Sell Rating on Prospect Capital Due to Incentive Fee Structure and Credit Headwinds

Analyst Finian O’Shea of Wells Fargo maintained a Sell rating on Prospect Capital (PSEC – Research Report), retaining the price target of $4.00.

Finian O’Shea has given his Sell rating due to a combination of factors that impact Prospect Capital’s financial outlook. One of the key concerns is the incentive fee structure, which introduces uncertainty to PSEC’s earnings narrative. Significant portfolio losses or substantial increases in leverage would be necessary to achieve higher performance thresholds, posing a challenge for future profitability.
Additionally, the company’s financial stability is affected by several credit headwinds, including write-downs in R-V Industries and Town & Country, as well as non-accrual issues with Aventiv. PSEC’s potential to increase leverage through available revolver capacity is tempered by the risk of not regaining investment-grade status. Furthermore, the ongoing exchange offers for preferred stock raise concerns about dilution risk and the potential for increased preferred dividend yields. These factors contribute to a challenging period of deleveraging and portfolio adjustments, leading to the Sell rating.

According to TipRanks, O’Shea is a 4-star analyst with an average return of 6.9% and a 58.99% success rate. O’Shea covers the Financial sector, focusing on stocks such as Ares Capital, Runway Growth Finance Corp, and Golub Capital Bdc.