Prospect Capital’s Strategic Pivot: Can a Defensive Shift Reverse Fortunes?

The shares of business development company (BDC) Prospect Capital have faced persistent headwinds for years. Investors are now closely watching whether a deliberate strategic pivot towards a less risky portfolio can finally halt a prolonged decline, even as the company grapples with diminishing earnings.

A profound sense of distrust continues to overshadow the equity. The stock currently trades at a steep discount of approximately 59% to its net asset value (NAV), signaling deep-seated investor doubts about its intrinsic worth. The long-term performance chart paints a stark picture: over the past decade, the share price has plummeted by about 65%, a slide driven by consistent book value erosion and repeated dividend cuts. The present dividend yield near 20% reflects not corporate generosity, but rather the severe depreciation in the share price. Technical analysis reinforces this bearish outlook, with the price trading well below its key long-term moving averages.

A Portfolio in Transition

At the core of Prospect Capital's efforts is a significant strategic overhaul. The company is actively de-risking its holdings by scaling back exposure to collateralized loan obligations (CLOs) and similar positions. Concurrently, it is expanding its allocation to safer, first-lien senior secured loans. This category now constitutes roughly 71.1% of the total portfolio. Nearly all—96.7%—of its investment income is derived from interest payments. While this shift aims to bolster the BDC's risk profile, it carries the potential to compress profitability over the long term.

Should investors sell immediately? Or is it worth buying Prospect Capital?

Earnings Challenge Amid Restructuring

Recent financial results highlight the difficulty of this transition. For the quarter ended September 30, 2025, Prospect Capital reported net investment income (NII) of $79.35 million. This figure represents a decline of about 11.7% compared to the same period last year. The earnings drop underscores the challenge of maintaining profit levels while reallocating capital into potentially lower-yielding, albeit safer, assets.

To bolster its liquidity position, the company successfully placed a $167 million bond issue in late October 2025. The 5.5% Series A Institutional Unsecured Notes were oversubscribed, demonstrating continued access to institutional capital markets. Meanwhile, the investment team has signaled ongoing confidence in specific growth opportunities, nearly tripling its position in Turning Point Brands during the third quarter.

The upcoming quarterly reports will be critical in assessing whether this defensive portfolio realignment can deliver the intended stability or if it condemns earnings to a permanently subdued state.