(Bloomberg) -- S&P Global Ratings revised its outlook on Prospect Capital Corp. to negative, citing concerns over mounting losses and non-accruing loans in its portfolio.
Prospect, an $8 billion private credit fund, saw $417 million in realized losses for the year ended on June 30, up from $41 million the year before, according to regulatory filings. About $181 million in realized losses were tied to a single investment in PGX Holdings Inc., also known as Progrexion, which filed for bankruptcy in 2023.
S&P said it revised its outlook because of concerns over levels of non-accruals, or loans on which lenders are at risk of losing money, and payment-in-kind income, which it said was higher than its peers.
While S&P kept Prospect’s rating steady at BBB-, the lowest tier considered investment-grade, it said it could downgrade the rating if portfolio performance deteriorates.
Prospect has faced increased scrutiny in recent months over its frequent use of payment-in-kind arrangements, which allow borrowers to defer interest payments, 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.”
Representatives for Prospect did not immediately respond to a request for comment on Wednesday about the S&P outlook revision.
Prospect has defended its 20-year track record on its earnings call and in documents, stressing that it has access to diversified sources of funding and that it sees PIK arrangements as appropriate for some borrowers.
S&P said Prospect’s non-accruals and payment-in-kind income were 3.6% and 15.6%, respectively, during the 12-month period ending in June. In its earnings report, Prospect said its non-accruals totaled 0.3% of its assets.
“Even when the PIK income is due to additional debt investments provided to controlling portfolio companies for investment and working capital purposes, we view it as an asset quality weakness,” S&P said.
The ratings firm also said the company has exposure in assets that it views as “riskier” than typical investments made by peers.
Because of this, the fund’s “asset quality will likely remain strained,” S&P said.
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