Prospect Capital (PSEC) risk factors, 2025 10-K

Risks Relating to Our Business

1. 01We are subject to risks related to corporate social responsibility
2. 02Inflation can adversely impact our cost of capital and the value of our portfolio investments
3. 03Capital markets may experience periods of disruption and instability, and we cannot predict when these conditions occur. Such market conditions may materially and adversely affect debt and equity capital markets in the United States and abroad, which may have a negative impact on our business and operations
4. 04The illiquidity of our investments may make it difficult for us to sell such investments, if required. As a result, we may realize significantly less than the value at which we have recorded our investments if forced to liquidate quickly
5. 05The U.S. and global capital markets are subject to systemic risk that could adversely affect our business, financial condition and results of operations
6. 06Global economic, political and market conditions, including uncertainty about the financial or political stability of the United States, could have a significant adverse effect on our business, financial condition and results of operations
7. 07Legislative or other actions relating to taxes could have a negative effect on us
8. 08Changes in interest rates may adversely affect the value of our portfolio investments which could have an adverse effect on our business, financial condition and results of operations
9. 09to investors could make investment in our common stock less attractive if we are not able to increase our dividend rate, which could reduce the value of our common stock
10. 10Volatility in the global financial markets could have a material adverse effect on our business, financial condition and results of operations
11. 11Economic sanction laws in the United States and other jurisdictions may prohibit us and our affiliates from transacting with certain countries, individuals and companies
12. 12Trade negotiations and related government actions may create regulatory uncertainty for the portfolio companies and our investment strategy and adversely affect the profitability of the portfolio companies
13. 13Our financial condition and results of operations will depend on our ability to manage our future growth effectively
14. 14We are dependent upon Prospect Capital Management’s key management personnel for our future success
15. 15We operate in a highly competitive market for investment opportunities
16. 16We fund a portion of our investments with borrowed money, which magnifies the potential for gain or loss on amounts invested and may increase the risk of investing in us
17. 17We need to raise additional capital to grow because we must distribute most of our income
18. 18Our most recent NAV was calculated on June 30, 2025 and our NAV when calculated effective September 30, 2025 and thereafter may be higher or lower
19. 19Our business model depends upon the development and maintenance of strong referral relationships with other asset managers and investment banking firms
20. 20The Investment Adviser’s liability is limited under the Investment Advisory Agreement, and we are required to indemnify the Investment Adviser against certain liabilities, which may lead the Investment Adviser to act in a riskier manner on our behalf than it would when acting for its own account
21. 21Potential conflicts of interest could impact our investment returns
22. 22Our incentive fee could induce Prospect Capital Management to make speculative investments
23. 23We may be obligated to pay our Investment Adviser incentive compensation even if we incur a loss
24. 24The Investment Adviser and the Administrator have the right to resign on 60 days’ notice, and we may not be able to find a suitable replacement within that time, resulting in a disruption in our operations that could adversely affect our business, financial condition and results of operations
25. 25Changes in the laws or regulations governing our business or the businesses of our portfolio companies and any failure by us or our portfolio companies to comply with these laws or regulations could negatively affect the profitability of our operations or the profitability of our portfolio companies
26. 26Foreign and domestic political risk may adversely affect our business
27. 27We may experience cybersecurity incidents and are subject to cybersecurity risks. The failure in cybersecurity systems, as well as the occurrence of events unanticipated in our disaster recovery systems and management continuity planning, could impair our ability to conduct business effectively
28. 28We are subject to risks associated with artificial intelligence and machine learning technology
29. 29We are dependent on information systems and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends

Risks Relating to Our Operation as a Business Development Company

1. 30If we do not invest a sufficient portion of our assets in qualifying assets, we could fail to qualify as a BDC or be precluded from investing according to our current business strategy
2. 31To maintain our qualification for U.S. federal income tax purposes as a RIC under Subchapter M of the Code and obtain RIC tax treatment, we must meet certain source of income, annual distribution and asset diversification requirements
3. 32We may have difficulty paying our required distributions if we recognize income before or without receiving cash representing such income
4. 33Regulations governing our operation as a BDC affect our ability to raise, and the way in which we raise, additional capital. These constraints may hinder our Investment Adviser’s ability to take advantage of attractive investment opportunities and to achieve our investment objective
5. 34Securitization of our assets subjects us to various risks
6. 35Our ability to invest in public companies may be limited in certain circumstances

