Two High-Yield Investments (Reaching 20.9%) That May Be Deceptive (Plus a Reliable 9% Payer)
Written by Emily J. Thompson, Senior Investment Analyst
Updated: Dec 08 2025
0mins
Source: NASDAQ.COM
Bankruptcy Impact on BDCs: The bankruptcy of auto-parts supplier First Brands has raised concerns about business development companies (BDCs), which provide loans to small and mid-sized firms, leading to fears of more issues in the private-credit market.
Caution Against High-Yield BDCs: Investors are advised to be cautious of BDCs like Blue Owl Capital and Prospect Capital Corp, which have high fees and poor long-term performance, making them less attractive despite their high yields.
Alternative Investment Recommendation: The Liberty All-Star Growth Fund (ASG) is highlighted as a better investment option, offering a 9% dividend and a significant discount to NAV, outperforming BDCs in total return.
Upcoming Investment Opportunities: The author plans to release a "mini-portfolio for 2026" featuring four high-yield closed-end funds (CEFs) with an average yield of 9.2% and potential for over 20% price upside, encouraging readers to access this information.
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Analyst Views on PSEC
About PSEC
Prospect Capital Corporation is a business development company that focuses on lending to and investing in private businesses. Its investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. It invests primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. It invests primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. It invests in debt and equity positions of structured credit, which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. It may also acquire controlling interests in companies in conjunction with making secured debt investments in such companies. Its investment adviser is Prospect Capital Management L.P.
About the author
Emily J. Thompson
Emily J. Thompson, a Chartered Financial Analyst (CFA) with 12 years in investment research, graduated with honors from the Wharton School. Specializing in industrial and technology stocks, she provides in-depth analysis for Intellectia’s earnings and market brief reports.
Prospect Capital to Sell Valley Electric Company for $328 Million
- Transaction Value: Prospect Capital announced the sale of its portfolio company Valley Electric for expected gross proceeds of approximately $328 million, with the transaction anticipated to close around July 1, 2026, indicating a proactive asset disposal strategy.
- Net Proceeds Expectation: The company expects to achieve about $280 million in net exit proceeds from this investment, excluding potential adjustments and earn-out payments, demonstrating its success in investment management and commitment to shareholder returns.
- Return on Investment: Since 2012, Prospect Capital has realized a 20.4% annualized internal rate of return and a 4.8-times multiple on invested capital from this investment, reflecting its efficiency and profitability in capital operations.
- Future Outlook: This transaction not only provides substantial cash flow but also optimizes the company's investment portfolio, enhancing future investment flexibility and market competitiveness.
See More
Diverse Risk Premiums in U.S. Private Credit Market
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders like BCP Investment Corp showing a weighted average option-adjusted spread (OAS) of 680 basis points, indicating market concerns over credit quality.
- Increased Market Selectivity: As borrower stress rises, investors are increasingly evaluating Business Development Companies (BDCs) based on portfolio quality and capital access, resulting in larger firms like Ares Capital maintaining spreads between 150 and 200 basis points.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% as of April, the highest since August 2024, reflecting a deteriorating market backdrop.
- Uncertain Outlook: Analysts predict that in the coming months, due to downgrades, increased rate volatility, and heightened focus on software-as-a-service (SaaS) exposures, the bond market for BDCs will experience greater differentiation, potentially impacting investor confidence.
See More
Diverse Risk Premiums Assigned to U.S. Private Credit Firms
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders priced at greater risk, indicating a growing selectivity in a market under borrower stress.
- Spread Data: BCP Investment Corp recorded the highest weighted average option-adjusted spread (OAS) at 680 basis points, followed by Prospect Capital Corp at 449 bps, highlighting market concerns over varying credit quality among firms.
- Market Selectivity: The widening of spreads this year reflects investors' increasing differentiation of BDCs exposed to AI disruptions in SaaS companies, signaling a heightened focus on credit quality and funding risks.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% over the past 12 months, the highest since August 2024, indicating a weakening backdrop for the private credit market.
See More
Prospect Capital Corporation Reports Q3 2026 Earnings Insights
- Decline in Net Investment Income: Prospect Capital reported a net investment income of $78 million or $0.16 per share for the March 2026 quarter, down from $91 million or $0.19 in the previous quarter, indicating a weakening in profitability that may affect investor confidence.
- Slight Decrease in NAV: As of March 31, 2026, the company's net asset value per share was $6.05, down from $6.21 at December 31, 2025, reflecting a minor adjustment in asset value that could impact future financing capabilities.
- Dividend Adjustment: The company announced a monthly distribution of $0.035 per share for May through August 2026, a reduction from $0.045 per share in the previous quarter, indicating a more cautious approach to cash flow management that may affect shareholder return expectations.
- Portfolio Restructuring: The company is shifting its asset focus towards first lien senior secured middle market loans, with the first lien mix increasing by 790 basis points to 72% since June 2024, aiming to enhance risk management and improve long-term revenue potential.
See More
Prospect Capital Declares Monthly Dividend of $0.035
- Monthly Dividend Announcement: Prospect Capital has declared a monthly dividend of $0.035 per share, with a forward yield of 17.21%, indicating the company's ongoing ability to generate stable cash flow, which enhances investor confidence.
- Dividend Payment Schedule: The dividend is set to be paid on June 18, with a record date of May 27 and an ex-dividend date also on May 27, ensuring shareholders receive timely returns and further solidifying the relationship between the company and its investors.
- Earnings Performance Analysis: While Q3 net investment income exceeded expectations, disappointing interest income reveals challenges in the company's revenue diversification, which could impact future dividend capabilities.
- Market Reaction Expectations: Investor reactions to this dividend announcement may influence stock price movements, particularly in the current market environment, where a stable dividend policy could attract more income-seeking investors.
See More
Prospect Capital Q3 Earnings Miss Estimates, Stock Drops
- Earnings Performance: Prospect Capital reported a net investment income of $0.16 per share for fiscal Q3 2026, exceeding the analyst estimate of $0.11, yet declining from $0.19 in the previous quarter and the same quarter last year, indicating a weakening in profitability.
- Declining Interest Income: The total interest income for the quarter was $140.1 million, down from $149.0 million in the prior quarter and $159.3 million a year ago, and it missed the market expectation of $142.6 million, reflecting challenges in revenue generation for the company.
- Risk Management in Portfolio: As of March 31, 2026, only 2.5% of Prospect Capital's portfolio was invested in software companies, significantly lower than the 23% average across other BDCs, demonstrating the company's relative safety against AI-related risks and aiming to bolster investor confidence.
- Net Asset Value Changes: The net asset value per common share was $6.05 as of March 31, 2026, down from $6.21 at December 31, 2025, indicating pressure on asset management that could impact future investment decisions.
See More
Prospect Capital to Sell Valley Electric Company for $328 Million
- Transaction Value: Prospect Capital announced the sale of its portfolio company Valley Electric for expected gross proceeds of approximately $328 million, with the transaction anticipated to close around July 1, 2026, indicating a proactive asset disposal strategy.
- Net Proceeds Expectation: The company expects to achieve about $280 million in net exit proceeds from this investment, excluding potential adjustments and earn-out payments, demonstrating its success in investment management and commitment to shareholder returns.
- Return on Investment: Since 2012, Prospect Capital has realized a 20.4% annualized internal rate of return and a 4.8-times multiple on invested capital from this investment, reflecting its efficiency and profitability in capital operations.
- Future Outlook: This transaction not only provides substantial cash flow but also optimizes the company's investment portfolio, enhancing future investment flexibility and market competitiveness.
See More
Diverse Risk Premiums in U.S. Private Credit Market
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders like BCP Investment Corp showing a weighted average option-adjusted spread (OAS) of 680 basis points, indicating market concerns over credit quality.
- Increased Market Selectivity: As borrower stress rises, investors are increasingly evaluating Business Development Companies (BDCs) based on portfolio quality and capital access, resulting in larger firms like Ares Capital maintaining spreads between 150 and 200 basis points.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% as of April, the highest since August 2024, reflecting a deteriorating market backdrop.
