Prospect Capital Corporation (NASDAQ:PSEC) wants shareholders to vote for it to have the option to sell shares under net asset value -- book value. It suggests that the ability to sell shares under NAV will help it keep its investment-grade rating, and make advantageous investments, even when its stock might trade at low prices.

I wanted to take a look at its claim of making opportunistic investments when its shares trade under net asset value. To do so, we'll examine the investments it made when it sold shares at below-NAV prices in summer 2011.

Here are the investments that took place around the time it issued 11.5 million shares at prices below its then-current NAV from June 24, 2011 to July 18, 2011.





June 21, 2011

U.S. HealthWorks

$25 million


June 30, 2011


$82.5 million


June 30, 2011

Pre-Paid Legal

$5 million


July 1, 2011


$2.3 million

LIBOR + 7.5%

July 8, 2011

Totes Isotoner

$39 million


August 5, 2011-September 7, 2011

ROM Acquisition Corporation

$15.65 million


August 9, 2011

Nobel Learning Communities

$15 million

11.5% + 1.5% PIK

August 9, 2011

Babson CLO 2011-I

$32.116 million


*Data unavailable for the CLO equity investment. However, we know that Prospect Capital realized a loss on the sale on October 3, 2014. Data source: SEC filings.

Clearing the air
On June 30, 2011 Prospect Capital reported that its weighted-average interest rate earned on its existing investments was 13.7%.

From this list of (mostly) debt investments, we see that Prospect Capital used the proceeds from its below-NAV stock sales to make investments that weren't materially different from what it already had on its balance sheet as of 2011.

The weighted-average yield on the assets in the table -- which were acquired from June 2011 to August 2011 -- was lower than the weighted-average yield on its existing investments, excluding the unknown yield on the CLO equity investment.

It appears only the investment in Boxercraft was "opportunistic," if you can call it that. Prospect doled out $2.3 million for which Boxercraft would have to repay $2.5 million.

But how about the long-run performance of these investments? Well, Boxercraft ended as a miserable failure this year, and was finally sold for pennies on the dollar last quarter. CRT MIDCO slowly repaid its loan -- part of it still on the balance sheet, marked at its cost. The Babson CLO was sold in the current quarter at a realized loss. Other than that, all borrowers eventually repaid their loans.

So, in short, the below NAV sales funded so-so investments at yields below those on its existing portfolio. That's not exactly the winners you'd expect from an extraordinary event like the sale of stock at a price below NAV.

Looking back at history
On August 24, 2011, shortly after making less-than-opportunistic investments with money from dilutive stock sales, Prospect Capital authorized a plan to repurchase $100 million in stock. That was an olive branch to make up the dilution to shareholders.

Believe it or not, that exact same repurchase authorization was extended in September 2014. The company bought back exactly zero shares under this authorization to date, even though the stock has traded for significant discounts to NAV since its authorization.

To sum it up, the last time Prospect Capital sold shares under NAV, the investments it made were neither opportunistic, nor particularly rewarding, except to the external manager, which earned millions of dollars in fees from the additional assets under management.