Prospect Capital (PSEC) Q4 2018 Earnings Conference Call Transcript

Prospect Capital (PSEC 0.57%)
Q4 2018 Earnings Conference Call
Aug. 29, 2018 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Prospect Capital Corporation's fourth fiscal quarter earnings release conference call. [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to John Barry, chairman and CEO. Please, go ahead.

John Barry -- Chairman and Chief Executive Officer

Thank you, Brandon. By the way, you're doing a great job. Joining me on the call today are Grier Eliasek, our president and chief operating officer, and Kristin Van Dask, our chief financial officer. Kristin?

Kristin Van Dask -- Chief Financial Officer

Thanks, John. This call is the property of Prospect Capital Corporation. Unauthorized use is prohibited. This call contains forward-looking statements within the meaning of the securities laws that are intended to be subject to safe harbor protection.

Actual outcomes and results could differ materially from those forecasts due to the impact of many factors. We do not undertake to update our forward-looking statements unless required by law. For additional disclosure, see our earnings press release, our 10-K and our corporate presentation filed previously and available on the Investor Relations tab on our website, prospectstreet.com. Now I'll turn the call back over to John.

John Barry -- Chairman and Chief Executive Officer

Thank you, Kristin. For the June 2018 quarter, our net investment income, or NII, was $79.5 million, or $0.22 per share, up $0.03 from the prior quarter and exceeding our current dividend rate of $0.18 per share. NII increased due to higher interest and other income. As the economic cycle ages, we are not chasing yield, but are instead seeking to reduce risk and protect capital.

We remain committed to our historic credit discipline, which has served us well in the past. While we have a robust pipeline of potential investments in our target range for credit quality and yield, we are not chasing risky assets with low returns and so remained under-invested at June 30. We believe our disciplined approach to credit will continue to serve us well in the coming years. In the June 2018 quarter, we've also maintained our objective to protect risk with a prudent net debt to equity ratio of 65.5%, down 2.6% from the prior quarter and down 4% from the prior year.

Our net investment income for the quarter was $114.3 million, or $0.31 per share, up $0.17 from the prior quarter due to increased NII and increased valuations of certain investments, including in the real estate CLO and consumer finance sectors. We have multiple discipline strategies in place with the goal of enhancing our future risk-adjusted income. On the asset management side, we plan on executing on a robust pipeline of new originations, improving cash flows in our structured credit portfolio, including through extensions, refinancings, and costs. Enhancing NPRC's largely multifamily real estate portfolio, including through realizations and supplemental financings, increasing results of controlled investments, including improving operating performance in closing accretive bolt-on acquisitions and enhancing yields through higher floating-rate LIBOR-based rates.

On the liability management side, we plan on managing our weighted average cost of capital through increased revolver utilization, while protecting against maturity risk through continued liability laddering issuance in a diversified capital markets fashion. We are announcing monthly cash distributions to shareholders of 6%, $0.06 per share for each of September and October, representing 123 consecutive shareholder distributions. We plan on announcing our next shareholder distributions in November. Since our IPO over 14 years ago through our October 2018 distribution, at our current share count, we will have paid out $16.80 per share to original shareholders, exceeding $2.6 billion in cumulative distributions to all shareholders.

Our NAV stood at $9.35 per share in June 2018, up $0.12 from the prior quarter. Our balance sheet as of June 30, 2018, consisted of 89.7% floating rate interest-earning assets, and 98.4% fixed-rate liabilities, positioning us to benefit from rate increases. Our percentage of total investment income from interest income was 91.8% in the June 2018 quarter, an increase of 2.2% from the prior quarter and demonstrating our continued dedication to recurring income compared to one-time structuring fees. We believe there is no greater alignment between management and shareholders than for management to purchase a significant amount of stock, particularly when management has purchased stock on the same basis as other shareholders in the open market.

Prospect management is the largest shareholder in Prospect and has never sold a share. Management affiliates on a combined basis have purchased that cost over $350 million of stock in Prospect, including over $285 million since December 2015. Our management team has been in the investment business for decades with experience handling both challenges and opportunities provided by dynamic economic and interest rate cycles. We have learned when it is more productive to reduce risk than to reach for yield, and the current environment is one of those time periods.

At the same time, we believe the future will provide us with substantial opportunities to purchase attractive assets, utilizing dry powder we have built and reserved. Thank you. I'll now turn the call over to Grier.

Grier Eliasek -- President and Chief Operating Officer

Thank you, John. Our scale business with over $6 billion of assets and undrawn credit continues to deliver solid performance. Our experienced team consists of approximately 100 professionals, representing one of the largest middle-market credit groups in the industry. With our scale, longevity, experience and deep bench, we continue to focus on a diversified investment strategy that covers third-party, private equity, sponsor-related and direct non-sponsor lending, Prospect-sponsored operating and financial buyouts, structured credit, real estate yield investing and online lending.

