Prospect Capital Continues to Sell More Preferred Stock

BDC Prospect Capital (PSEC) has continued to sell plenty of shares of the 5.50% perpetual preferred which is an untraded security (although they imply it may be listed in the future).

In a press release today they said sales of the shares exceed $500 million which would appear to mean they have sold about $50 million in shares in the last month.

While these new shares are convertible, at the option of the holder, anytime prior to exchange listing it is somewhat surprising that that they are able to sell that many shares of a 5.50% coupon issue.

Here is one of the prospectuses related to the 5.50% shares–although there are additional prospectuses since this one.

The current exchange traded 5.35% perpetual preferred (PSEC-A) is trading at $19.70/share with a current yield of 6.79%. This has taken an incessant pounding—as Gridbird would say ‘names matter’ and Prospect Capital is a hated name.

24 thoughts on “Prospect Capital Continues to Sell More Preferred Stock”

  1. The 5.50% is selling because it has bond like qualities — it can be redeemed at par within five years without penalty (some at first). So it’s not comparable to perpetual preferred which has zero redemption rights. With the public preferred now trading at about $20/share it will almost certainly not be redeemed, assuming Never. So this preferred must be seen like nothing more than a ~6.7% issue at par with assumption it will be truly perpetual. Compare to 5.5% with certainty (assuming no bankruptcy by issuer) of liquidation at par if one desires. I am purchasing this 5.5% through my practice.

  2. There is something rotten here! PSEC-A IPO’ed ~ 7/12/21. I did a brief study of comparable coupon yield preferreds (5.10% to 5.60%) from 7/15/21 through yesterday (2/4/22.) Eliminated convertibles and issues that did NOT trade on both dates which left 43 issues. The median price change was -6.38%. Here are the worst 10 performers:

    (Ticker, coupon yield, price change from 7/14/21-2/4/22)

    PSEC-A 5.35% -20.26%
    BIP-A 5.13% -13.68%
    STT-G 5.35% -10.63%
    BHFAN 5.38% -10.51%
    DLR-L 5.20% -9.44%
    ALL-H 5.12% -9.29%
    FULTP 5.13% -9.14%
    BPYPN 5.58% -9.03%
    ETI- 5.36% -8.93%
    SIVBP 5.28% -8.87%

    As you can see, PSEC-A wins the race by a country mile! I do not know why it has underperformed by that much. I do wonder if they have been using “At the Market” (ATM) sells along the way. If the company constantly had semi large sell orders open most of time, that definitely could cause what we are seeing. I have ZERO proof this is happening, but the upcoming earnings report and conference call should shed some light on it.

    We do NOT own PSEC-A in any account. Should shorted it though . . .

    1. Tex2:

      The only thing “rotten” about the 5.35% PSEC+A performance is that there have been more sellers than buyers due to spiking interest rates and spreads across the investment universe. A Business Development Corporation probably never should have attained that low of a yield on a perpetual preferred when it was issued last July. Most BDCs issue baby bonds with stated maturities (at higher yields than 5.35%), and not perpetual preferreds.

      Anyone doing any homework on PSEC knows that they are extremely well capitalized (one of the largest and least leveraged BDCs), have been growing NAV, have multiple/diversified revenue sources, and have zero trouble raising capital when needed. They will pay this preferred dividend come Hell or high-water.

      For nearly a year I have read about posters here groaning about low yields, and now when opportunities are arising from all the selling some (not you) seem to be perplexed/panicked about the decreasing valuations of their positions/portfolios and finding reasons not to buy? (I realize you are a portfolio manager but most of us here are not).

      I depend on the dividends and interest from my portfolio to pay most of my bills. Any realized capital gains are a bonus. 2020 and 2021 were fabulous years for me for realized capital gains, but all I truly care about is that income.

      I love that a rock solid preferred like PSEC+A is now selling 20% below par value and now comes with a 6.75% yield. I have been buying below $20 and hope it falls more, as that is more safe preferred dividend income for me and I am at a 34% cash level. Also get a chance at substantial capital appreciation when the next Fed easing cycle inevitably occurs.

      Look at the initial investors who bought 4.1% PSA+S a month ago when it was issued – now it trades for $23. Is there anything rotten there after anyone who held on has lost 8% in a month? Nope. PSA+S is likely going to fall much further.

      It is going to be truly wild times in the income space over the next year or two. I hope everyone has cash reserves to take advantage of the opportunities!

      1. “Most BDCs issue baby bonds with stated maturities (at higher yields than 5.35%), ”

        Every BDC, except the most terrible, has been issuing baby bonds below 5%. PSEC issued a bond not long after PSEC-A was issued around 3.5% (which is low compared to PSEC-A but high for the BBB- rating).

        1. Landlord:

          You are correct. I meant to say “lower yields”.

          By the way, that PSEC bond you mentioned (I believe the $300 million 10/15/28 3.437% senior unsecured notes) are currently trading at $92.65 for a last trade yield of 4.73%.

          They have a few other senior unsecured notes with initial coupons under 4% that mature in 4-5 years and are trading near $100.

          Not exactly a company in “distress” at the moment. Of course, anything can happen going forward.

    2. ” I do not know why it has underperformed by that much.”

      It was significantly overpriced at IPO, so it’s not surprising it’s underperformed other similar coupons but this is getting crazy. PSEC-A was a little aggressively priced for its BB rating with non-qual/non-199A divs but the bigger factor is the BB rating is too high. It’s BB- at best.

