)
4.378 Three Hundred Eighty-Second Supplemental Indenture dated as of September 11, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(153)
4.379 Three Hundred Eighty-Third Supplemental Indenture dated as of September 17, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(154)
4.380 Three Hundred Eighty-Fourth Supplemental Indenture dated as of September 17, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(154)
4.381 Three Hundred Eighty-Fifth Supplemental Indenture dated as of September 24, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(155)
4.382 Three Hundred Eighty-Sixth Supplemental Indenture dated as of September 24, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(155)
4.383 Three Hundred Eighty-Seventh Supplemental Indenture dated as of October 1, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(156)
4.384 Three Hundred Eighty-Eighth Supplemental Indenture dated as of October 1, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(156)
226
Exhibit No.
4.385 Three Hundred Eighty-Ninth Supplemental Indenture dated as of October 8, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(157)
4.386 Three Hundred Ninetieth Supplemental Indenture dated as of October 8, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2022(157)
4.387 Three Hundred Ninety-First Supplemental Indenture dated as of October 16, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(159)
4.388 Three Hundred Ninety-Second Supplemental Indenture dated as of October 16, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(159)
4.389 Three Hundred Ninety-Third Supplemental Indenture dated as of October 22, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(160)
4.390 Three Hundred Ninety-Fourth Supplemental Indenture dated as of October 22, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(160)
4.391 Three Hundred Ninety-Fifth Supplemental Indenture dated as of October 29, 2015, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2020(161)
4.392 Three Hundred Ninety-Sixth Supplemental Indenture dated as of October 29, 2015, to the U.S. Bank Indenture and Form
of 5.250% Prospect Capital InterNote® due 2022(161)
4.393 Three Hundred Ninety-Seventh Supplemental Indenture dated as of November 4, 2015, to the U.S. Bank Indenture and
Form of 4.750% Prospect Capital InterNote® due 2020(163)
4.394 Three Hundred Ninety-Eighth Supplemental Indenture dated as of November 4, 2015, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2022(163)
4.395 Three Hundred Ninety-Ninth Supplemental Indenture dated as of November 19, 2015, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2020(164)
4.396 Four Hundredth Supplemental Indenture dated as of November 19, 2015, to the U.S. Bank Indenture and Form of 5.625%
Prospect Capital InterNote® due 2022(164)
4.397 Four Hundred First Supplemental Indenture dated as of November 19, 2015, to the U.S. Bank Indenture and Form of
5.875% Prospect Capital InterNote® due 2025(164)
4.398 Four Hundred Second Supplemental Indenture dated as of November 27, 2015, to the U.S. Bank Indenture and Form of
5.125% Prospect Capital InterNote® due 2020(165)
4.399 Four Hundred Third Supplemental Indenture dated as of November 27, 2015, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2022(165)
4.400 Four Hundred Fourth Supplemental Indenture dated as of November 27, 2015, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(165)
4.401 Four Hundred Fifth Supplemental Indenture dated as of December 3, 2015, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2020(166)
4.402 Four Hundred Sixth Supplemental Indenture dated as of December 3, 2015, to the U.S. Bank Indenture and Form of
5.750% Prospect Capital InterNote® due 2022(166)
4.403 Four Hundred Seventh Supplemental Indenture dated as of December 3, 2015, to the U.S. Bank Indenture and Form of
6.000% Prospect Capital InterNote® due 2025(166)
4.404 Supplemental Indenture dated as of December 10, 2015, to the U.S. Bank Indenture and Form of 6.250% Note due
2024(167)
4.405 Four Hundred Eighth Supplemental Indenture dated as of December 17, 2015, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2020(168)
4.406 Four Hundred Ninth Supplemental Indenture dated as of December 24, 2015, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2020(169)
4.407 Four Hundred Tenth Supplemental Indenture dated as of December 31, 2015, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2020(170)
4.408 Four Hundred Eleventh Supplemental Indenture dated as of January 7, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(171)
4.409 Four Hundred Twelfth Supplemental Indenture dated as of January 14, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(172)
4.410 Four Hundred Thirteenth Supplemental Indenture dated as of January 22, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(173)
227
Exhibit No.
4.411 Four Hundred Fourteenth Supplemental Indenture dated as of March 3, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(175)
4.412 Four Hundred Fifteenth Supplemental Indenture dated as of March 10, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(176)
4.413 Four Hundred Sixteenth Supplemental Indenture dated as of March 17, 2016, to the U.S. Bank Indenture and Form of
5.375% Prospect Capital InterNote® due 2021(177)
4.414 Four Hundred Seventeenth Supplemental Indenture dated as of March 24, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(178)
4.415 Four Hundred Eighteenth Supplemental Indenture dated as of March 31, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(179)
4.416 Four Hundred Nineteenth Supplemental Indenture dated as of April 7, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(180)
4.417 Four Hundred Twentieth Supplemental Indenture dated as of April 14, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(181)
4.418 Four Hundred Twenty-First Supplemental Indenture dated as of April 21, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(182)
4.419 Four Hundred Twenty-Second Supplemental Indenture dated as of April 28, 2016, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(183)
4.420 Four Hundred Twenty-Third Supplemental Indenture dated as of May 5, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(184)
4.421 Four Hundred Twenty-Fourth Supplemental Indenture dated as of May 12, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(185)
4.422 Four Hundred Twenty-Fifth Supplemental Indenture dated as of May 26, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(186)
4.423 Four Hundred Twenty-Sixth Supplemental Indenture dated as of June 3, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(187)
4.424 Four Hundred Twenty-Seventh Supplemental Indenture dated as of June 9, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(188)
4.425 Four Hundred Twenty-Eighth Supplemental Indenture dated as of June 16, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(189)
4.426 Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture, and Form of 6.250% Note due 2024(190)
4.427 Four Hundred Twenty-Ninth Supplemental Indenture dated as of June 23, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(190)
4.428 Form of 6.250% Notes due 2024, Note 1, of an aggregate principal amount of $650,775.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(191)
4.429 Form of 6.250% Notes due 2024, Note 2, of an aggregate principal amount of $538,575.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(191)
4.430 Form of 6.250% Notes due 2024, Note 3, of an aggregate principal amount of $191,075.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(191)
4.431 Four Hundred Thirtieth Supplemental Indenture dated as of June 30, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(191)
4.432 Form of 6.250% Notes due 2024, Note 4, of an aggregate principal amount of $563,000.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(192)
4.433 Form of 6.250% Notes due 2024, Note 5, of an aggregate principal amount of $323,825.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(192)
4.434 Form of 6.250% Notes due 2024, Note 6, of an aggregate principal amount of $730,600.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(192)
4.435 Form of 6.250% Notes due 2024, Note 7, of an aggregate principal amount of $265,125.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(192)
4.436 Form of 6.250% Notes due 2024, Note 8, of an aggregate principal amount of $722,100.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(192)
228
Exhibit No.