As of June 2018, our controlled investments at fair value stood at 42% of our portfolio. This diversity allows us to source a broad range and high volume of opportunities then selected a disciplined bottoms-up manner that opportunities we deem to be the most attractive on a risk-adjusted basis. Our team typically evaluates thousands of opportunities annually and invests in a disciplined manner in a low single-digit percentage of such opportunities. Our non-bank structure gives us the flexibility to invest in multiple levels of the corporate capital stack with a preference for secured lending and senior loans.

As of June 2018, our portfolio at fair value comprised 43.9% secured first lien, 42.1% secured second lien, 16.8% structured credit with underlying secured first lien collateral, 0.6% unsecured debt and 16.6% equity investments resulting in 83% of our investments being assets with underlying secured debt benefiting from borrower pledge collateral. Prospect's approach is one that generates attractive risk-adjusted yields and our debt investments were generating an annualized yield of 13% as of June 2018, up 10 basis points from the prior quarter and the third straight quarterly increase. We also hold equity positions in certain investments that can act as yield enhancers or capital gains contributors as such positions generate distributions. We've continued to prioritize senior unsecured debt with our originations to protect against downside risk, while still achieving above-market yields through credit selection discipline and a differentiated origination approach.

As of June 2018, we held 135 portfolio companies, up one from the prior quarter with a fair value of $5.73 billion. We also continued to invest in a diversified fashion across many different portfolio company industries with no significant industry concentration. The largest is 14.2%. As of June 2018, our asset concentration in the energy industry stood at 3% and our concentration in the retail industry stood at 0%.

Non-accruals as a percentage of total assets stood at approximately 2.5% in June 2018, up 1.2% from the prior quarter. Our weighted average per portfolio net leverage stood at 4.60 times EBITDA, down from 4.65 the prior quarter. Our weighted average EBITDA per portfolio company stood at $55.4 million in June 2018, up from $48.3 million a year prior. The majority of our portfolio consists of sole-agented and self-originated middle-market loans.

In recent years, we perceived the risk-adjusted reward to be higher for agented self-originated and anchor investor opportunities compared to the non-anchor broadly syndicated market causing us to prioritize our proactive sourcing efforts. Our differentiated call center initiative continues to drive proprietary deal flow for our business. Originations in the June 2018 quarter aggregated $340 million. We also experienced $362 million of repayments and exits as a validation of our capital preservation objective resulting in net repayments of $22 million.

During the June 2018 quarter, our originations comprised 42% agented sponsor debt, 33% agented non-sponsor debt, 15% real estate, 6% structured credit, 3% non-agented debt and 1% corporate yield buyouts. To date, we've made multiple investments in the real estate arena through our private REITs, largely focused on multifamily, stabilized yield acquisitions with attractive 10-year financing. In the June 2016 quarter, we consolidated a recent NPRC. NPRC's real state portfolio has benefited from rising rents, strong occupancies, high returning value-added renovation programs and attractive financing recapitalizations resulting in an increase in cash yields as a validation of this income growth business alongside our corporate credit businesses.

NPRC has exited completely certain properties, including Vista, Abington, Bexley, Mission Gate, Hillcrest, Central Park, St. Marin and Matthews, with an objective to redeploy capital into new property acquisitions, including with repeat property manager relationships. We expect both recapitalizations and exits to continue. Our structured credit business performance has performed largely in line with our underwriting expectations demonstrating the benefits of pursuing majority stakes, working with world-class management teams, providing strong collateral underwriting through primary issuance and focusing on attractive risk-adjusted opportunities.

As of June 2018, we held $960 million across 44 nonrecourse structured credit investments. The underlying structured credit portfolios comprised over 2,000 loans and a total asset base of over $19 billion. As of June 2018, our structured credit portfolio experienced a trailing 12-month default rate of 115 bps, up five bps from the prior quarter and 83 basis points less than the broadly syndicated market default rate of 198 basis points. In the June 2018 quarter, this portfolio generated an annualized cash yield of 21.1%, up 7.9% from the prior quarter due to liability spread reductions from resets, and a GAAP yield of 14.5%, up 1.3% from the prior quarter also largely due to such resets.

Cash yield includes all cash distributions from an investment, while GAAP yield subtracts out amortization of cost basis. As of June 2018, our existing structured credit portfolio has generated $1.16 billion in cumulative cash distributions to us, representing over 76% of our original investment. Through June 2018, we've also exited 11 investments, totaling $291 million with an average realized IRR of 16.1% and cash on cash multiple of 1.48 times. Our structured credit portfolio consists entirely of majority-owned positions.

