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

Prospect Capital's Surprising Profit Boost Sparks Stock Rally

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