      “I do wonder if they have been using “At the Market” (ATM) sells along the way.:

      Haven’t seen any evidence of that in the 10-Qs yet.

  3. I must be missing something here. The common pays a div. Earnings are always positive from a glance. Preferred get paid before common. The common shares are not performing horribly.

    I bought some PSEC-A but its continual price drop makes me feel like I am missing something besides them offering more preferred stock. Since I cannot find anything truly amiss I would not sell and just enjoy the income.

  4. We are buying A-B rated preferred stock at less then $21.00…and PSEC.A less then $20.00..last $19.85….that”s 20% return at maturity ++ 4.50%….Bargain Fest….Georges

    1. Nice. I ran with that idea on picking a specific under amount to buy at. So I called up a son and had him throw a minimum of 2 darts, and the total had to be under 25. He threw a 23. So that tells me to buy anything under $23. That is an 8% bargain!

    2. Georges – I hope you’re not talking specifically about PSEC-A when talking about 20% return at maturity because there is no “maturity.” It’s a perpetual that could very well remain outstanding forever….. so there’s nothing magic about buying at $19.85 to protect you from it potentially trade lower over time in a rising interest rate environment….. Interestingly, they do point out the risks pretty clearly in the Risk Factors section of prospectus including these:

      Holders of the Series A Preferred Stock will be subject to inflation risk:
      Inflation is the reduction in the purchasing power of money resulting from the increase in the price of goods and services. Inflation risk is the risk that the inflation-adjusted, or “real,” value of an investment in the Series A Preferred Stock or the income from that investment will be worth less in the future. As inflation occurs, the real value of the shares of Series A Preferred Stock and dividends payable on such shares may decline.

      Holders of the Series A Preferred Stock will be subject to Interest Rate Risk.
      The Series A Preferred Stock pays dividends at a fixed rate. Prices of fixed income investments tend to vary inversely with changes in market yields. The market yields on securities comparable to the Series A Preferred Stock may increase, which would likely result in a decline in the value of the Series A Preferred Stock. Additionally, if interest rates rise, securities comparable to the Series A Preferred Stock may pay higher dividend rates and holders of the Series A Preferred Stock may not be able to sell the Series A Preferred Stock at the Stated Value (as defined below) and reinvest the proceeds at market rates. The Company may be subject to a greater risk of rising interest rates due to the current period of historically low interest rates. There is a possibility that interest rates may rise, which would likely drive down the prices of income- or dividend-paying securities.

  5. This one has been a stinker so far. I have 100 shs at $23.20 avg. They have paid the dividend payments so far on time.

    It looks like they will announce earnings on 2.8.22. I am not ready to throw in the towel on this one….yet.

    Do you still have your shares, Tim?

    1. NWGG–I lightened up in the $21 area, but continue to hold a few hundred painful shares–anymore erosion and I will start slow, small additions.

  6. One of my mistakes. I bought some on the way down. New popular scam to avoid, never buy anything that may offer a secondary at fire sale prices.

  7. What a sad sack preferred. Down over 20%. It has the same yield now as Pacific Gas and Electric Series A 6% preferred and it has been suspended since 2017. And this is with backing out the 17 accrued dividends from price of PCG-A.

  8. Are they really paying a 10% selling concession??? I guess it’s worth it if they can still find suckers to buy the 5.5% issue

    1. WTH! That should be illegal. Basically bribing advisors to sell their clients preferreds that are a bad deal.

      1. Remember it is a 5.5% issue off liquidation/redemption value. That doesnt mean they cant be offered at a significantly lower price to investors, and it certainly wouldnt mean the underwriters pocket the difference.
        I remember SPLP-A a $25, 6% liquidation issue was being given to shareholders of companies they bought out at $20 ish range a couple years ago. It was still the same 6% series though and referred too as such.

      2. Landlord:

        You will be surprised how many senior citizens consider a relatively safe 5.5% yield on a private/non-traded security that stays at $25/share a good deal. Many of them want nothing to do with the volatility of the public markets.

        I have seen private REITs (and companies like Gladstone) do the same thing over and over again. These are companies that also are exceptional at marketing and hire the right firms to get it done.

        1. “You will be surprised how many senior citizens consider a relatively safe 5.5% yield on a private/non-traded security that stays at $25/share a good deal.”

          Ignorance is bliss! Just because it’s listed at $25 on their account doesn’t mean it’s worth $25, anymore than my WTREP listed at $0 is worth $0!

          1. GWG L Bonds are non-traded, unsecured bonds that are imploding right now. Interest payments missed on January 16, just a few more days until default if they can’t come up with the cash. And they already said that historically, cash flow was only positive because they were able to sell more of these notes, and that selling assets doesn’t look favorable…doesn’t look good for holders.

            They were, of course, sold to investors as SAFE high yield bonds, “not correlated” to the markets, but that’s only because you don’t what the true value is because they don’t trade.

            Some here like to say about riskier bonds that “they have always paid like clockwork,” to which I pointed out the obvious flaw is that is the case with every bond until it defaults. Here’s your latest example. They paid every interest payment for about 13 years, right up until the day that they didn’t. I would assume that the principal losses here will be massive.

  9. The only advantage I can think of with the privately traded preferred is it comes with a “death put”. That’s pretty valuable for the 80+ but giving up 130 bps in yield vs. PSEC-A is a lot for anyone else.

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