4.437 Four Hundred Thirty-First Supplemental Indenture dated as of July 8, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(192)
4.438 Form of 6.250% Notes due 2024, Note 9, of an aggregate principal amount of $599,050.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(193)
4.439 Form of 6.250% Notes due 2024, Note 10, of an aggregate principal amount of $807,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(193)
4.440 Form of 6.250% Notes due 2024, Note 11, of an aggregate principal amount of $799,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(193)
4.441 Form of 6.250% Notes due 2024, Note 12, of an aggregate principal amount of $501,625.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(193)
4.442 Four Hundred Thirty-Second Supplemental Indenture dated as of July 14, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(193)
4.443 Form of 6.250% Notes due 2024, Note 13, of an aggregate principal amount of $592,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(194)
4.444 Form of 6.250% Notes due 2024, Note 14, of an aggregate principal amount of $581,250.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(194)
4.445 Form of 6.250% Notes due 2024, Note 15, of an aggregate principal amount of $463,750.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(194)
4.446 Form of 6.250% Notes due 2024, Note 16, of an aggregate principal amount of $836,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(194)
4.447 Form of 6.250% Notes due 2024, Note 17, of an aggregate principal amount of $536,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(194)
4.448 Four Hundred Thirty-Third Supplemental Indenture dated as of July 21, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(194)
4.449 Form of 6.250% Notes due 2024, Note 18, of an aggregate principal amount of $1,746,400.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(195)
4.450 Form of 6.250% Notes due 2024, Note 19, of an aggregate principal amount of $826,325.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(195)
4.451 Form of 6.250% Notes due 2024, Note 20, of an aggregate principal amount of $838,525.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(195)
4.452 Form of 6.250% Notes due 2024, Note 21, of an aggregate principal amount of $1,027,325.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(195)
4.453 Form of 6.250% Notes due 2024, Note 22, of an aggregate principal amount of $1,329,050.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(195)
4.454 Four Hundred Thirty-Fourth Supplemental Indenture dated as of July 28, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(195)
4.455 Form of 6.250% Notes due 2024, Note 23, of an aggregate principal amount of $1,232,075.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(196)
4.456 Form of 6.250% Notes due 2024, Note 24, of an aggregate principal amount of $1,273,150.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(196)
4.457 Form of 6.250% Notes due 2024, Note 25, of an aggregate principal amount of $1,825,850.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(196)
4.458 Form of 6.250% Notes due 2024, Note 26, of an aggregate principal amount of $902,650.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(196)
4.459 Form of 6.250% Notes due 2024, Note 27, of an aggregate principal amount of $866,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(196)
4.460 Four Hundred Thirty-Fifth Supplemental Indenture dated as of August 4, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(196)
4.461 Form of 6.250% Notes due 2024, Note 28, of an aggregate principal amount of $1,284,800.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(197)
4.462 Form of 6.250% Notes due 2024, Note 29, of an aggregate principal amount of $1,423,275.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(197)
229
Exhibit No.
4.463 Form of 6.250% Notes due 2024, Note 30, of an aggregate principal amount of $1,424,750.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(197)
4.464 Form of 6.250% Notes due 2024, Note 31, of an aggregate principal amount of $1,525,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(197)
4.465 Form of 6.250% Notes due 2024, Note 32, of an aggregate principal amount of $1,335,200.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(197)
4.466 Four Hundred Thirty-Sixth Supplemental Indenture dated as of August 11, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(197)
4.467 Form of 6.250% Notes due 2024, Note 33, of an aggregate principal amount of $746,950.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(198)
4.468 Form of 6.250% Notes due 2024, Note 34, of an aggregate principal amount of $1,254,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(198)
4.469 Form of 6.250% Notes due 2024, Note 35, of an aggregate principal amount of $790,900.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(198)
4.470 Form of 6.250% Notes due 2024, Note 36, of an aggregate principal amount of $1,477,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(198)
4.471 Form of 6.250% Notes due 2024, Note 37, of an aggregate principal amount of $2,147,375.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(198)
4.472 Four Hundred Thirty-Seventh Supplemental Indenture dated as of August 18, 2016, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(198)
4.473 Form of 6.250% Notes due 2024, Note 38, of an aggregate principal amount of $1,502,000.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(199)
4.474 Form of 6.250% Notes due 2024, Note 39, of an aggregate principal amount of $1,098,150.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(199)
4.475 Form of 6.250% Notes due 2024, Note 40, of an aggregate principal amount of $719,375.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(199)
4.476 Form of 6.250% Notes due 2024, Note 41, of an aggregate principal amount of $979,025.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(199)
4.477 Four Hundred Thirty-Eighth Supplemental Indenture dated as of August 25, 2016, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(199)
4.478 Form of 6.250% Notes due 2024, Note 4, of an aggregate principal amount of $563,000.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(200)
4.479 Form of 6.250% Notes due 2024, Note 5, of an aggregate principal amount of $323,825.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(200)
4.480 Form of 6.250% Notes due 2024, Note 6, of an aggregate principal amount of $730,600.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(200)
4.481 Form of 6.250% Notes due 2024, Note 7, of an aggregate principal amount of $265,125.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(200)
4.482 Form of 6.250% Notes due 2024, Note 8, of an aggregate principal amount of $722,100.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(200)
4.483 Four Hundred Thirty-First Supplemental Indenture dated as of July 8, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(200)
4.484 Form of 6.250% Notes due 2024, Note 9, of an aggregate principal amount of $599,050.00, pursuant to the Supplemental
Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(201)
4.485 Form of 6.250% Notes due 2024, Note 10, of an aggregate principal amount of $807,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(201)
4.486 Form of 6.250% Notes due 2024, Note 11, of an aggregate principal amount of $799,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(201)
4.487 Form of 6.250% Notes due 2024, Note 12, of an aggregate principal amount of $501,625.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(201)
4.488 Four Hundred Thirty-Second Supplemental Indenture dated as of July 14, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(201)
230
Exhibit No.
