Prospect Capital Agrees to Acquire Patriot Capital for $197 Million, or 54% of Equity Book Value
NEW YORK, NY--(Marketwire - August 3, 2009) - Prospect Capital Corporation (NASDAQ: PSEC)
("Prospect") announced today that it has entered into a definitive
agreement to acquire Patriot Capital Funding, Inc. (NASDAQ: PCAP)
("Patriot").
Prospect is acquiring Patriot for $197 million, comprised of (a) cash to
repay all Patriot debt, anticipated to be $110.5 million when the
acquisition closes, plus (b) Prospect shares exchanged at a ratio of
approximately 0.3992 Prospect shares for each Patriot share, or 8,616,467
Prospect shares for 21,584,251 Patriot shares, with such exchange ratio
decreased by any tax distributions Patriot may declare before closing.
The acquisition, unanimously approved by both of Prospect's and Patriot's
Board of Directors, is expected to close in the next 60 days. The
acquisition is subject to Patriot stockholder approval and other customary
closing conditions. Patriot's shareholders will own 15% of Prospect's
outstanding shares pro forma for the acquisition, so Prospect shareholder
approval is not required.
Prospect believes the benefits of the acquisition for its shareholders
include, but are not limited to:
-- Accretion: Prospect expects the Prospect shares issued to generate 64
cents per share per quarter of net investment income, which would be
accretive to Prospect at 10 cents per share per quarter across all Prospect
shares pro forma for the acquisition. Prospect expects to generate a more
than 20% IRR and 2x cash-on-cash return on the Patriot acquisition.
-- Attractive Price: Prospect is acquiring Patriot for 63% of asset cost,
75% of asset book value, and 54% of equity book value. Purchases of assets
below book value, if such assets have existing leverage, imply even greater
discounts to equity book value. Prospect's purchase price, assuming
Prospect has to pay 100 cents on the dollar for the debt financed portion
of the Patriot portfolio, translates into 54 cents on the dollar for the
equity portion.
-- Synergy: Because Patriot has been in default without forbearance from
its lenders, creating a risk of lender foreclosure eliminating Patriot
equity value, and because Patriot has ceased its dividend, Patriot's stock
price has traded at significant discounts to net asset value. Prospect's
acquisition, which pays off Patriot's existing debt, enables both a premium
to the Patriot share price as well as a discount to Patriot net asset
value, unlocking value for mutual shareholder benefit.
-- Scale: With this acquisition, Prospect's gross assets increase by more
than 35% and equity capitalization increases by more than 14% without
incurring underwriting costs associated with a stock offering. Prospect
expects this greater scale to enhance daily trading volume, increase
Prospect's attractiveness to lending institutions, and expand access to
investment opportunities, including both individual transactions as well as
portfolio purchase opportunities similar to Patriot.
-- Diversification: Prospect will double its number of portfolio companies
to over 60 by adding approximately 30 companies located in 13 U.S. states
and covering 18 industry sectors.
-- Seniority: 70% of the acquired asset value is in portfolio companies
where Patriot has a senior secured position in the capital structure.
-- Private Equity Sponsor Expansion: Patriot has pursued a strategy of
lending to middle market private equity sponsors. With this acquisition,
Prospect deepens its presence in the sponsor marketplace, building on
Prospect's own sponsor business in addition to Prospect's direct lending
and controlled buyouts.
-- Low Leverage: On a combined basis, Prospect's debt to equity is
expected to be less than 20%.
-- Tax-free: The acquisition is expected to be considered a tax-free
reorganization under the Internal Revenue Code.
All amounts set forth herein are estimates subject to change.
"The Patriot acquisition is a perfect example of our previously stated
strategy to go on offense in the current opportunity-rich marketplace in
which competitors have faltered with overleveraged balance sheets," said M.
Grier Eliasek, President of Prospect. "We are pursuing other move-the-
needle portfolio opportunities similar to Patriot in addition to continuing
our work on individual transactions."
"We are pleased to be completing with Patriot the first of what we hope
will be multiple strategically compelling acquisitions to drive superior
value to our shareholders," said John F. Barry III, Chief Executive Officer
of Prospect. "We would not have signed this agreement but for the
creativity, drive, and persistence of Grier Eliasek, and his team, focusing
and executing on this wonderful opportunity for Prospect and Patriot. We
look forward to having Richard Buckanavage and other Patriot professionals
join our team."
Skadden, Arps, Slate, Meagher & Flom LLP served as Prospect's legal counsel
in connection with the transaction and related matters.
FBR Capital Markets & Co. served as financial advisor to Patriot in
connection with the transaction, and Sutherland Asbill & Brennan LLP served
as Patriot's legal counsel in connection with the transaction and related
matters.