Such positions can enjoy significant benefits compared to minority holdings in the same tranche. In many cases, we receive fee rebates because of our majority position. As the majority holder, we control the ability to call a transaction in our sole discretion in the future, and we believe such options add substantial value to our portfolio. We have the option of waiting years to call a transaction in an optimal fashion rather than when loan asset valuations might be temporarily low.

We as majority investor can refinance liabilities on more advantageous terms, remove bond baskets in exchange for better terms from debt investors in the deal and extend or reset the investment period to enhance value. We have completed 20 refis and resets in the past year. Our structured credit equity portfolio has paid us an average 17.6% cash yield in the 12 months ending June 30, 2018. So far in the current quarter, the current September 2018 quarter, we have booked $181 million in originations and received repayments of $20 million resulting in net originations of $161 million.

Our originations have comprised 66% agented sponsor debt, 24% non-agented debt, 6% structured credit and 4% real estate. Thank you. I'll now turn the call over to Kristin.

Kristin Van Dask -- Chief Financial Officer

Thanks, Grier. We believe our prudent leverage, diversified access to match-book funding, substantial majority of unencumbered assets and weighting toward unsecured fixed rate debt demonstrate both balance sheet strength, as well as substantial liquidity to capitalize on attractive opportunity. Our company has locked in a ladder of fixed rate liabilities extending 25 years into the future, while the significant majority of our loans float with LIBOR providing potential upside to shareholders as interest rates rise. We're a leader and innovator in our marketplace.

We were the first company in our industry to issue a convertible bond, develop a notes program, issue an institutional bond, acquire another BDC and many other lists of first. Shareholders and unsecured creditors alike should appreciate the thoughtful approach differentiated in our industry, which we have taken toward construction of the right-hand side of our balance sheet. As of June 2018, we held approximately $4.5 billion of our assets as unencumbered assets, representing approximately 77% of our portfolio. The remaining assets are pledged to Prospect Capital funding, where we recently completed an extension of our revolver by 5.7 years, reducing the interest rate on drawn amounts to one month LIBOR plus 220 basis points.

We currently have $770 million of commitments from 19 banks with a $1.5 billion total size accordion feature at our option. We are targeting adding more commitments from additional lenders. The facility involves until March 2022 followed by two years of amortization with interest distributions continuing to be allowed to us. Outside of our revolver and benefiting from our unencumbered assets, we've issued at Prospect Capital Corporation, including recently multiple types of investment-grade unsecured debt including convertible bonds, institutional bonds, baby bonds and program notes.

All of these types of unsecured debt have no financial covenant, no asset restrictions and no cross defaults with our revolver. We enjoy an investment-grade BBB rating from Kroll, an investment-grade BBB rating from Egan Jones, and an investment-grade BBB negative rating from S&P. We've now tapped the unsecured term debt market on multiple occasions to ladder our maturities and to extend our liability duration out 25 years. Our debt maturities extend through 2043.

With so many banks and debt investors across so many debt tranches, we've substantially reduced our counter-party risk over the years. We have refinanced five non-programmed term debt maturities in the past three years, including our $100 million baby bond in May 2015, our $150 million convertible note in December 2015, our $167.5 million convertible note in August 2016, our $50.7 million convertible note in October 2017, and our $85.4 million convertible note in March 2018, the latter two of which we had also significantly repurchased in the June 2017 quarter. In the past fiscal year, we not only repaid our remaining October 2017 and March 2018 convertible notes at maturity, but also repurchased $269.4 million of our program notes. And we recently repurchased additional program notes.

In May 2018, we repurchased $98.4 million in principal amount of our January 2019 convertible notes and issued an additional $103.5 million of our July 2022 convertible notes. In June 2018, we repurchased $146.5 million in principal amount of our 5% coupon July 2019 notes, issued $70 million of our March 2023 notes and issued $55 million of our June 2028 notes. If the need should arise to decrease our leverage ratio, we believe we could slow originations and allow repayments and exits to come in during the ordinary course as we demonstrated in the first half of calendar-year 2016 during market volatility. We now have seven separate unsecured debt issuances aggregating $1.6 billion, not including our program notes, with maturities ranging from January 2019 to June 2028.

As of June 30, 2018, we had $761 million of program notes outstanding with staggered maturities through October 2043. Now I'll turn the call back over to John.

John Barry -- Chairman and Chief Executive Officer

Thank you. We can now answer any questions.

Questions and Answers:

Operator

At this time...

John Barry -- Chairman and Chief Executive Officer

Thank you, Kristin. We can now answer any questions.