- Uncertain Outlook: Analysts predict that in the coming months, due to downgrades, increased rate volatility, and heightened focus on software-as-a-service (SaaS) exposures, the bond market for BDCs will experience greater differentiation, potentially impacting investor confidence.
See More
Diverse Risk Premiums Assigned to U.S. Private Credit Firms
- Risk Premium Disparity: A Reuters analysis reveals that U.S. private credit firms are facing diverse risk premiums, with smaller lenders priced at greater risk, indicating a growing selectivity in a market under borrower stress.
- Spread Data: BCP Investment Corp recorded the highest weighted average option-adjusted spread (OAS) at 680 basis points, followed by Prospect Capital Corp at 449 bps, highlighting market concerns over varying credit quality among firms.
- Market Selectivity: The widening of spreads this year reflects investors' increasing differentiation of BDCs exposed to AI disruptions in SaaS companies, signaling a heightened focus on credit quality and funding risks.
- Rising Default Rates: Fitch Ratings reports that the default rate among U.S. private credit borrowers reached 6% over the past 12 months, the highest since August 2024, indicating a weakening backdrop for the private credit market.
See More
Prospect Capital Corporation Reports Q3 2026 Earnings Insights
- Decline in Net Investment Income: Prospect Capital reported a net investment income of $78 million or $0.16 per share for the March 2026 quarter, down from $91 million or $0.19 in the previous quarter, indicating a weakening in profitability that may affect investor confidence.
- Slight Decrease in NAV: As of March 31, 2026, the company's net asset value per share was $6.05, down from $6.21 at December 31, 2025, reflecting a minor adjustment in asset value that could impact future financing capabilities.
- Dividend Adjustment: The company announced a monthly distribution of $0.035 per share for May through August 2026, a reduction from $0.045 per share in the previous quarter, indicating a more cautious approach to cash flow management that may affect shareholder return expectations.
- Portfolio Restructuring: The company is shifting its asset focus towards first lien senior secured middle market loans, with the first lien mix increasing by 790 basis points to 72% since June 2024, aiming to enhance risk management and improve long-term revenue potential.
See More
Prospect Capital Declares Monthly Dividend of $0.035
- Monthly Dividend Announcement: Prospect Capital has declared a monthly dividend of $0.035 per share, with a forward yield of 17.21%, indicating the company's ongoing ability to generate stable cash flow, which enhances investor confidence.
- Dividend Payment Schedule: The dividend is set to be paid on June 18, with a record date of May 27 and an ex-dividend date also on May 27, ensuring shareholders receive timely returns and further solidifying the relationship between the company and its investors.
- Earnings Performance Analysis: While Q3 net investment income exceeded expectations, disappointing interest income reveals challenges in the company's revenue diversification, which could impact future dividend capabilities.
- Market Reaction Expectations: Investor reactions to this dividend announcement may influence stock price movements, particularly in the current market environment, where a stable dividend policy could attract more income-seeking investors.
See More
Prospect Capital Q3 Earnings Miss Estimates, Stock Drops
- Earnings Performance: Prospect Capital reported a net investment income of $0.16 per share for fiscal Q3 2026, exceeding the analyst estimate of $0.11, yet declining from $0.19 in the previous quarter and the same quarter last year, indicating a weakening in profitability.
- Declining Interest Income: The total interest income for the quarter was $140.1 million, down from $149.0 million in the prior quarter and $159.3 million a year ago, and it missed the market expectation of $142.6 million, reflecting challenges in revenue generation for the company.
- Risk Management in Portfolio: As of March 31, 2026, only 2.5% of Prospect Capital's portfolio was invested in software companies, significantly lower than the 23% average across other BDCs, demonstrating the company's relative safety against AI-related risks and aiming to bolster investor confidence.
- Net Asset Value Changes: The net asset value per common share was $6.05 as of March 31, 2026, down from $6.21 at December 31, 2025, indicating pressure on asset management that could impact future investment decisions.
See More
