How This New Regulation Will Boost Prospect Capital Corporation's Business

Bank regulations keep most banks out of the buyout business. This could be good for BDCs, which don't have to follow strict regulatory oversight from the Federal Reserve or OCC.

Jul 7, 2014 at 5:08PM

Regulators are clamping down on banks, leaving other companies such as like Prospect Capital (NASDAQ:PSEC) to gain market share in leveraged finance. 

Recently, the Office of the Comptroller of the Currency and the Federal Reserve imposed a limit that would require banks to sit out on highly leveraged lending. Motley Fool Financials Bureau Chief David Hanson and Fool contributor Jordan Wathen interviewed Grier Eliasek, president and COO of Prospect Capital, to ask how those regulations are impacting the levered loan business for business development companies. 

These stocks pay big dividends without the dangers of leverage
Our top analysts recently put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

A transcript follows the video.


Hanson: Great. Moving to a little bit of a different topic, and new regulations that are affecting buyout leverage, and the limits on that, how is Prospect being affected by regulation from the OCC, from the Fed, that aims to hold buyout debt leverage at less than six times EBITDA?

Eliasek: Prospect and other nonbank lenders, including other BDCs, stand to benefit significantly from increasing bank regulation in our country. The bank restrictions are even tighter than what you just quoted, when you get to the private capital middle market in which we compete.

In the middle market, banks must demonstrate to the regulators that their cash flow term loans pay off a certain amount of principal over a five-year period. Such regulation acts to limit leverage from banks to only around three times EBITDA for many companies.

Many middle market companies need more leverage than that for change of control, growth, and recapitalization financing, which creates an opportunity for Prospect to step in to compete, given that we do not take deposits, unlike a bank.

Our favorite way to pursue such business is with a first-lien senior-secured loan, with scheduled amortization, cash sweeps, and deleveraging financial covenants that get us paid down over the life of the loan, thereby reducing our risk. We're generally able to charge several hundred basis points higher than banks, because of our enhanced financial flexibility.

Hanson: Great. Jordan, any follow-up on that?

Jordan Wathen: I was curious, within those limitations, do you see banks competing more aggressively for the lower-levered stuff? Do you see the higher-levered deals going through CLOs? Where are those higher-levered deals flowing to -- the ones that the banks can't touch? Is it pure BDCs? Where are they going?

Eliasek: It depends on which market you're talking about. If you're talking about the private capital market, the middle market in which we compete, the higher-levered deals are going in one of two directions.

One, the bank will provide a first-lien instrument, and a nonbank will provide some type of second-lien or junior debt/mezzanine instrument in a so-called "bifurcated" structure.

Wathen: Right. It's bifurcated, so the bank is taking the lesser-levered first lien, and everything after that goes ... it might be a unitranche deal or something like that, past that, except for that one sliver at the top.

Eliasek: That would be a bifurcated deal.

The second approach would be a so-called unitranche or one-stop deal, in which the bank does not provide any term debt, and all of the term debt is supplied by a nonbank like Prospect. That's in the middle market.

The six times leverage limit that you were quoting before is really more of a broadly syndicated issue on whether or not arrangers of large, broadly syndicated deals are subject to a cap as to how much leverage a company can have. Above six times, there can be an issue for that arranger and their regulator.

That's really not the market in which we tend to compete. That's the market that CLOs play in. We participate in CLOs indirectly in the equity business, but when I'm just talking about our straight lending business, it's the middle market aspects that I talked about that apply.

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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers