Earlier today, Prospect Capital Corp. (PSEC 0.46%) tallied up the votes on a proposal to allow the company to sell shares at prices under its net asset value -- book value.
The results are in. Shareholders voted to approve the proposal by a wide margin:
|
For |
Against |
Abstained |
Broker non-votes |
|---|---|---|---|
|
71.9% |
26.1% |
2% |
0% (only 28 votes) |
Source: SEC filings.
Why it matters
Business development companies like Prospect Capital grow largely by issuing new shares to the public. By law, a BDC can only issue shares when its stock trades above net asset value, or book value. The idea is that any share issuance should maintain or increase net asset value per share. However, with shareholder approval, a BDC can issue shares even when its stock trades below net asset value.
Prospect Capital asked shareholders for the right to issue an unlimited amount of shares at prices under net asset value at this year's annual meeting. After approval from shareholders, the company can issue new shares, at any time, and at any price, regardless of its impact on its current investors.
What happens next?
The net effect of this proposal will ultimately be determined by how many shares Prospect inevitably sells at prices below net asset value. If it doesn't sell any shares at dilutive prices, it will have no real impact at all.
If, however, it makes aggressive use of below-NAV stock issuance, book value could theoretically go to zero. That's the difficulty of quantifying a power that has no bounds.
History provides evidence that Prospect Capital issues shares at prices under NAV. It did so recently when it sold millions of shares in September and October of 2014, which reduced net asset value by roughly $0.02 per share. Before that, it sold millions more shares in 2011 to make new investments. For the full fiscal 2011 year, stock issuance reduced its NAV by $0.16 per share.
How this will impact shareholders going forward is anyone's best guess. But one thing is certain: Great powers require great responsibility. Investors owe it to themselves to watch Prospect Capital's share count like a hawk. Each dilutive share sold represents a massive transfer of wealth from current shareholders to new shareholders.
