Prospect Capital's Surprising Profit Boost Sparks Stock Rally

Prospect Capital (NASDAQ: PSEC) shares jumped in after-hours trading on the back of a strong earnings beat for its fiscal fourth quarter. The business development company posted net investment income per share of $0. 25, easily topping analyst expectations of just $0. 18. However, some key metrics did show signs of softening demand and tighter credit conditions in the middle market lending space where Prospect operates. Total interest income declined year-over-year to $189. 3 million from $197. 5 million in Q4 2023. Annualized current yield on performing investments also dipped to 12. 1% from 13. 2%. But the company managed to boost total originations by over 10% sequentially to $242. 1 million, driven largely by its Prospect Energy Partners lending vehicle which has seen strong deal flow in recent months.Repayments and sales also rose significantly to $244. 7 million from just $114. 5 million the previous quarter. Non-accrual loans as a percentage of total assets continued their downward trend, falling to 0. 3% from 1. 1% a year ago. However, net asset value per share declined to $8. 74 from $9. 24 over the same period, reflecting ongoing market volatility and tighter credit spreads. Investors seem to be focusing on Prospect's ability to generate stable cash flows in a challenging environment rather than NAV fluctuations in the short-term. But questions remain about how sustainable this level of earnings growth is as the middle market lending cycle matures and default rates potentially start to rise. One thing is clear - Prospect Capital is doing an impressive job of driving deal volume and keeping non-performers off its books. But it remains to be seen whether this can continue in a more difficult credit environment ahead. Keep an eye on originations, repayments and NIM trends when management discusses the results on next week