(Bloomberg) — Private lender Prospect Capital Corp. defended its 20-year track record and pushed back against criticism over its widespread use of schemes that allow borrowers to pay interest with more debt and its reliance on individual investors for financing.
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In a statement posted on its website this week, the company said it has access to “diversified sources of financing through multiple investor bases,” including dozens of bank lenders, and that it views so-called payment-in-kind as appropriate for some borrowers.
“Prospect’s in-kind payment interest may be an efficient financing mechanism for certain portfolio companies, where such companies are making accretive investments in their businesses at valuations substantially above Prospect’s cost of ownership,” the company said. Prospect did not immediately respond to a request for further comment on Friday.
A Bloomberg News report on Tuesday highlighted growing concerns among analysts about an $8 billion private credit fund that Prospect manages and the potential risks posed by its PIK arrangements. Shares in the fund, which is structured as a business development company and is publicly traded, have fallen 9% to a four-year low since the Bloomberg report was published.
Analysts interviewed by Bloomberg expressed concern about Prospect’s reliance on preferred stock and small bond sales to individual investors to plug a cash shortage stemming in part from a strained loan portfolio. Meanwhile, the company has continued to pay out hefty dividends to shareholders, a strategy that analysts described as unsustainable.
In its statement, Prospect said it had completed a number of institutional bond sales and had opted to wait for lower rates to potentially issue more, while favoring other markets in the meantime. It also stressed that it had an “intensive screening” process and a diversified investment strategy, even within a real estate investment trust that represents a fifth of the fund’s total portfolio.
It also praised other features of the fund, including a non-accrual loan ratio, or loans where lenders risk losing money, of just 0.4% and low leverage in March. It said the fund maintains investment-grade ratings from five credit agencies and has generated “superior total returns” compared with peers.
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