Operator

We have Robert Dodd with Raymond James. Please, go ahead.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Congrats on the quarter. The big step-up in interest income from sequentially from the prior quarter, can you give us any color -- obviously, some of that was the improvements you've worked on financing the CLOs and we can see that in the structured product income. But was there anything else this quarter in terms of one-time accelerated amortization or make-whole premium or anything like that? Because obviously that was a big step-up sequentially in interest income.

John Barry -- Chairman and Chief Executive Officer

Grier, why don't you take that because nothing jumps to mind from me. Maybe you or Kristin can identify a single item.

Grier Eliasek -- President and Chief Operating Officer

Sure, yes. Yes, Robert, it's really -- I think what we're seeing is reaping the benefits of capital structure that we put in place some years ago with floating rate assets when LIBOR was near zero and having a predominantly fixed rate liability structure. So we're a full-quarter beneficiary of upward movement in the fed funds rate and correspondingly a LIBOR that inure to our benefit, that in addition to the boosting of structured credit cash and GAAP yields as a function of primarily reducing our liability spreads were big, big drivers in the quarter for revenue.

Robert Dodd -- Raymond James -- Analyst

OK. I mean, that's just surprisingly a large benefit. It's just a business sense, obviously on the structured credit. You have $4 million sequentially to your point on restructuring the finance on those and another $10 million from other sources and yields were up pretty -- just simple calculated yields, pretty significantly sequentially, but rates certainly up 40 basis points on average for three months, but understood.

The other one, just a housekeeping one, could you tell us what your spillover income is now that's undistributed taxable income rather than just -- I can find the undistributed NII on the balance sheet, but...

John Barry -- Chairman and Chief Executive Officer

I'll let Kristin tackle that. Tax is always tricky because it's such a lag to calculating out for our business, predominantly because of the structured credit book and the lag of getting in trustee reports, etc., etc. We might not have that at our fingertips. Kristin, do you want to take that one?

Kristin Van Dask -- Chief Financial Officer

Yes. I don't want to misspeak on the spill-back. That might be something that we want to check and respond back. I don't have that on my fingertips, actually.

Robert Dodd -- Raymond James -- Analyst

Not a problem. I appreciate that. It is complicated. And then last one for me, if I...

Grier Eliasek -- President and Chief Operating Officer

Hey, Robert, sorry, well -- I'll just add that when you -- just to give you a general sense, when you do a reset or an extension in structured credit business, there's an upfront investment required to pay the lawyers and the bankers to place the debt. And that is a direct cost associated with it. For GAAP purposes, that cost is amortized over the life of the deal. For tax purposes, that's an immediate charge from a permanent tax standpoint and a deduction against taxable income.

Now that doesn't mean it's not a good investment. In many cases, we've had over 100% IRRs from doing these resets. But on a short-term temporary basis, there's a deduction against taxable income. Another tax effect that's been in place for several years in our business is with First Tower that we bought six -- just over six years ago, where there's an amortization of goodwill that acts as a deduction for tax purposes, but which has no impact from a cash standpoint.

So those effects have depressed taxable income. From a dividend standpoint, we've moved over the years more in the direction of economic return and looking at net investment income from a dividend standpoint and coverage standpoint and a bit away from a tax standpoint. And the minimum required distribution I think it's safe to say we're reasonably above any minimum required distribution. Does that help, Robert?

Robert Dodd -- Raymond James -- Analyst

Got it. Yes, yes, yes, very helpful. Thank you. Last one, if I can.

You've been -- you're doing a lot of work on the liability side of the BDC, lowered the cost of the revolver, etc. Is there -- during the process of that work in terms of refinancing some of the converts in the revolver, are you restructuring those as well to adjust covenants with respect to potentially double leverage? And when I say double leverage, I mean, obviously, the change in the asset coverage ratio later. Obviously, you say you're not going to do that imminently, but is that part of the work of restructuring those today so that you've got more flexibility in the future?

Grier Eliasek -- President and Chief Operating Officer

I would say, partially. In the case of our capital markets issuance, two of these deals we did were simple add-ons to existing deals last quarter for a convert and a straight institutional primarily bond and then we issued a new baby bond. Those continue not to have any financial covenants associated with them. In the case of our recently closed Prospect Capital Funding ABL revolving credit facility, we actually removed certain -- and that's a non-recourse bankruptcy remote deal.

So there's certain covenants pertaining to the originator and seller of loans down into that entity. There was Prospect Capital Corporation. We still have, I believe, a tangible net worth covenant, but we no longer have a leverage covenant. That being said – and you could say that improves financial flexibility.

