Prospect’s Private Debt Fund on Cusp of Junk After Outlook Cuts
(Bloomberg) -- Prospect Capital Corp., an $8 billion publicly-traded private credit fund, had the outlook on its Baa3 credit grade cut to negative by Moody’s Ratings, the second such revision by a ratings firm in as many weeks.
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Prospect is now on the cusp of junk at three out of the five firms that rate its debt, following S&P Global Ratings’ outlook revision last week and a similar action from Kroll Bond Rating Agency earlier this year. Prospect has seen a “deterioration in asset quality over the last 12 months,” Moody’s said in a report Tuesday.
The rating company specifically cited the share of borrowers paying Prospect by accumulating more debt with the fund, an arrangement known on Wall Street as payment-in-kind, or PIK. About 16% of Prospect’s total income was from payment-in-kind as of June 30, according to Moody’s, up from 10% the year prior.
That figure is “one of the highest levels among peers,” Moody’s said in the report.
Prospect has faced increased scrutiny in recent months over its PIK income, its relationship with a real estate investment trust it fully controls and its reliance on retail investors for funding.
Last month, Wells Fargo & Co. cut its price target on the fund to $4.50 from $5.00 over the risk of dilution for existing shareholders. The revision followed a heated earnings call during which Prospect CEO John F. Barry III lashed out at the Wells Fargo analyst, blasting some of his questions as “absurd.” On earnings calls and in documents, Prospect has defended PIK arrangements, seeing them as appropriate for some borrowers.
Representatives for Prospect did not immediately respond to a request for comment.
Moody’s also pointed to the fund’s subordinated structured investments and real estate holdings, which expose the fund to the volatility of equity returns. It also cited a lower debt-to-equity ratio relative to peers, as well as a deteriorating asset coverage ratio, for the outlook cut.
Moody’s, which kept Prospect’s rating steady at Baa3, said it could downgrade the fund if it sees meaningful asset deterioration, lowered profitability or a further decrease to the asset coverage ratio cushion.
The ratings firm said it could upgrade Prospect if the fund effectively manages portfolio asset quality and reduces its higher-risk exposures, strengthens its asset coverage ratio cushion, or generates profitability that compared with peers.
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