4.489 Form of 6.250% Notes due 2024, Note 13, of an aggregate principal amount of $592,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(202)
4.490 Form of 6.250% Notes due 2024, Note 14, of an aggregate principal amount of $581,250.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(202)
4.491 Form of 6.250% Notes due 2024, Note 15, of an aggregate principal amount of $463,750.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(202)
4.492 Form of 6.250% Notes due 2024, Note 16, of an aggregate principal amount of $836,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(202)
4.493 Form of 6.250% Notes due 2024, Note 17, of an aggregate principal amount of $536,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(202)
4.494 Four Hundred Thirty-Third Supplemental Indenture dated as of July 21, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(202)
4.495 Form of 6.250% Notes due 2024, Note 18, of an aggregate principal amount of $1,746,400.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(203)
4.496 Form of 6.250% Notes due 2024, Note 19, of an aggregate principal amount of $826,325.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(203)
4.497 Form of 6.250% Notes due 2024, Note 20, of an aggregate principal amount of $838,525.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(203)
4.498 Form of 6.250% Notes due 2024, Note 21, of an aggregate principal amount of $1,027,325.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(203)
4.499 Form of 6.250% Notes due 2024, Note 22, of an aggregate principal amount of $1,329,050.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(203)
4.500 Four Hundred Thirty-Fourth Supplemental Indenture dated as of July 28, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(203)
4.501 Form of 6.250% Notes due 2024, Note 23, of an aggregate principal amount of $1,232,075.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(204)
4.502 Form of 6.250% Notes due 2024, Note 24, of an aggregate principal amount of $1,273,150.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(204)
4.503 Form of 6.250% Notes due 2024, Note 25, of an aggregate principal amount of $1,825,850.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(204)
4.504 Form of 6.250% Notes due 2024, Note 26, of an aggregate principal amount of $902,650.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(204)
4.505 Form of 6.250% Notes due 2024, Note 27, of an aggregate principal amount of $866,500.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(204)
4.506 Four Hundred Thirty-Fifth Supplemental Indenture dated as of August 4, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(204)
4.507 Form of 6.250% Notes due 2024, Note 28, of an aggregate principal amount of $1,284,800.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(205)
4.508 Form of 6.250% Notes due 2024, Note 29, of an aggregate principal amount of $1,423,275.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(205)
4.509 Form of 6.250% Notes due 2024, Note 30, of an aggregate principal amount of $1,424,750.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(205)
4.510 Form of 6.250% Notes due 2024, Note 31, of an aggregate principal amount of $1,525,475.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(205)
4.511 Form of 6.250% Notes due 2024, Note 32, of an aggregate principal amount of $1,335,200.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(205)
4.512 Four Hundred Thirty-Sixth Supplemental Indenture dated as of August 11, 2016, to the U.S. Bank Indenture and Form of
5.500% Prospect Capital InterNote® due 2021(205)
4.513 Form of 6.250% Notes due 2024, Note 33, of an aggregate principal amount of $746,950.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(206)
4.514 Form of 6.250% Notes due 2024, Note 34, of an aggregate principal amount of $1,254,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(206)
231
Exhibit No.
4.515 Form of 6.250% Notes due 2024, Note 35, of an aggregate principal amount of $790,900.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(206)
4.516 Form of 6.250% Notes due 2024, Note 36, of an aggregate principal amount of $1,477,725.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(206)
4.517 Form of 6.250% Notes due 2024, Note 37, of an aggregate principal amount of $2,147,375.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(206)
4.518 Four Hundred Thirty-Seventh Supplemental Indenture dated as of August 18, 2016, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(206)
4.519 Form of 6.250% Notes due 2024, Note 38, of an aggregate principal amount of $1,502,000.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(207)
4.520 Form of 6.250% Notes due 2024, Note 39, of an aggregate principal amount of $1,098,150.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(207)
4.521 Form of 6.250% Notes due 2024, Note 40, of an aggregate principal amount of $719,375.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(207)
4.522 Form of 6.250% Notes due 2024, Note 41, of an aggregate principal amount of $979,025.00, pursuant to the
Supplemental Indenture dated as of June 22, 2016, to the U.S. Bank Indenture(207)
4.523 Four Hundred Thirty-Eighth Supplemental Indenture dated as of August 25, 2016, to the U.S. Bank Indenture and Form
of 5.500% Prospect Capital InterNote® due 2021(207)
4.524 Four Hundred Thirty-Ninth Supplemental Indenture dated as of September 15, 2016, to the U.S. Bank Indenture and
Form of 5.250% Prospect Capital InterNote® due 2021(209)
4.525 Four Hundred Fortieth Supplemental Indenture dated as of September 22, 2016, to the U.S. Bank Indenture and Form of
5.250% Prospect Capital InterNote® due 2021(210)
4.526 Four Hundred Forty-First Supplemental Indenture dated as of September 29, 2016, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2021(211)
4.527 Four Hundred Forty-Second Supplemental Indenture dated as of October 6, 2016, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2021(212)
4.528 Four Hundred Forty-Third Supplemental Indenture dated as of October 14, 2016, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2021(213)
4.529 Four Hundred Forty-Fourth Supplemental Indenture dated as of October 20, 2016, to the U.S. Bank Indenture and Form
of 4.750% Prospect Capital InterNote® due 2021(214)
4.530 Four Hundred Forty-Fifth Supplemental Indenture dated as of October 27, 2016, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2021(215)
4.531 Four Hundred Forty-Sixth Supplemental Indenture dated as of November 3, 2016, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2021(216)
4.532 Four Hundred Forty-Seventh Supplemental Indenture dated as of November 25, 2016, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2021(217)
4.533 Four Hundred Forty-Eighth Supplemental Indenture dated as of December 1, 2016, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2021(218)
4.534 Four Hundred Forty-Ninth Supplemental Indenture dated as of December 8, 2016, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2021(219)
4.535 Four Hundred Fiftieth Supplemental Indenture dated as of December 15, 2016, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2021(220)
4.536 Four Hundred Fifty-First Supplemental Indenture dated as of December 22, 2016, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2021(221)
4.537 Four Hundred Fifty-Second Supplemental Indenture dated as of December 30, 2016, to the U.S. Bank Indenture and
Form of 5.000% Prospect Capital InterNote® due 2021(222)
4.538 Four Hundred Fifty-Third Supplemental Indenture dated as of January 6, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(223)
4.539 Four Hundred Fifty-Fourth Supplemental Indenture dated as of January 12, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(224)
4.540 Four Hundred Fifty-Fifth Supplemental Indenture dated as of January 20, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(225)
232
Exhibit No.