That being said, as we've stated pretty clearly and consistently in the last several months, our interest and desire is to adhere to rating agency preferences and adhere to our preferences, which is not to change the leverage profile of the company. And in fact, the sort of moves, if you want to call them that, in March pertain to just flexibility around the 40 Act test as opposed to an actual desire to increase leverage. If anything, we're focused on risk management and de-risking the business. And these capital markets transactions are part of our ordinary course laddering, designed to extend tenor, extend maturity, demonstrate balance sheet strength and by being able to issue in multiple markets, including after -- there was a change a bit in the backdrop for liability investors in our sector with margin.

In fact, we are the first company to go and issue in a significant way in multiple markets, I think says something positive about our leadership with liability management and how we come across to those investors. We now, as we said in our prepared remarks, that have no debt due termed out for the rest of the year. '19 is only $100 million. We started calling several program notes in 2020 and cleaning that out.

I think we only have one term deal that particular year. If we do go through an economic downturn -- and we were credit people, right? So we're always looking at the glass half-empty and managing our risk accordingly. And there's an economic downturn. We won't -- our intention is to have very few debt maturities to have to take care of during such downturn, even if the capital markets were to shut entirely.

We think we'd be in a good position to handle that with our revolver, with other sources of liquidity along the way. So that's really the logic behind it more than anything else, Robert.

Robert Dodd -- Raymond James -- Analyst

I appreciate it. Thank you.

Grier Eliasek -- President and Chief Operating Officer

Let's see if John or Kristin have anything to add to that as well.

John Barry -- Chairman and Chief Executive Officer

I guess, the one thing I would add to it is, to me, it's blocking and tackling, both on the asset and liability side of the balance sheet. Yet, this one apparently modest item after another, cumulatively, adds up. Robert, one reason I said I can't think of anything beyond what you had mentioned, I think, maybe the most important thing you did mention, which was resetting these CLOs.

Robert Dodd -- Raymond James -- Analyst

Yes, right? No, I got it. That was material.

John Barry -- Chairman and Chief Executive Officer

Yes. Each one individually is a lot of work and prodding, and each one individually is a few million dollars. But cumulatively, they have really added up to significant dollars. Kristin, do you have anything to add to that? OK.

Grier Eliasek -- President and Chief Operating Officer

One other addendum, Robert, I think, in last quarter, you had some excellent questions pertaining to real estate book. We're very happy with the results we're getting out of our real estate business. As we said in our prepared remarks, we just monetized another asset, this one in Charlotte, with an NPRC called Matthews. We've got other dispositions that we're working on in real-time.

It's a recycling approach where we look at the NPVs of retaining an asset, recapitalizing an asset, selling an asset. And then, of course, we're looking at new deals, as well from a recycling standpoint. And we're feeling increasing confidence about the ability to sustain dividends from NPRC, not just sustain them, but actually potentially grow them, as well as in the not-too-distant future. So I don't have any specific guidance to give you on that at the moment, but we think we're positive about what's going on in NPRC.

Robert Dodd -- Raymond James -- Analyst

If I can -- the NPRC clearly has performed well. I asked about it differently last quarter, and you indicate stability, you've done that here now. Not trying to -- well, all right, yes, I'm trying to back you in the corner, when you say in the not-too-distant future, I mean, how -- like could -- are we conceivably looking in the next 12 months? Or is it a longer-term potential where you think you could grow the distribution from that REIT to the BDC?

Grier Eliasek -- President and Chief Operating Officer

In the next 12 months, we've got some real-time exits we're working on that could result in increased distribution.

Robert Dodd -- Raymond James -- Analyst

Got it. Got it. Appreciate it.

John Barry -- Chairman and Chief Executive Officer

Say, Robert, so if I were in your shoes, I'd be thinking, rising tide lifts all boats. Interest rates have been declining, no surprise that the rather large multifamily book Prospect has built is benefiting from that rising tide. But tides come in and tides go out. So that's been – that has been my position for a while.

And I just thought these dividends now are merely stealing from the future. But I have to commend our real estate team and Grier, again, just day-to-day blocking and tackling, intensive management of that, C2B, it's really a largely C2B book. We -- I so hesitate to say this because I don't want to jinx anything, but we seem to have -- and it's great credit to Ted Fowler and Scott and the whole team, Peter, Dan, Curtis, that they are able to repeat, right? Repeating these things is something you don't see often. Repeat a, what I would call, a value-add strategy more than once, and Grier, does it surprise you? It does surprise me.

Grier Eliasek -- President and Chief Operating Officer

Well, I mean, they're submitting it to put in place. One is, we've declined to do short-term floating rate financing for the multifamily assets that can create refi risks that we've locked in 10 years. I think it's 12 years of financing for those assets. Secondly, so-called workforce housing as we do multifamily class B, class C, with reasonably low monthly average rents, tends to be historically a much more stable part of the real estate spectrum than, let's say, suburban office since it's something more volatile.

