Prospect Capital Corporation (NASDAQ:PSEC) has a problem: its investment yields are in decline.
Now it has a solution: swap low-yielding debt investments for higher-yielding alternatives.
How it works
Prospect Capital announced a new "senior loan initiative" in which the company would sell low-yielding debt to third parties.
Prospect will free up investment capital it can dedicate to new, higher-yielding assets, removing the drag of low-return assets on its balance sheet. In the past year, yields on interest-bearing assets have fallen from 13.9% to 12.5%.
Additionally, the company believes it could generate on-going servicing revenue for managing the investments on behalf of another party.
I went through the company's latest quarterly report to check up on asset yields across the portfolio. Here's what that distribution looks like:
As you can see, the company has a substantial portion of its balance sheet dedicated to largely low-yielding assets. Some $712.5 million of debt investments yield less than 10%, and roughly half of that yields less than 7%. Fully half of the company's asset base yields under 12% per year.
Selling the lowest-yielding securities and reinvesting the proceeds in higher-return investments could be very accretive to total investment income.
A 2 percentage point improvement in yields on its $712.5 million in sub-10% yielding debt would add $14.25 million in new total investment income, or about 7.5% of total investment income in the third quarter.
The details of the program are still being worked out, but it's an undeniable reality that reallocating the portfolio could do a lot to reverse the effects of falling yields.
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Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.