4.541 Four Hundred Fifty-Sixth Supplemental Indenture dated as of January 26, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(226)
4.542 Four Hundred Fifty-Seventh Supplemental Indenture dated as of February 2, 2017, to the U.S. Bank Indenture and Form
of 5.000% Prospect Capital InterNote® due 2022(227)
4.543 Four Hundred Fifty-Eighth Supplemental Indenture dated as of February 9, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(228)
4.544 Four Hundred Fifty-Ninth Supplemental Indenture dated as of February 24, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(229)
4.545 Four Hundred Sixtieth Supplemental Indenture dated as of March 2, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(230)
4.546 Four Hundred Sixty-First Supplemental Indenture dated as of March 9, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(231)
4.547 Four Hundred Sixty-Second Supplemental Indenture dated as of March 16, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(232)
4.548 Four Hundred Sixty-Third Supplemental Indenture dated as of March 23, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(233)
4.549 Four Hundred Sixty-Fourth Supplemental Indenture dated as of March 30, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(234)
4.550 Four Hundred Sixty-Fifth Supplemental Indenture dated as of April 6, 2017, to the U.S. Bank Indenture and Form of
5.000% Prospect Capital InterNote® due 2022(235)
4.551 Supplemental Indenture dated as of April 11, 2017, to the U.S. Bank Indenture, and Form of 4.950% Convertible Note
due 2022(236)
4.552 Four Hundred Sixty-Sixth Supplemental Indenture dated as of April 20, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(240)
4.553 Four Hundred Sixty-Seventh Supplemental Indenture dated as of April 27, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(241)
4.554 Four Hundred Sixty-Eighth Supplemental Indenture dated as of May 4, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(242)
4.555 Four Hundred Sixty-Ninth Supplemental Indenture dated as of May 11, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(243)
4.556 Four Hundred Seventieth Supplemental Indenture dated as of May 25, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(244)
4.557 Four Hundred Seventy-First Supplemental Indenture dated as of June 2, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(245)
4.558 Four Hundred Seventy-Second Supplemental Indenture dated as of June 8, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(246)
4.559 Four Hundred Seventy-Third Supplemental Indenture dated as of June 15, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(247)
4.560 Four Hundred Seventy-Fourth Supplemental Indenture dated as of June 22, 2017, to the U.S. Bank Indenture, and Form
of 4.750% Convertible Note due 2022(248)
4.561 Four Hundred Seventy-Fifth Supplemental Indenture dated as of June 29, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(249)
4.562 Four Hundred Seventy-Sixth Supplemental Indenture dated as of July 7, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2022(250)
4.563 Four Hundred Seventy-Seventh Supplemental Indenture dated as of July 7, 2017, to the U.S. Bank Indenture, and Form
of 5.000% Convertible Note due 2024(250)
4.564 Four Hundred Seventy-Eighth Supplemental Indenture dated as of July 13, 2017, to the U.S. Bank Indenture, and Form of
4.500% Convertible Note due 2022(251)
4.565 Four Hundred Seventy-Ninth Supplemental Indenture dated as of July 13, 2017, to the U.S. Bank Indenture, and Form of
5.000% Convertible Note due 2024(251)
4.566 Four Hundred Eightieth Supplemental Indenture dated as of July 20, 2017, to the U.S. Bank Indenture, and Form of
4.500% Convertible Note due 2022(252)
233
Exhibit No.
4.567 Four Hundred Eighty-First Supplemental Indenture dated as of July 20, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2024(252)
4.568 Four Hundred Eighty-Second Supplemental Indenture dated as of July 27, 2017, to the U.S. Bank Indenture, and Form of
4.500% Convertible Note due 2022(253)
4.569 Four Hundred Eighty-Third Supplemental Indenture dated as of July 27, 2017, to the U.S. Bank Indenture, and Form of
4.750% Convertible Note due 2024(253)
4.570 Four Hundred Eighty-Fourth Supplemental Indenture dated as of August 3, 2017, to the U.S. Bank Indenture, and Form
of 4.500% Convertible Note due 2022(254)
4.571 Four Hundred Eighty-Fifth Supplemental Indenture dated as of August 3, 2017, to the U.S. Bank Indenture, and Form of
5.000% Convertible Note due 2025(254)
4.572 Four Hundred Eighty-Sixth Supplemental Indenture dated as of August 10, 2017, to the U.S. Bank Indenture, and Form
of 4.500% Convertible Note due 2022(255)
4.573 Four Hundred Eighty-Seventh Supplemental Indenture dated as of August 10, 2017, to the U.S. Bank Indenture, and
Form of 5.000% Convertible Note due 2025(255)
4.574 Four Hundred Eighty-Eighth Supplemental Indenture dated as of August 17, 2017, to the U.S. Bank Indenture, and Form
of 4.500% Convertible Note due 2022(256)
4.575 Four Hundred Eighty-Ninth Supplemental Indenture dated as of August 17, 2017, to the U.S. Bank Indenture, and Form
of 5.000% Convertible Note due 2025(256)
4.576 Four Hundred Ninetieth Supplemental Indenture dated as of August 24, 2017, to the U.S. Bank Indenture, and Form of
4.500% Convertible Note due 2022(257)
4.577 Four Hundred Eighty-Ninth Supplemental Indenture dated as of August 24, 2017, to the U.S. Bank Indenture, and Form
of 5.000% Convertible Note due 2025(257)
10.1
Investment Advisory Agreement between Registrant and Prospect Capital Management L.P.(2)
10.2 Administration Agreement between Registrant and Prospect Administration LLC(2)
10.3 Dividend Reinvestment and Direct Stock Purchase Plan(174)
10.4
Trademark License Agreement between the Registrant and Prospect Capital Investment Management, LLC(2)
10.5
Transfer Agency and Registrar Services Agreement(4)
10.6
Fifth Amended and Restated Loan and Servicing Agreement, dated August 29, 2014, among Prospect Capital
Funding LLC, Prospect Capital Corporation, the lenders from time to time party thereto, the managing agents from time
to time party thereto, U.S. Bank National Association as Calculation Agent, Paying Agent and Documentation Agent,
KeyBank National Association as Facility Agent, Key Equipment Finance Inc. and Royal Bank of Canada as Syndication
Agents, and KeyBank National Association as Structuring Agent, Sole Lead Arranger and Sole Bookrunner(13)
10.7
Sixth Amended and Restated Selling Agent Agreement, dated November 10, 2016, by and among, the Registrant,
Prospect Capital Management L.P., Prospect Administration LLC, Incapital LLC and the Agents named therein and
added from time to time(217)
