S&P Downgrades Prospect Capital’s Private Credit Fund to Junk Status
S&P Global Ratings has downgraded Prospect Capital Corporation’s private credit fund to junk status, assigning it a BB+ rating. The decision reflects growing concerns about credit quality and financial losses in the $7.6 billion fund, which is publicly traded under the ticker PSEC.
S&P noted that Prospect earns a substantial portion of its income through payment-in-kind (PIK) arrangements, a practice allowing borrowers to defer cash interest payments. While such arrangements can provide flexibility, they also carry risks, especially when borrowers face financial pressures. The rating agency also highlighted that Prospect has a higher level of debt classified as non-accrual compared to its industry peers, signalling potential challenges in recovering these loans.
In the quarter ending September 30, Prospect reported significant financial setbacks, including $100 million in net losses due to the restructuring of a loan to Research Now Group (now operating as Dynata). Additionally, the fund experienced $69 million in losses related to its structured subordinated notes portfolio and $124 million in unrealized losses.
S&P projects that Prospect’s reliance on PIK income will increase in the coming year. This trend, coupled with anticipated declines in base interest rates, is likely to reduce net investment income, further impacting the fund’s financial standing.
Adding to its challenges, Prospect’s stock currently trades below its net asset value, which hampers its ability to secure additional funding through equity markets. The fund’s recent dividend cut—the first in seven years—has also drawn attention, signalling potential strain on its operations.
Scrutiny has intensified over Prospect’s heavy reliance on PIK arrangements, its connections with a real estate investment trust under its full control, and its dependence on retail investors for funding. In September, S&P placed Prospect’s previous BBB- rating on a negative outlook, citing growing losses and the declining quality of its loan portfolio as key concerns.
Despite these setbacks, Prospect has defended its long-standing performance, emphasizing its two decades of experience, access to diverse funding sources, and belief in the suitability of PIK arrangements for certain borrowers.