ABOUT PROSPECT CAPITAL CORPORATION
Prospect Capital Corporation (www.prospectstreet.com) is a closed-end
investment company that lends to and invests in private and microcap public
businesses. Prospect's investment objective is to generate both current
income and long-term capital appreciation through debt and equity
investments.
Prospect has elected to be treated as a business development company under
the Investment Company Act of 1940 (the "1940 Act"). Prospect is required
to comply with a series of regulatory requirements under the 1940 Act as
well as applicable NASDAQ, federal and state rules and regulations.
Prospect has elected to be treated as a regulated investment company under
the Internal Revenue Code of 1986. Failure to comply with any of the laws
and regulations that apply to Prospect could have an adverse effect on
Prospect and its shareholders.
ABOUT PATRIOT CAPITAL FUNDING, INC.
Patriot Capital Funding, Inc. (www.patcapfunding.com) is a specialty
finance company primarily providing customized financing solutions to
private equity sponsors focused on making investments in small- to mid-
sized companies. Patriot Capital Funding typically invests in companies
with annual revenues generally ranging from $10 million to $100 million
that operate in diverse industry sectors. Investments usually take the form
of senior secured loans, junior secured loans, and/or subordinated debt
investments -- which may contain equity or equity-related instruments.
Patriot Capital Funding also offers "one-stop" financing, which typically
includes a revolving credit line, one or more senior term loans and a
subordinated debt investment. Patriot Capital Funding also makes equity co-
investments of up to $3.0 million.
CAUTIONARY LANGUAGE CONCERNING FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, whose safe harbor
for forward-looking statements does not apply to business development
companies. Any such statements, other than statements of historical fact,
are highly likely to be affected by other unknowable future events and
conditions, including elements of the future that are or are not under our
control, and that we may or may not have considered; accordingly, such
statements cannot be guarantees or assurances of any aspect of future
performance. Actual developments and results are highly likely to vary
materially from these estimates and projections of the future. Such
statements are subject to a number of risks, assumptions and uncertainties
that include, but are not limited to risks associated with the acquisition,
including (i) the occurrence of any event, change or other circumstances
that could give rise to the termination of the merger agreement; (ii) the
inability to complete the transaction due to the failure to obtain the
necessary stockholder approval; (iii) the failure to satisfy other
conditions to completion of the transaction; and (iv) other risks. Such
statements speak only as of the time when made, and we undertake no
obligation to update any such statement now or in the future.
IMPORTANT ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC
This communication is being made in respect of the proposed business
combination involving Prospect and Patriot. In connection with the proposed
transaction, Prospect plans to file with the SEC a Registration Statement
on Form N-14 containing a Joint Proxy Statement/Prospectus and each of
Prospect and Patriot plan to file with the SEC other documents regarding
the proposed transaction. The definitive Joint Proxy Statement/Prospectus
will be mailed to stockholders of Patriot. INVESTORS AND SECURITY HOLDERS
OF PROSPECT AND PATRIOT ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED WITH THE SEC CAREFULLY IN
THEIR ENTIRETY WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN
IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION.
Investors and security holders will be able to obtain free copies of the
Registration Statement and the Joint Proxy Statement/Prospectus (when
available) and other documents filed with the SEC by Prospect and Patriot
through the web site maintained by the SEC at http://www.sec.gov/. Free
copies of the Registration Statement and the Joint Proxy
Statement/Prospectus (when available) and other documents filed with the
SEC can also be obtained by directing a request to Prospect Capital
Corporation, 10 East 40th Street, 44th Floor, New York, NY 10016,
Attention: Brian Oswald, Chief Financial Officer, or by directing a request
to Patriot Capital Funding, Inc., 274 Riverside Avenue, Westport,
Connecticut, Attention: William Alvarez, Chief Financial Officer.
PROXY SOLICITATION
Prospect, Patriot and their respective directors, executive officers and
certain other members of management and employees may be soliciting proxies
from Patriot stockholders in favor of the acquisition. Information
regarding the persons who may, under the rules of the SEC, be considered
participants in the solicitation of the Patriot stockholders in connection
with the proposed acquisition will be set forth in the proxy
statement/prospectus when it is filed with the SEC. You can find
information about Prospect's executive officers and directors in the
prospectus supplement, dated June 30, 2009, to the prospectus dated June
26, 2009, filed with the SEC on July 1, 2009. You can find information
about Patriot's executive officers and directors in its definitive proxy
statement filed with the SEC on April 28, 2009. You can obtain free copies
of these documents from Prospect and Patriot in the manner set forth above.