Earlier this week we got a call at nearly 9 p.m. local time. You may be a night owl; I'm not. Neither is my wife. The caller was neither a relative nor a friend nor even a telemarketer. Rather, it was an agency representative of Prospect Capital (Nasdaq: PSEC ) offering to take our votes for the annual meeting in December.
Interestingly, I had completed the proxy card over the weekend and was preparing to send it back, so the call -- if late -- was still timely. Most of my votes were simple. Here's a rundown:
- Withheld a vote for William J. Gremp as a Class I director. Why? I don't find his experience as a senior banker for Merrill Lynch to be at all comforting, given history and Prospect's need to lend carefully while seeking high returns.
- Voted to authorize BDO as Prospect's accounting firm. Why? I don't see any issues with reported fees, and BDO also helps the company with tax compliance, a nice bonus in my point of view.
- Voted against allowing management to issue shares at prices below net asset value (NAV) per share. Why? What should be rare has become routine.
Anatomy of an excuse
When I gave this last vote, the voice on the other end quickly interrupted. "Management has asked that the following statement be read ..." and went on to explain how market volatility would make it more difficult to raise equity capital for making new investments on favorable terms. My response? "It's a lazy strategy," and I still believe that.
Don't get me wrong; there are times when issuing shares below NAV makes sense. I've no doubt that 2008 was one of those times. That year ended with a financial crisis that all but torpedoed the banking industry and sent Gremp's Merril Lynch into the waiting arms of Bank of America (NYSE: BAC ) .
But this is also the fourth consecutive year in which Prospect management has asked investors to grant the authority to issue shares beneath NAV. Contrast this year's reasoning with the explanation given in the 2008 proxy.
2008: "Over the past several months, U.S. credit markets, including middle market lending, have experienced significant turbulence spurred in large part by the sub-prime residential mortgage crisis and concerns generally about the state of the U.S. economy. This has led to significant stock price volatility for capital providers like us and has made access to capital more challenging for many firms, particularly those (unlike us) who have relied heavily on secured lending facilities. ... Our ability to take advantage of these opportunities is dependent upon, among other things, our access to equity capital." [Emphasis added.]
2011: "Over the past several years, U.S. credit markets, including middle market lending, experienced significant turbulence spurred in large part by the sub-prime residential mortgage crisis and concerns generally about the state of the U.S. economy ... Market conditions began to improve in 2009 through 2011; however, markets recently have experienced another disruption due to, among other things, uncertainty surrounding U.S. lawmakers' agreement to raise the federal debt ceiling, including a fiscal consolidation plan, and the Standard & Poor's downgrade of the long term sovereign credit rating of the United States of America and the credit rating of several related government agencies and institutions." [Emphasis added.]
See why I'm frustrated? Recycled reasoning colored with issues that are either resolved or well beyond anyone's control. What's more, page 24 of the proxy shows that in only two out of eight quarters did the quarterly high stock price drift below NAV -- or six times when compared with the quarterly low. But even during those low periods, only twice did the stock drift 10% or more below NAV.
The past two years haven't been nearly as problematic as 2009. At no point that year did Prospect Capital shares trade for above NAV. Broad economic chaos created special circumstances, and I'm glad to have supported the company's efforts to raise equity at a discount during that time. No longer. Not when conditions are improving and markets are rising.
Not the only excuse-monger
To be fair, Prospect Capital isn't alone in its hat-shaking. Apollo Investment (Nasdaq: AINV ) , another of our family holdings, also asked for the authority to sell below NAV in August. The measure passed. Ares Capital (Nasdaq: ARCC ) asked for similar dispensation in June and received it. Small-business development company (BDC) peers Gladstone Capital (Nasdaq: GLAD ) and Triangle Capital (Nasdaq: TCAP ) also use this strategy.
But just because others are doing it doesn't mean Prospect should. Certainly not four years in a row. Or, if there really is a dire need, then the proxy should also include conditions for when this (ahem) "emergency" measure should no longer be needed -- something that tells me when I can expect that my ownership interests will no longer be diluted annually.
Why the hard line, you ask? Maybe it's the talking-to we all received from governance expert Nell Minow during The Motley Fool's Superior Investment Ideas conference last month, but I'm done wielding a rubber stamp. I think you should be, too. Please carefully consider all the proposals, and then vote your Prospect Capital shares come December. You can request a proxy or ask for more information on the proposal to sell shares under NAV by contacting investor relations right here.
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