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Rating Action:

Moody's affirms Prospect Capital's Baa3 long-term issuer and senior unsecured ratings and revises its outlook to stable from negative

25 Feb 2021

New York, February 25, 2021 -- Moody's Investors Service ("Moody's") has affirmed the Baa3 long-term issuer and senior unsecured ratings of Prospect Capital Corporation (PSEC) and revised its outlook to stable from negative.

While the ratings affirmation reflects no change to PSEC's standalone assessment, the revision of the outlook to stable from negative is based on Moody's expectations that more favorable operating conditions will contribute to improved strength and stability of asset quality, profitability and leverage over the next 12-18 months.

Affirmations:

..Issuer: Prospect Capital Corporation

.... Issuer Rating, Affirmed Baa3

....Senior Unsecured Shelf, Affirmed (P)Baa3

....Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed Baa3

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

Outlook Actions:

..Issuer: Prospect Capital Corporation

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

Moody's has affirmed PSEC's Baa3 long-term issuer and senior unsecured ratings based on the company's low leverage, strong liquidity management, and longer history of profitable operations compared to most rated business development company (BDC) peers. PSEC's outlook was revised to stable from negative to reflect Moody's expectation that the company's asset quality, profitability and financial leverage will exhibit improved strength and stability over the next 12-18 months, based on the company's financial resilience during the coronavirus-led downturn in 2020, and on expectations of more favorable operating conditions in 2021.

PSEC maintains a strong capital cushion with a ratio of net debt to tangible net worth of 0.61x at 31 December 2020. PSEC's asset coverage ratio measured 258% at the same date, providing a strong 72% cushion compared to its regulatory 150% minimum asset coverage requirement. Moody's expects that PSEC will maintain net debt-to-tangible equity leverage within a range of 0.7 - 0.85x even as it increases new investment activity as demand and operating conditions strengthen.

PSEC's strong liquidity management is aided by ample availability under its multi-year committed revolving credit facility, its very low unfunded credit extensions to portfolio companies, and well-distributed debt maturities. PSEC's funding is also more diverse and its borrowing agreements have fewer financial covenants compared to most rated BDC peers. The company's next senior debt maturity is in 2022 and its revolving credit facility matures in 2024, indicating absence of short-term refinancing risk.

Over its 16-year history of profitable operations, PSEC's portfolio strategy has been anchored by its US middle market lending and investing businesses that comprised 69% of invested capital at 31 December 2020. The company also invests in subordinated structured notes (13%) and real estate (16%), resulting in greater revenue diversity than most peers and which has benefited earnings stability. Moody's expects that the company's collateralized loan obligation investments could demonstrate greater asset volatility over time than other investments, but this portfolio is unlikely to grow in relation to PSEC's other investments. Additionally, PSEC has effectively managed asset quality challenges during the downturn, with non-accrual loans declining to 0.7% of total investments (at fair value) at 31 December 2020, from 1.6% at 31 March 2020. Aiding asset quality, PSEC's exposure to sectors negatively affected by the coronavirus epidemic is lower than most rated BDCs.

Credit challenges include pressures on middle market loan quality owing to the effects of the coronavirus pandemic on portfolio performance. PSEC's ratings also incorporate risks common to BDCs, including the illiquidity of lending investments, covenant compliance and liquidity risks associated with the requirement that investments be marked to fair value, in addition to high dividend payouts that increase its reliance on equity capital markets for growth capital.

PSEC's stable outlook is based on Moody's expectation of more favorable operating conditions for BDCs that will contribute to improved strength and stability of asset quality, profitability and leverage metrics over the next 12-18 months. The stable outlook also incorporates Moody's expectation that PSEC will maintain strong underwriting discipline amid growing pricing competition for middle market loans and that liquidity coverage will remain strong. Moody's revised its outlook for the BDC sector to stable from negative in December 2020, as downside pressures on middle-market loan quality, BDC portfolio fair values and capital measures have eased.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade PSEC's ratings if the company: 1) sustainably maintains debt-to-tangible equity of not more than 1x; 2) reduces structured credit, real estate exposures and junior investments as a proportion of total investments; and 3) generates profitability that consistently compares well with BDC peers.

Moody's could downgrade PSEC's ratings if the company: 1) increases the ratio of net debt to tangible equity to more than 1.3x; 2) increases investments that Moody's expects will increase the company's asset and earnings volatility; 3) generates profitability that is weaker than expected compared to peers; 4) pays dividends that exceed net investment income on a regular basis; or 5) materially increases its funding reliance on secured debt.

The principal methodology used in these ratings was Finance Companies Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1187099. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mark L. Wasden
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Ana Arsov
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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