10.8 Amended and Restated Custody Agreement, dated as of September 23, 2014, by and between the Registrant and U.S.
Bank National Association(106)
10.9 Custody Agreement, dated as of April 24, 2013, by and between the Registrant and Israeli Discount Bank of New York
Ltd.(5)
10.10 Custody Agreement, dated as of October 28, 2013, by and between the Registrant and Fifth Third Bank(82)
10.11 Custody Agreement, dated as of May 9, 2014, by and between the Registrant and Customers Bank(104)
10.12 Custody Agreement, dated as of May 9, 2014, by and between the Registrant and Peapack-Gladstone Bank(105)
10.13 Custody Agreement, dated as of October 10, 2014, by and between Prospect Yield Corporation, LLC and U.S. Bank
National Association(106)
10.14 Debt Distribution Agreement, dated June 22, 2016(190)
10.15
Form of Debt Distribution Agreement(208)
10.16
Underwriting Agreement, dated April 6, 2017, by and among Prospect Capital Corporation, Prospect Capital
Management L.P., Prospect Administration LLC and Goldman, Sachs & Co.(237)
11
Computation of Per Share Earnings (included in the notes to the financial statements contained in this report)
12
Computation of Ratios (included in the notes to the financial statements contained in this report)
14
Code of Ethics(258)
21
Subsidiaries of the Registrant (included in the notes to the consolidated financial statements contained in this annual
report)
22.1
Proxy Statement(259)
234
Exhibit No.
22.2
Published report regarding matters submitted to vote of security holders(260)
23.1 Consent of BDO USA, LLP, Certified Public Accountants of National Property REIT Corp.*
23.2 Consent of RSM US LLP, Certified Public Accountants of First Tower Finance Company LLC*
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended*
32.1 Certification of Chief Executive Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)*
32.2 Certification of Chief Financial Officer pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)*
99.1 Audited Combined Consolidated Financial Statements of National Property REIT Corp. for the years ended December
31, 2016 and 2015*
99.2 Unaudited Combined Consolidated Statement of Operations of National Property REIT Corp. for the period ended
December 31, 2014*
99.3 Audited Consolidated Financial Statements of First Tower Finance Company LLC for the years ended December 31,
2016 and December 31, 2015*
99.4 Audited Consolidated Financial Statements of First Tower Finance Company LLC for the years ended December 31,
2015 and December 31, 2014*
________________________
*
Filed herewith.
(1)
Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K, filed on May 9, 2014.
(2)
Incorporated by reference from the Registrant’s Pre-effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on July 6, 2004.
(3)
Incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K, filed on December 11, 2015.
(4)
Incorporated by reference from the Registrant’s Pre-effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on July 23, 2004.
(5)
Incorporated by reference to Exhibit 10.258 of the Registrant’s Form 10-K filed on August 21, 2013.
(6)
Incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K, filed on February 18, 2011.
(7)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on December 21, 2010.
(8)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on February 18, 2011.
(9)
Incorporated by reference from the Registrant’s Registration Statement on Form N-2, filed on September 1, 2011.
(10)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on March 1, 2012.
(11)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on March 8, 2012.
(12)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on March 14, 2012.
(13)
Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K, filed on September 2, 2014.
(14)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 5 to the Registration Statement on
Form N-2, filed on April 5, 2012.
(15)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on April 12, 2012.
(16)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on April 16, 2012.
(17)
Incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K, filed on April 16, 2012.
(18)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on April 26, 2012.
(19)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on August 14, 2012.
(20)
Incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K, filed on August 14, 2012.
(21)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on September 27, 2012.
(22)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on October 4, 2012.
235
(23)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on November 23, 2012.
(24)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on November 29, 2012.
(25)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 4 to the Registration Statement on
Form N-2, filed on December 6, 2012.
(26)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 5 to the Registration Statement on
Form N-2, filed on December 13, 2012.
(27)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on December 20, 2012.
(28)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on December 21, 2012.
(29)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on December 28, 2012.
(30)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 9 to the Registration Statement on
Form N-2, filed on January 4, 2013.
(31)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 10 to the Registration Statement on
Form N-2, filed on January 10, 2013.
(32)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 11 to the Registration Statement on
Form N-2, filed on January 17, 2013.
(33)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 12 to the Registration Statement on
Form N-2, filed on January 25, 2013.
(34)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 13 to the Registration Statement on
Form N-2, filed on January 31, 2013.
(35)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 14 to the Registration Statement on
Form N-2, filed on February 7, 2013.
(36)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 16 to the Registration Statement on
Form N-2, filed on February 22, 2013.
(37)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 17 to the Registration Statement on
Form N-2, filed on February 28, 2013.
(38)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 18 to the Registration Statement on
Form N-2, filed on March 7, 2013.
(39)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 19 to the Registration Statement on
Form N-2, filed on March 14, 2013.
(40)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on March 15, 2013.
(41)
Incorporated by reference to Exhibit 4.2 of the Registrant’s Form 8-K, filed on March 15, 2013.
(42)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 21 to the Registration Statement on
Form N-2, filed on March 21, 2013.
(43)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 22 to the Registration Statement on
Form N-2, filed on March 28, 2013.
(44)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 23 to the Registration Statement on
Form N-2, filed on April 4, 2013.
(45)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 24 to the Registration Statement on
Form N-2, filed on April 11, 2013.
(46)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 25 to the Registration Statement on
Form N-2, filed on April 18, 2013.
(47)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on April 25, 2013.
(48)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on May 2, 2013.
(49)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on May 9, 2013.
(50)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on May 23, 2013.
(51)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on May 31, 2013.
236
(52)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on June 6, 2013.
(53)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on June 13, 2013.
(54)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on June 20, 2013.
(55)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on June 27, 2013.
(56)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 36 to the Registration Statement on
Form N-2, filed on July 5, 2013.
(57)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 37 to the Registration Statement on
Form N-2, filed on July 11, 2013.
(58)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 38 to the Registration Statement on
Form N-2, filed on July 18, 2013.
(59)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 39 to the Registration Statement on
Form N-2, filed on July 25, 2013.
(60)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 40 to the Registration Statement on
Form N-2, filed on August 1, 2013.
(61)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 41 to the Registration Statement on
Form N-2, filed on August 8, 2013.
(62)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 42 to the Registration Statement on
Form N-2, filed on August 15, 2013.
(63)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 43 to the Registration Statement on
Form N-2, filed on August 22, 2013.
(64)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 45 to the Registration Statement on
Form N-2, filed on September 6, 2013.
(65)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 46 to the Registration Statement on
Form N-2, filed on September 12, 2013.