And that's a big reason why we expanded into that sector seven, seven years ago or so, in addition to the attractive current cash yield. So the attractive current cash yields, growth potential, capital gains potential, and resilience during downturns, all positives. I would say that, of course, more capital flows into that sector during bull markets, like just about every other sector. You can think of, with little bit about real estate compared to middle-market private credit is real estate multifamily having a normal cyclical boom, middle-market credit, our largest plurality core business, is experiencing both cyclical inflows and secular inflows from a lot of institutions allocating more to the space than they did compared to a decade ago during the last upturn, which creates its share of challenges in finding attractive risk-reward opportunities.

So it's a long way of saying is we found real estate to be more attractive on a relative-value basis in many cases, and -- but we're doing deal sizes that are generally $10 million to $20 million, that adds to diversity with non-recourse financings, but it also means we're not going to have, generally speaking, large swings in portfolio composition because we're not doing large portfolio acquisitions. We look at those, but we tend to find more value in the one-off deals, the sort of middle-market equivalent within that space.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate the color.

John Barry -- Chairman and Chief Executive Officer

Again, Robert, I have to commend Ted Fowler and his whole team in that it's a lot of blocking and tackling. We drive this team very hard. They can always do better is the attitude of Grier and myself. And they do do better.

And it's everything from designs of these buildings, how often you paint them, change the roof, change the refrigerator and the stove, the ROE on the upgrades. And the great news about real estate is it -- when you inevitably make a mistake, you would still have an asset that you can work with, whereas on the loan side, if you've made a mistake, you may discover that you have no power to do anything about it. So we are very happy with the real estate book. And just for myself, I'd love to see us be doing more in real estate.

I think it's a good place to be. If, as and when the inevitable downturn comes, right, it's 100% likelihood, we just don't know when.

Robert Dodd -- Raymond James -- Analyst

Yes, understood. Thank you.

Operator

Our next question is from Christopher Testa with National Securities Corporation. Please, go ahead.

Christopher Testa -- National Securities -- Analyst

Hi, good morning. Thank you for taking my questions. Just wanted to ask you guys a couple of questions about InterDent. So at 9/30/17, you guys had pushed out the maturity from 8/3/17 to 12/31/17.

Term loan B was marked down very modestly, then it was marked back up the cost the next quarter. Then, 3/31/18, the term loan B, the spread was reduced by 425 bps and it was marked down by about 2.5 points. Now there is customer attrition cited and it was marked down further. So I'm just curious, over that timeline, kind of what's been the ebb and flow in that business and what changed and what caused the reduction and spread and push out in maturity last year as well?

John Barry -- Chairman and Chief Executive Officer

You want to take that, Grier?

Grier Eliasek -- President and Chief Operating Officer

Sure. So InterDent is a dental services company that has two primary parts, one is a more kind of Northwest-centric Medicaid business that's a reasonable concentration in that business, and the other is in other largely contiguous states and more of a private-pay program. We had looked to potentially exit that business through a sale process for the overall company, but decided we're more likely to keep the company and invest in projects for growth, really reinvest for profit growth. The team is pretty excited about the potential payoff of investments in the business.

So adjusting the capital structure and ultimately higher IRR projects then debt service, and that's where you see a picking component that can grow value is -- we're concluding the right prioritization for that business, Obviously, dental services are an area that is a recurring revenue business model, not "going away" or subject to extreme cyclicality. So with the right execution, we're cautiously optimistic on where we can take that business.

Christopher Testa -- National Securities -- Analyst

Got it. But was the spread over LIBOR, was that reduced by 425 bps before or after you controlled the business?

Grier Eliasek -- President and Chief Operating Officer

I forgot the exact timing, but the general construct is to grow value by having a reduced or a cash spread so we can reinvest in the projects. I don't recall the exact timing of that change. We did assume control of the business in the last few months.

Christopher Testa -- National Securities -- Analyst

OK. Got it. And just wanted to talk about NPRC, so during this fiscal year, you guys recognized $8.8 million of other income. There was no other income recognized from this in fiscal 2017.

Just wondering if you could give us some color on what drove this?

Grier Eliasek -- President and Chief Operating Officer

Sure. So from an NPRC standpoint, we've talked about the dividend distributions. We also have fee income from NPRC as well. There's been quite a robust array of activity, both of new deal activity, as well as exit activity.

That's generally -- correct me if I'm wrong, Kristin, it shows within other income, separate and distinct from dividend income for NPRC. Let's see if Kristin has any other elaborations there. Kristin?

Kristin Van Dask -- Chief Financial Officer

No. It's just the restructuring fees for our different investments. I don't think there's anything else. Royalty trust?

