Prospect Capital Posts 32% Income Drop

Prospect Capital (PSEC 3.59%), a business development company investing in U.S. middle-market loans and related assets, released its Q4 FY2025 earnings on August 27, 2025. The release highlighted a sharp decline in GAAP earnings and net asset value amid continued portfolio repositioning. The company reported net investment income per share of $0.17 (GAAP), down from $0.25 a year ago, and a net loss per share of $(0.50), a significant swing compared to $(0.02) in the same quarter last year. Total investment income (GAAP) dropped to $167 million, compared to $212 million in the prior year.

These results missed past levels and underscored management’s ongoing efforts to focus on less risky assets. The quarter saw substantial realized and unrealized losses, major distribution reductions, and declining asset values, marking a challenging period for the company.

What Prospect Capital Does and What Drives Results

Prospect Capital is a business development company (BDC) that provides senior, first lien, and second lien loans to U.S. middle-market companies. The company also invests in equity and equity-linked securities for potential capital gains. Its primary revenue comes from recurring interest payments and, to a lesser extent, from capital gains on its equity and other investments.

Recently, it has focused on reducing portfolio risk by shifting its capital toward first lien senior secured loans, stepping away from riskier structured products, and managing funding costs. The key factors for its success include earning predictable income and complying with regulations to maintain its advantageous tax status. The team, led by long-serving executives, also holds a significant stake, increasing alignment with shareholders.

Key Developments and Drivers in the Quarter

The quarter was marked by financial strain and a notable shift in the composition of Prospect Capital’s portfolio. Net investment income (GAAP) fell sharply compared to both the prior quarter and prior year periods. This decline reflects lower total assets and contraction in the company’s investment base, and a decrease in other non-recurring income sources. Interest income now makes up almost 95% of total investment income, a result of the company’s retreat from more volatile or opportunistic investments such as equity and structured notes.

The net loss widened to $(0.50) per share (GAAP), driven by realized losses in non-control and non-affiliate investments as well as negative fair value adjustments. The net asset value per share, an important measurement for BDCs because it represents the company’s net worth per share, dropped to $6.56 as of June 30, 2025, down approximately 24.9% from the prior year. This decrease is not solely the result of payments to shareholders, but also of real losses in portfolio value over the period. Total assets fell nearly 14% from June 30, 2024, to June 30, 2025, indicating a shrinking balance sheet.

Distributions -- regular payments to shareholders -- were cut to $0.135 per share, down from $0.18 a year earlier, and management set new monthly distributions at $0.045 per share for the next several months. This marks another step down and reflects lower recurring earnings power.

The asset mix shifted further toward first lien senior secured loans, which made up 70.5% of all investments by cost, up from 64.1% a year ago. First lien loans are debt instruments that get paid back before others if a borrower defaults, reducing risk. Second lien loans, a subordinated product paid after first lien debt, made up 14.4% of the portfolio (based on cost). The share of subordinated structured notes, once a key segment for risk and yield, dropped from 8.4% as of Q2 FY2024 to just 0.6% as of Q2 FY2025 (based on cost), as the company exited this area almost entirely.

Equity investments also increased slightly. The company highlighted new investments and follow-ons in portfolio firms, though Net originations were negative, indicating more repayments and sales than new deals—a sign of caution or limited opportunity.

The real estate subsidiary, NPRC, continues to shrink as properties are gradually sold, with six exited in the last six quarters and 58 remaining. While real estate provides stability and yielded 4.5% during the period, an unrealized gain in this segment offered some offset to broader losses, though exposure is expected to decline as asset sales continue.

Credit quality trends were mixed. The ratio of non-accrual loans -- which are loans not generating their expected interest payments -- rose to 4.0% of total assets at cost as of June 30, 2025, up 1.3 percentage points from June 30, 2024. While that figure is higher, the fair value ratio remains much lower, suggesting that the loans on non-accrual have been written down.

Leverage, or the company’s level of debt relative to assets and equity, increased from 28.7% as of March 31, 2025, to 30.4% as of June 30, 2025. The cost of debt increased but remains within a manageable range due to laddered maturities and a large pool of unencumbered assets. Prospect Capital's liquidity position, measured as available cash and undrawn lines of credit, stood at $1.32 billion, providing flexibility despite a tighter lending environment.

Insider ownership ticked up to 28.5% of outstanding shares, reinforcing alignment between management and shareholders. Management continuity remained firm, with no reported changes in key leadership roles.

Looking Ahead: Guidance and Key Areas for Investors

Management did not provide formal guidance for future net investment income, net asset value, or portfolio originations for the upcoming quarters. The only forward-looking commitments are to monthly distributions of $0.045 per share through October 2025, with further payments for November through January yet to be declared.

The company’s liquidity position and staggered debt maturities offer support, with only minor maturities until late 2026. However, persistent declines in asset values, recurring earnings power, and rising non-accruals could put additional pressure on future distributions or portfolio stability. With monthly distributions now set notably below prior levels, ongoing dividend policy will likely remain under scrutiny unless performance begins to recover and coverage improves.

The quarterly dividend was reduced 25.0% from the prior year, from $0.18 per share for the quarter ended June 30, 2024, to $0.135 per share for the quarter ended June 30, 2025. Announced future payments are set at $0.045 per month for September 2025 and October 2025.

Revenue and net income presented using U.S. generally accepted accounting principles (GAAP) unless otherwise noted.