(66)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 47 to the Registration Statement on
Form N-2, filed on September 19, 2013.
(67)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 48 to the Registration Statement on
Form N-2, filed on September 26, 2013.
(68)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 49 to the Registration Statement on
Form N-2, filed on October 3, 2013.
(69)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 50 to the Registration Statement on
Form N-2, filed on October 10, 2013.
(70)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 51 to the Registration Statement on
Form N-2, filed on October 18, 2013.
(71)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on October 24, 2013.
(72)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 4 to the Registration Statement on
Form N-2, filed on October 31, 2013.
(73)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on November 7, 2013.
(74)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 7 to the Registration Statement on
Form N-2, filed on November 15, 2013.
(75)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on November 21, 2013.
(76)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 9 to the Registration Statement on Form
N-2, filed on November 29, 2013.
(77)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 10 to the Registration Statement on
Form N-2, filed on December 5, 2013.
(78)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 11 to the Registration Statement on
Form N-2, filed on December 12, 2013.
(79)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 12 to the Registration Statement on
Form N-2, filed on December 19, 2013.
237
(80)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 13 to the Registration Statement on
Form N-2, filed on December 27, 2013.
(81)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 14 to the Registration Statement on
Form N-2, filed on January 3, 2014.
(82)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 15 to the Registration Statement on
Form N-2, filed on January 9, 2014.
(83)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 16 to the Registration Statement on
Form N-2, filed on January 16, 2014.
(84)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 17 to the Registration Statement on
Form N-2, filed on January 24, 2014.
(85)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 18 to the Registration Statement on
Form N-2, filed on January 30, 2014.
(86)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 19 to the Registration Statement on
Form N-2, filed on February 6, 2014.
(87)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 20 to the Registration Statement on
Form N-2, filed on February 13, 2014.
(88)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 21 to the Registration Statement on
Form N-2, filed on February 19, 2014.
(89)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 22 to the Registration Statement on
Form N-2, filed on February 21, 2014.
(90)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 23 to the Registration Statement on
Form N-2, filed on February 27, 2014.
(91)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 24 to the Registration Statement on
Form N-2, filed on March 6, 2014.
(92)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 25 to the Registration Statement on
Form N-2, filed on March 11, 2014.
(93)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on March 13, 2014.
(94)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on March 20, 2014.
(95)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 28 to the Registration Statement on
Form N-2, filed on March 27, 2014.
(96)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on April 3, 2014.
(97)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on April 7, 2014.
(98)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on April 10, 2014.
(99)
Incorporated by reference to Exhibit 4.1 of the Registrant’s Form 8-K, filed on April 16, 2014.
(100)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on April 17, 2014.
(101)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on April 24, 2014.
(102)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on May 1, 2014.
(103)
Incorporated by reference from the Registrant’s Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on May 8, 2014.
(104)
Incorporated by reference to Exhibit 10.12 of the Registrant’s Form 10-K, filed on August 25, 2014.
(105)
Incorporated by reference to Exhibit 10.13 of the Registrant’s Form 10-K, filed on August 25, 2014.
(106)
Incorporated by reference from the Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on October 14, 2014.
(107)
Incorporated by reference to Exhibit 99.1 of the Registrant's Form 10-K/A, filed on November 3, 2014.
(108)
Incorporated by reference from the Registrant's Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on November 3, 2014.
238
(109)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on November 3, 2014.
(110)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on November 20, 2014.
(111)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on November 28, 2014.
(112)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 4 to the Registration Statement on
Form N-2, filed on December 4, 2014.
(113)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 5 to the Registration Statement on
Form N-2, filed on December 11, 2014.
(114)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on December 18, 2014.
(115)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 7 to the Registration Statement on
Form N-2, filed on December 29, 2014.
(116)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on January 5, 2015.
(117)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 9 to the Registration Statement on
Form N-2, filed on January 8, 2015.
(118)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 10 to the Registration Statement on
Form N-2, filed on January 15, 2015.
(119)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 11 to the Registration Statement on
Form N-2, filed on January 23, 2015.
(120)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 12 to the Registration Statement on
Form N-2, filed on January 29, 2015.
(121)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 13 to the Registration Statement on
Form N-2, filed on February 5, 2015.
(122)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 14 to the Registration Statement on
Form N-2, filed on February 20, 2015.
(123)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 15 to the Registration Statement on
Form N-2, filed on February 26, 2015.
(124)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 16 to the Registration Statement on
Form N-2, filed on March 5, 2015.
(125)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 17 to the Registration Statement on
Form N-2, filed on March 12, 2015.
(126)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 18 to the Registration Statement on
Form N-2, filed on March 19, 2015.
(127)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 19 to the Registration Statement on
Form N-2, filed on March 26, 2015.
(128)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 20 to the Registration Statement on
Form N-2, filed on April 2, 2015.
(129)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 21 to the Registration Statement on
Form N-2, filed on April 9, 2015.
(130)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 22 to the Registration Statement on
Form N-2, filed on April 16, 2015.
(131)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 23 to the Registration Statement on
Form N-2, filed on April 23, 2015.
(132)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 24 to the Registration Statement on
Form N-2, filed on April 29, 2015.
(133)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 25 to the Registration Statement on
Form N-2, filed on May 7, 2015.
(134)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on May 21, 2015.
(135)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on May 29, 2015.
(136)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 28 to the Registration Statement on
Form N-2, filed on June 4, 2015.
239
(137)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on June 11, 2015.
(138)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on June 18, 2015.
(139)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on June 25, 2015.
(140)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on July 2, 2015.
(141)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on July 9, 2015.
(142)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on July 16, 2015.
(143)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on July 23, 2015.
(144)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 36 to the Registration Statement on
Form N-2, filed on July 30, 2015.
(145)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 37 to the Registration Statement on
Form N-2, filed on August 6, 2015.
(146)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 38 to the Registration Statement on
Form N-2, filed on August 13, 2015.
(147)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 39 to the Registration Statement on
Form N-2, filed on August 20, 2015.
(148)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 40 to the Registration Statement on
Form N-2, filed on August 27, 2015.
(149)
Incorporated by reference to Exhibit 14 of the Registrant’s Form 10-K, filed on August 26, 2015.
(150)
Incorporated by reference from the Registrant's Pre-Effective Registration Statement on Form N-2, filed on August 31,
2015.
(151)
Incorporated by reference to Exhibit 99.1 of the Registrant’s Form 10-K/A, filed on September 11, 2015.
(152)
Incorporated by reference to Exhibit 99.2 of the Registrant’s Form 10-K/A, filed on September 11, 2015.