Grier Eliasek -- President and Chief Operating Officer

Yes, that's right. We also collect certain royalty tickers on top of our interest income, which shows up in other income as well, which is a yield addition. One note is, when a dividend is paid, it's recognized as income when paid out of taxable earnings and profits. So that's something that occurs across the board, whether it's a real estate investment like NPRC, or any other investment, controlled or uncontrolled, has to go through all of the tax hoops as well.

Christopher Testa -- National Securities -- Analyst

Got it. So it seems like activity is driving this. And given your commentary on the likelihood of more sales and then recycling, should we expect other income to remain elevated for NPRC over the next fiscal year?

Grier Eliasek -- President and Chief Operating Officer

I think that's a reasonable assumption. Just to give you some perhaps more variability to that one, then in the interest and as well as dividend side of things, but I think that's a reasonable assumption, Chris. We are -- as you can imagine, as we look through and optimize, look at each asset, it doesn't make sense to start process or not, we're finding an increasing number of candidates that are attractive from an exit standpoint. And one reason for that is that consistent with our corporate credit underwriting and other businesses, generally, in base cases, we're assuming some sort of economic downturn in the next couple of years, call it 2020.

No one has a crystal ball in this, of course. But we just think that's a reasonable risk management and expected value way to plan our lives. Then to the extent there are any other actors, financial, strategic, buyers, otherwise, that assume a recession-free future, then that can be a reason why each of the buyer and seller are happy, at least at the time of closing. So that's what's transpiring.

And M&A processes can be uncertain. You don't know exactly where they'll end up or if you would get the value that you hope for. But we've now banked, I think, eight realizations within NPRC, and more, we hope, to come.

Christopher Testa -- National Securities -- Analyst

Got it. OK. And there was 3 percentage points of tick that was added to the First Tower loan during the quarter. Can you guys just give some color on what induced that?

Grier Eliasek -- President and Chief Operating Officer

Sure. So First Tower, it's really two factors, Chris. One is, we've seen significant improvements in the business, the core business, the First Tower business goes back, there's been buildup of improvement for at least 18 months now where we've seen an increase in pre-tax net income led by a reduction in charge-offs and solid originations. Tower, when we bought the business, was in really three primary states and we since expanded into other states.

There is a learning curve aspect when you expand into a new state to optimize, not only the business model for how to lend from a regulatory standpoint. But also to get your staffing right, your human resource base right to manage what can be a reasonable turnover type of branch-based role and position. And that started to really connect, and some of the states have become much more profitable now than in sort of year one of entry. So that's item one.

Item two is the Tower completed an add-on acquisition purchasing Harrison a few months ago, which has gone quite well from an integration standpoint and a result standpoint. So we're able to move up what we're able to take out of Tower. In the case of Tower adding, and this can be the case from time to time elsewhere as well, adding a pick instrument often means that there's an option to pick. But in general, we prefer to receive cash as a payment.

And so there's an election for the interest to be paid in cash, even though there is an option to pick the payment. There's some decent seasonality to that kind of a business, so it's good to have at least a partial pick construct in place because you get a surge in borrowings for the holiday season and then repayments when the tax refunds come in. That's the case with a lot of consumer businesses that have been in place for a long, long time. So that's really the rationale for the positive capital structure adjustment that you saw there, Chris.

Christopher Testa -- National Securities -- Analyst

OK. And on the structure credit front, obviously, the resets and refinance have been beneficial to you guys as well for the sector as a whole. Would you say that most of your vintages that have been set to be refi-ed over, let's call it, this year and through the next year have already been refinanced? So should we expect less upfront cost and the cash yields to remain around where they are? Or do you guys still have a significant number of vintages in the book that might cause some upfront cost, but will benefit you down the road further through fiscal 2019?

Grier Eliasek -- President and Chief Operating Officer

Yes, we expect more resets to continue. And what happens is, you reset a deal and there's generally a two-year non-call period. And then, by the time you get to the end of two years, there's a rationale to reset again. So these aren't one and done creatures, it's a constant optimization.

So we have more deals that we're interested in potentially resetting. I would say, the activity occurs at a, dare I say, frenetic pace during the last -- during the first six months of the year. It took a little bit of a pause in July and August. I think we've done one reset quarter to date.

We've got a bunch teed up potentially for September. In part, that's because of the way the documents work for some of the deals. You've got to match up with a payment date. In part, it's because the asset spread compression dynamic has slowed a little bit in recent weeks as there's been kind of a digestion period.

And liability spreads have been a bit sticky. So we're not going to reset a deal unless the numbers are favorable to do so. They become a little bit less favorable, it's kind of an overall statement, every deal is going to be a little bit different and we have a number of candidates where the numbers are penciling out. The reset aspect is a significant validation of our majority strategy within PSEC, because obviously, the majority equity investor has the most to gain from a reset or lose from a non-reset if that's economically advantageous to do so.