Risks Relating to Our Investments

1. 36We may not realize gains or income from our investments
2. 37Most of our portfolio investments are recorded at fair value as determined in good faith under the direction of our Board of Directors and, as a result, there is uncertainty as to the value of our portfolio investments
3. 38Price declines and illiquidity in the corporate debt markets have adversely affected, and may in the future adversely affect, the fair value of our portfolio investments, reducing our net asset value through increased net unrealized depreciation
4. 39Our investments in prospective portfolio companies may be risky and we could lose all or part of our investment
5. 40The lack of liquidity in our investments may adversely affect our business
6. 41Economic recessions or downturns could impair our portfolio companies and harm our operating results
7. 42Investments in equity securities, many of which are illiquid with no readily available market, involve a substantial degree of risk
8. 43There may be circumstances where our debt investments could be subordinated to claims of other creditors or we could be subject to lender liability claims
9. 44Our portfolio companies may incur debt or issue equity securities that rank equally with, or senior to, our investments in such companies
10. 45When we are a debt or minority equity investor in a portfolio company, we are often not in a position to exert influence on the entity, and other debt holders, other equity holders and/or portfolio company management may make decisions that could decrease the value of our portfolio holdings
11. 46Our portfolio companies may be highly leveraged
12. 47Our portfolio contains a limited number of portfolio companies, some of which comprise a substantial percentage of our portfolio, which subjects us to a greater risk of significant loss if any of these companies defaults on its obligations under any of its debt securities
13. 48Our failure to make follow-on investments in our existing portfolio companies could impair the value of our portfolio
14. 49We may be unable to invest the net proceeds raised from offerings and repayments from investments on acceptable terms, which would harm our financial condition and operating results
15. 50We may have limited access to information about privately-held companies in which we invest
16. 51We may not be able to fully realize the value of the collateral securing our debt investments
17. 52Our investments in foreign securities may involve significant risks in addition to the risks inherent in U.S. investments
18. 53We may expose ourselves to risks if we engage in hedging transactions
19. 54Our Board of Directors may change our operating policies and strategies without prior notice or stockholder approval, the effects of which may be adverse to us and could impair the value of our stockholders’ investment
20. 55Investments in the energy sector are subject to many risks
21. 56Our investments in collateralized loan obligations are subject to additional risks
22. 57The application of the risk retention rules under Section 941 of the Dodd-Frank Act to CLOs may have broader effects on the CLO and loan markets in general, potentially resulting in fewer or less desirable investment opportunities for us
23. 58Risks affecting investments in real estate
24. 59To the extent original issue discount (“OID”) and payment in kind (“PIK”) interest constitute a portion of our income, we will be exposed to typical risks associated with such income being required to be included in taxable and accounting income prior to receipt of cash representing such income
25. 60Investments in covenant-lite loans may expose us to different and increased risks