(153)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 42 to the Registration Statement on
Form N-2, filed on September 16, 2015.
(154)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 43 to the Registration Statement on
Form N-2, filed on September 17, 2015.
(155)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 44 to the Registration Statement on
Form N-2, filed on September 24, 2015.
(156)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 45 to the Registration Statement on
Form N-2, filed on October 1, 2015.
(157)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 46 to the Registration Statement on
Form N-2, filed on October 8, 2015.
(158)
Incorporated by reference from the Registrant's Pre-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on October 9, 2015.
(159)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 47 to the Registration Statement on
Form N-2, filed on October 16, 2015.
(160)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 48 to the Registration Statement on
Form N-2, filed on October 22, 2015.
(161)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 49 to the Registration Statement on
Form N-2, filed on October 29, 2015.
(162)
Incorporated by reference from the Registrant's Pre-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on November 2, 2015.
(163)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 50 to the Registration Statement on
Form N-2, filed on November 4, 2015.
(164)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on November 19, 2015.
(165)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on November 27, 2015.
240
(166)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on December 3, 2015.
(167)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 4 to the Registration Statement on
Form N-2, filed on December 10, 2015.
(168)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 5 to the Registration Statement on
Form N-2, filed on December 17, 2015.
(169)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on December 24, 2015.
(170)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 7 to the Registration Statement on
Form N-2, filed on December 31, 2015.
(171)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on January 7, 2016.
(172)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 9 to the Registration Statement on
Form N-2, filed on January 14, 2016.
(173)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 10 to the Registration Statement on
Form N-2, filed on January 22, 2016.
(174)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 11 to the Registration Statement on
Form N-2, filed on February 12, 2016.
(175)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 12 to the Registration Statement on
Form N-2, filed on March 3, 2016.
(176)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 13 to the Registration Statement on
Form N-2, filed on March 10, 2016.
(177)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 14 to the Registration Statement on
Form N-2, filed on March 17, 2016.
(178)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 15 to the Registration Statement on
Form N-2, filed on March 24, 2016.
(179)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 16 to the Registration Statement on
Form N-2, filed on March 31, 2016.
(180)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 17 to the Registration Statement on
Form N-2, filed on April 7, 2016.
(181)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 18 to the Registration Statement on
Form N-2, filed on April 14, 2016.
(182)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 19 to the Registration Statement on
Form N-2, filed on April 21, 2016.
(183)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 20 to the Registration Statement on
Form N-2, filed on April 28, 2016.
(184)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 21 to the Registration Statement on
Form N-2, filed on May 5, 2016.
(185)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 22 to the Registration Statement on
Form N-2, filed on May 12, 2016.
(186)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 23 to the Registration Statement on
Form N-2, filed on May 26, 2016.
(187)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 24 to the Registration Statement on
Form N-2, filed on June 3, 2016.
(188)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 25 to the Registration Statement on
Form N-2, filed on June 9, 2016.
(189)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on June 16, 2016.
(190)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on June 23, 2016.
(191)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 28 to the Registration Statement on
Form N-2, filed on June 30, 2016.
(192)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on July 8, 2016.
(193)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on July 14, 2016.
241
(194)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on July 21, 2016.
(195)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on July 28, 2016.
(196)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on August 4, 2016.
(197)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on August 11, 2016.
(198)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on August 18, 2016.
(199)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 36 to the Registration Statement on
Form N-2, filed on August 25, 2016.
(200)
(201)
(202)
(203)
(204)
(205)
(206)
(207)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on July 8, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on July 14, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on July 21, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on July 28, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on August 4, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on August 11, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on August 18, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 36 to the Registration Statement on
Form N-2, filed on August 25, 2016.
(208)
(209)
(210)
(211)
(212)
(213)
(214)
(215)
(216)
(217)
(218)
(219)
(220)
(221)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 37 to the Registration Statement on
Form N-2, filed on September 1, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 38 to the Registration Statement on
Form N-2, filed on September 15, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 39 to the Registration Statement on
Form N-2, filed on September 22, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 40 to the Registration Statement on
Form N-2, filed on September 29, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 41 to the Registration Statement on
Form N-2, filed on October 6, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 42 to the Registration Statement on
Form N-2, filed on October 14, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 43 to the Registration Statement on
Form N-2, filed on October 20, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 44 to the Registration Statement on
Form N-2, filed on October 27, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 45 to the Registration Statement on
Form N-2, filed on November 3, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 1 to the Registration Statement on
Form N-2, filed on November 25, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 2 to the Registration Statement on
Form N-2, filed on December 1, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 3 to the Registration Statement on
Form N-2, filed on December 8, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 4 to the Registration Statement on
Form N-2, filed on December 15, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 5 to the Registration Statement on
Form N-2, filed on December 22, 2016.
242
(222)
(223)
(224)
(225)
(226)
(227)
(228)
(229)
(230)
(231)
(232)
(233)
(234)
(235)
(236)
Incorporated by reference from the Registrant's Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2, filed on December 30, 2016.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 7 to the Registration Statement on
Form N-2, filed on January 6, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 8 to the Registration Statement on
Form N-2, filed on January 12, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 9 to the Registration Statement on
Form N-2, filed on January 20, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 10 to the Registration Statement on
Form N-2, filed on January 26, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 11 to the Registration Statement on
Form N-2, filed on February 2, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 12 to the Registration Statement on
Form N-2, filed on February 9, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 13 to the Registration Statement on
Form N-2, filed on February 24, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 14 to the Registration Statement on
Form N-2, filed on March 2, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 15 to the Registration Statement on
Form N-2, filed on March 9, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 16 to the Registration Statement on
Form N-2, filed on March 16, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 17 to the Registration Statement on
Form N-2, filed on March 23, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 18 to the Registration Statement on
Form N-2, filed on March 30, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 19 to the Registration Statement on
Form N-2, filed on April 6, 2017.
Incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K, filed on April 11, 2017.
(237)
(238)
(239)
(240)
(241)
(242)
(243)
(244)
(245)
(246)
(247)
(248)
(249)
(250)
Incorporated by reference to Exhibit 1.1 of the Registrant's Form 8-K, filed on April 11, 2017.
Incorporated by reference to Exhibit 5.1 of the Registrant's Form 8-K, filed on April 11, 2017.