And because we speak for so much of the equity and the votes, we can be highly organized to drive prioritization in the queue. And there is a queue out there, a digestion period of getting deals done with liability providers, with desks, etc. So we've been positively aggressive about getting these deals done, and we're seeing the results in real-time. We had messaged to -- for folks to expect an improvement in our yields in the structure credit book, and that has come through.

So it's hard to tell exactly when the next wave will unfold. There's a little bit of summer slowdown as well, and we'll see what happens when we get to September and beyond.

Christopher Testa -- National Securities -- Analyst

Got it. And was the contract to manage majority income sold?

Grier Eliasek -- President and Chief Operating Officer

That's a fund separate and distinct from Prospect Capital Corp. So we're subject to confidentiality. I mean, that's not something I can cover, unfortunately, on a completely different agenda call here.

Christopher Testa -- National Securities -- Analyst

OK. And just one more, if I may, the 30% bucket seems to be kind of the earnings driver for you guys between NPRC and between CLO equity. Obviously, if you guys were to reduce asset coverage, you would greatly expand that basket, which would contribute greatly toward kind of your bread and butter, which has become NPRC and CLO equity. So I'm just wondering, we've had a couple of your peers, Ares and TPG, have increased the available leverage without a ratings downgrade triggered by S&P, which seem to be your concern earlier in the year when you guys went through what you initially had gotten a board approval for the reduced leverage.

So my question is, why not reduce the asset coverage and then grow NPRC and the CLO equity book further?

Grier Eliasek -- President and Chief Operating Officer

Well, there are a few things there. First, as a predicate, NPRC, to clarify, is not a 30% basket investment. Mortgage REITs are, but NPRC is a property REIT. Property REITs are 70% basket, good qualifying assets for BDC, assuming they're private companies, right, and not public companies with a more than 250 market cap.

This, of course, is a private portfolio company. So that's not really a driver. We have unutilized 30% basket capacity. We're comfortable with the percentage that CLOs represent of our book.

I'd say it's unlikely to see us -- highly unlikely to see us increase that percentage meaningfully from where it is today, and we have certain understandings, as you can imagine, in discussions with rating agencies, etc. You mentioned other actors in the industry, I mean, every issuer is going to be a little bit different, and a rating agency, even the same rating agency in response to, an issuer might be different as well. Some people didn't like the results so they just drop the rating agency, I noticed. Other people have come back in with much more constrained, self-imposed or jointly imposed restrictions on leverage that aren't really meaningfully that much greater perhaps than where they are today.

So we just look at it from a risk-management standpoint, Chris, and just don't view it as necessary or desirable to take on more risk. I guess, on paper, you lever up more, you can enhance your turn in equity. But it just -- it doesn't seem like the right time in the business cycle. For us, at least, and we take the long view to be doing something like that.

I don't know if John wants to add any other commentary here.

John Barry -- Chairman and Chief Executive Officer

Well, I guess so I share with people my surprise that merely adding an option in our arsenal that we view it as risk-reducing would generate the response it did. The option to go beyond the statutory, the prior existing statutory limit, we view it as risk-reducing, for sure, in that you could have a situation wherein in an economic downturn with a balance sheet loaded with mark-to-market assets, that a mark-to-market valuation could take us from leverage of whatever it is, say, 70%, or now we're in the 60s. But maybe we might be, at some point, higher in the 70s. And a sudden mark-to-market valuation takes us above 80% -- above the one to one.

So we thought having this option would give us more flexibility to deal with such a situation without any -- not having any intent one way or the other to simply go beyond the existing statutory limit. Well, we were unable to obtain that option without a cost that struck us as too high for the value of the option. So that's why we've decided we'll live without the option for the time being. Every day is a new day, there's new incoming data, we relook at our book, we relook at the industry, we relook at our economic projections and we often rethink things.

But right now, as Grier said, we're comfortable where we are. We wish we could have the option on a cost-less basis, but it's not cost-less at least currently. When it becomes cost-less, maybe we'll -- should it become cost-less, maybe we'll reexamine that. Thank you.

Christopher Testa -- National Securities -- Analyst

OK. All right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to John Barry for any closing remarks.

John Barry -- Chairman and Chief Executive Officer

Sure. Well, Brandon, thank you very much, and we thank people for joining us on our year-end call. Have a wonderful afternoon, everyone. Bye now.

Grier Eliasek -- President and Chief Operating Officer

Thank you all.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

John Barry -- Chairman and Chief Executive Officer

Kristin Van Dask -- Chief Financial Officer

Grier Eliasek -- President and Chief Operating Officer

Robert Dodd -- Raymond James -- Analyst

Christopher Testa -- National Securities -- Analyst

More PSEC analysis

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.