Prospect Capital (NASDAQ:PSEC) Corporation (NASDAQ: PSEC) is a publicly traded business development company (BDC), that specializes in providing capital to middle-market businesses and private equity funds. Its diversified portfolio spans consumer goods, healthcare, manufacturing, and financial services, with a focus on secured loans (55% first-lien, 25% second-lien) and CLO investments. Prospect’s strategic choice to operate as a BDC enables it to enjoy certain tax advantages while pursuing high-yield opportunities in private markets.
The company’s geographic focus is primarily the U.S. (80% of its portfolio), with additional investments in Canada, Ireland, and the Cayman Islands. Recent years have seen Prospect shift its portfolio away from energy assets toward consumer and software sectors, reflecting evolving market conditions. 
Financial Snapshot
- Total assets (Q4 2024): $7.86 billion
- Liabilities: $2.58 billion
- Net Asset Value (NAV): $3.5 billion ($8.10/share)
- Current stock price (Jan. 16, 2025): $4.29, trading at a 40% discount to NAV
- Unsecured debt cost: 4.42%
Despite its attractive NAV, Prospect faces challenges such as a September 2024 downgrade from BBB- to BB+ by S&P, increasing its borrowing costs and affecting market confidence. The downgrade stemmed from portfolio risks, including reliance on Payment-In-Kind (PIK) income (16% of total investment income) and portfolio concentration (50% in its top 10 investments). 
Investment Opportunity
Prospect Capital presents two distinct opportunities for investors:
1. Stock Purchase: Shares are trading significantly below NAV, offering the potential for capital appreciation if market conditions stabilize.
2. Bond Purchase: The company’s bonds maturing on Dec. 15, 2025 (ISIN: US74348GKE97), are trading at 96 with a 10% yield-to-maturity, 200 basis points higher than similar BB+ rated instruments.
These opportunities come with inherent risks, such as portfolio concentration and the potential for higher financing costs. However, Prospect’s commitment to strengthening its capital structure, including a $2.25 billion preferred stock issuance in October 2024, demonstrates its focus on mitigating liquidity risks and supporting long-term growth. 
Conclusion
While Prospect Capital faces challenges, its dual investment approach offers opportunities for both income-focused and value-seeking investors. Its ability to navigate portfolio risks and stabilize its financials will be crucial in determining its performance in 2025 and beyond.