Incorporated by reference to Exhibit 5.2 of the Registrant's Form 8-K, filed on April 11, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 21 to the Registration Statement on
Form N-2, filed on April 20, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 22 to the Registration Statement on
Form N-2, filed on April 27, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 23 to the Registration Statement on
Form N-2, filed on May 4, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 24 to the Registration Statement on
Form N-2, filed on May 11, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 25 to the Registration Statement on
Form N-2, filed on May 25, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 26 to the Registration Statement on
Form N-2, filed on June 2, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 27 to the Registration Statement on
Form N-2, filed on June 8, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 28 to the Registration Statement on
Form N-2, filed on June 15, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 29 to the Registration Statement on
Form N-2, filed on June 22, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 30 to the Registration Statement on
Form N-2, filed on June 29, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 31 to the Registration Statement on
Form N-2, filed on July 7, 2017.
243
Incorporated by reference from the Registrant's Post-Effective Amendment No. 32 to the Registration Statement on
Form N-2, filed on July 13, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 33 to the Registration Statement on
Form N-2, filed on July 20, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 34 to the Registration Statement on
Form N-2, filed on July 27, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 35 to the Registration Statement on
Form N-2, filed on August 3, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 36 to the Registration Statement on
Form N-2, filed on August 10, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 37 to the Registration Statement on
Form N-2, filed on August 17, 2017.
Incorporated by reference from the Registrant's Post-Effective Amendment No. 38 to the Registration Statement on
Form N-2, filed on August 24, 2017.
(251)
(252)
(253)
(254)
(255)
(256)
(257)
(258)
Incorporated by reference to Exhibit 14 of the Registrant's Form 10-K/A, filed on October 20, 2016.
(259)
Incorporated by reference from the Registrant's Proxy Statement, filed on September 12, 2016.
(260)
Incorporated by reference from the Registrant’s Form 8-K, filed on December 6, 2016.
244
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on August 28, 2017 .
SIGNATURES
PROSPECT CAPITAL CORPORATION
By:
/s/ JOHN F. BARRY III
John F. Barry III
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ JOHN F. BARRY III
John F. Barry III
/s/ ANDREW C. COOPER
Andrew C. Cooper
Chairman of the Board, Chief Executive Officer and Director
Director
August 28, 2017
August 28, 2017
/s/ BRIAN H. OSWALD
Brian H. Oswald
Chief Financial Officer
August 28, 2017
/s/ M. GRIER ELIASEK
M. Grier Eliasek
President, Chief Operating Officer and Director
August 28, 2017
/s/ WILLIAM J. GREMP
William J. Gremp
Director
August 28, 2017
/s/ EUGENE S. STARK
Eugene S. Stark
Director
August 28, 2017
CONSENT OF INDEPENDENT ACCOUNTANTS
EXHIBIT 23.1
We have issued our report dated August 9, 2017, with respect to the combined consolidated financial statements of National Property REIT
Corp., included in the Annual Report of Prospect Capital Corporation on Form 10-K, dated August 28, 2017 , for the year ended June 30,
2017. We hereby consent to the inclusion of said report in the Form 10-K, dated August 28, 2017 .
/s/ BDO USA, LLP
August 28, 2017
CONSENT OF INDEPENDENT ACCOUNTANTS
EXHIBIT 23.2
We have issued our report dated March 17, 2017, with respect to the consolidated financial statements of First Tower Finance Company LLC
and Subsidiaries for the years ended December 31, 2016 and 2015, and March 24, 2016 with respect to the consolidated financial statements
of First Tower Finance Company LLC and Subsidiaries for the years ended December 31, 2015 and 2014, included in the Annual Report of
Prospect Capital Corporation on Form 10-K, dated August 28, 2017 , for the year ended June 30, 2017. We hereby consent to the inclusion of
said report in the Form 10-K, dated August 28, 2017 .
/s/ RSM US LLP
Raleigh, North Carolina
August 28, 2017
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, John F. Barry III, Chairman of the Board and Chief Executive Officer of Prospect Capital Corporation, certify that:
1.
I have reviewed this annual report on Form 10-K of Prospect Capital Corporation;
EXHIBIT 31.1
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over the financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: August 28, 2017
/s/ JOHN F. BARRY III
John F. Barry III
Chairman of the Board and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a)/15d-14(a)
I, Brian H. Oswald, Chief Financial Officer and Treasurer of Prospect Capital Corporation, certify that:
1.
I have reviewed this annual report on Form 10-K of Prospect Capital Corporation;
EXHIBIT 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a 15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over the financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely
to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: August 28, 2017
/s/ BRIAN H. OSWALD
Brian H. Oswald
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
EXHIBIT 32.1
In connection with the annual report on Form 10-K for the year ended June 30, 2017 (the “Report”) of Prospect Capital Corporation (the “Registrant”), as filed
with the Securities and Commission on the date hereof, I, John F. Barry III, Chairman of the Board and Chief Executive Officer of the Registrant, hereby certify, to
the best of my knowledge, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: August 28, 2017
/s/ JOHN F. BARRY III
John F. Barry III
Chairman of the Board and Chief Executive Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Prospect Capital Corporation and will
be retained by Prospect Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and is not being filed for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the
date hereof, regardless of any general incorporation language in such filing.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
EXHIBIT 32.2
In connection with the annual report on Form 10-K for the year ended June 30, 2017 (the “Report”) of Prospect Capital Corporation (the “Registrant”), as filed
with the Securities and Commission on the date hereof, I, Brian H. Oswald, Chief Financial Officer of the Registrant, hereby certify, to the best of my knowledge,
that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
Date: August 28, 2017
/s/ BRIAN H. OSWALD
Brian H. Oswald
Chief Financial Officer
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Prospect Capital Corporation and will
be retained by Prospect Capital Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. ss. 1350, and is not being filed for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the
date hereof, regardless of any general incorporation language in such filing.
National Property REIT Corp.
Combined Consolidated Statement of Operations
Unaudited
Revenues
Rental income
Interest income
Other income
Total revenues
Costs and expenses
Property operating expenses
Management fees
Depreciation and amortization
General and administrative expenses
Total costs and expenses
Other (expense) income
Acquisition costs
Interest expense
Fair value adjustments
Total other (expense) income, net
Net loss before income tax
Income tax expense
Net loss
Loss attributable to non-controlling interest
Dividends attributable to preferred shares
Year Ended
December 31, 2014
$
111,296,847
10,541,177
14,890,726
136,728,750
52,640,950
5,543,245
48,263,589
8,877,148
115,324,932
(11,071,525)
(71,097,935)
(688,402)
(82,857,862)
(61,454,044)
(391,121)
(61,845,165)
10,809,509
(60,536)
Net loss attributable to common shares
$
(51,096,192)