The days of dilutive equity raises at Prospect Capital Corporation (PSEC 0.19%) may be over.
In a filing with the SEC, Prospect Capital revealed a new mailer that asks shareholders to vote for its request to sell shares at prices under book value. Complete with web address and QR code, shareholders are prompted to watch a video in which Prospect COO Grier Eliasek pleads for votes for the proposal.
The message is succinct, but perhaps a little over the top. Eliasek suggests that the proposal's failure may result in the loss of Prospect Capital's investment-grade rating. In turn, its borrowing costs could rise, hampering its ability to pay a dividend.
Conflicting viewpoints
Standard & Poor's -- a credit agency that rates Prospect as investment grade -- has a conflicting view on dilutive equity sales on a web page about how it rates BDCs: "Permanent equity capital is also a credit support -- we review a firm's track record in issuing equity. That said, repeated dilutive equity issuances (that is, issuing below net asset value) could impede future financial flexibility."
In the letter and video, Eliasek also points out that the ability to issue under NAV gives it the capacity to make opportunistic investments in bad credit and equity markets. That point is well received. But it also allows Prospect Capital to raise capital in good credit markets at bad prices, as it has been doing for more than two months.
Interestingly, this is the first time Prospect Capital has ever had to go so far to rally votes in support of the proposal. In recent years, shareholders have heavily favored allowing the company to issue at prices under net asset value.
|
Year |
For |
Against |
Abstained or Non-Votes |
|---|---|---|---|
|
2010 |
72.5% |
15.7% |
11.8% |
|
2011 |
71.3% |
14.5% |
14.1% |
|
2012 |
77.2% |
11.6% |
11.2% |
|
2013 |
72.8% |
13.8% |
13.4% |
Source: Company 8-K filings with the SEC.
On the same day the new proxy and mailer were filed with the SEC, the company also filed new form 4 statements showing that insiders purchased more than $1 million of common stock. This seems to be a recurring theme. The last big insider buys happened about a week before the first proxy was filed with the SEC. Make of that what you will.
It's unusual to see such a strong "get out the vote" drive, particularly for a corporate entity. One could only surmise that the early results show that shareholders have had enough of dilutive equity sales.
And although I don't have a dog in this fight -- I'm not a shareholder -- I do know that I'd vote against this proposal the second it hit my mailbox. Prospect Capital has proven it can't be trusted with the temptation of growing its balance sheet with below-NAV stock sales. Shareholders shouldn't be enablers for this growth addict.