Risks Relating to Our Securities

1. 61Our credit ratings may not reflect all risks of an investment in our debt or preferred equity securities
2. 62Senior securities, including debt and preferred equity, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business, financial condition and results of operations
3. 63Corresponding Return to Common Stockholder(1) (33.4)% (21.0)% (8.6)% 3.8% 16.2%
4. 64(1) Assumes no conversion of preferred stock to common stock
5. 65The Public Notes present other risks to holders of our common stock, including the possibility that such notes could discourage an acquisition of us by a third party and accounting uncertainty
6. 66The Public Notes present other risks to holders of our preferred stock
7. 67Floating rate securities, like the Floating Rate Preferred Stock, have risks that conventional fixed rate securities do not
8. 68We fund a portion of our investments with preferred stock, which magnifies the potential for gain or loss and the risks of investing in us in the same way as our borrowings
9. 69We have entered into dealer manager agreements and underwriting agreements pursuant to which we intend to sell shares of 5.50% Preferred Stock and 6.50% Preferred Stock, the terms of which could result in significant dilution to existing common stockholders
10. 70On May 19, 2021, we entered into an Underwriting Agreement with UBS Securities LLC, relating to the offer and sale of 187,000 shares, par value $0.001 per share, of Series A2 Preferred Stock, with a liquidation preference of $25.00 per share
11. 71With respect to the 5.50% Preferred Stock and 6.50% Preferred Stock, the consideration paid upon a Holder Optional Conversion and Issuer Optional Conversion is uncertain
12. 72Unlike the 5.50% Preferred Stock and 6.50% Preferred Stock, the Floating Rate Preferred Stock and 7.50% Preferred Stock do not have a Holder Optional Conversion feature
13. 73Redemption of our Floating Rate Preferred Stock and 7.50% Preferred Stock at the Holder’s option is limited
14. 74Redemption capacity of the 7.50% Preferred Stock will be allocated on a pro rata basis based on the number of 7.50% Preferred Stock, as applicable, submitted in the event that a monthly redemption is oversubscribed based on any of the foregoing redemption limits
15. 75Although we have retained the right to waive the Series M4 Shares Clawback and Series M5 Shares Clawback in the manner described above, we are not required to establish any such waivers and we may never establish any such waivers
16. 76There is no cap on the number of shares of common stock that can be issued upon the conversion of shares of 5.50% Preferred Stock and 6.50% Preferred Stock. The conversion of the 5.50% Preferred Stock and 6.50% Preferred Stock into shares of common stock could cause the price of common stock to decline significantly
17. 77Shares of common stock, which shares of 5.50% Preferred Stock and 6.50% Preferred Stock may be converted into, rank junior to the 5.50% Preferred Stock and 6.50% Preferred Stock with respect to dividends and upon liquidation
18. 78Holders of our Preferred Stock have the right to elect members of the Board of Directors and class voting rights on certain matters
19. 79The trading market or market value of our publicly traded preferred stock may fluctuate
20. 80The Company may be subject to a greater risk in this period of heightened interest rates. There is a possibility that interest rates may continue to rise, which would likely drive down the prices of income- or dividend-paying securities
21. 81In addition to regulatory restrictions that restrict our ability to raise capital, our credit facility contains various covenants which, if not complied with, could accelerate repayment under the facility, thereby materially and adversely affecting our liquidity, financial condition and results of operations
22. 82Failure to extend our existing credit facility, the revolving period of which is currently scheduled to expire on June 28, 2028, could have a material adverse effect on our results of operations and financial position and our ability to pay expenses and make distributions
23. 83Failure to refinance our existing Unsecured Notes could have a material adverse effect on our results of operations and financial position
24. 84The trading market or market value of our publicly issued debt securities may fluctuate
25. 85Terms relating to redemption may materially adversely affect our noteholders’ or Preferred Stockholders’, as applicable, return on any debt or preferred equity securities that we may issue
26. 86Our shares of common stock currently trade at a discount from net asset value and may continue to do so in the future, which could limit our ability to raise additional equity capital
27. 87In addition, due to the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. Further, if we invest a greater amount of assets in equity securities that do not pay current dividends, it could reduce the amount available for distribution
28. 88Investing in our securities may involve a high degree of risk and is highly speculative
29. 89Our stockholders may experience dilution in their ownership percentage if they opt out of our dividend reinvestment plan
30. 90Sales or issuances of Preferred Stock at a discount to Stated Value reduces the net assets available to holders of our common stock
31. 91Sales of substantial amounts of our common stock in the public market may have an adverse effect on the market price of our common stock
32. 92If we sell shares of our common stock or securities to subscribe for or are convertible into shares of our common stock at a discount to our net asset value per share, stockholders who do not participate in such sale will experience immediate dilution in an amount that may be material
33. 93Our ability to enter into transactions with our affiliates is restricted
34. 94The market price of our securities may fluctuate significantly
35. 95In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has, from time to time, been brought against that company
36. 96There is a risk that you may not receive distributions or that our distributions may not grow over time
37. 97Provisions of the Maryland General Corporation Law and of our charter and bylaws could deter takeover attempts and have an adverse impact on the price of our common stock
38. 98Your interest in us may be diluted if you do not fully exercise your subscription rights in any rights offering. In addition, if the subscription price is less than our net asset value per share, then you will experience an immediate dilution of the aggregate net asset value of your shares
39. 99We may in the future choose to pay dividends in our own stock, in which case our stockholders may be required to pay tax in excess of the cash they receive
40. 100We may experience fluctuations in our quarterly results