Prospect Fund's Net Assets Plunge on Realized, Unrealized Losses

TL;DR

**Sell Prospect Floating Rate & Alternative Income Fund; significant unrealized losses and declining NAV signal trouble ahead.**

AI Summary

Prospect Floating Rate & Alternative Income Fund, Inc. reported a net decrease in net assets from operations of $2,204,839 for the three months ended September 30, 2025, a significant decline from a net increase of $258,463 in the same period of 2024. Total investment income slightly increased to $2,191,356 in Q3 2025 from $2,165,210 in Q3 2024. However, this was offset by a substantial increase in net realized losses on investments to $1,070,322 (from $726,757 in Q3 2024) and a net change in unrealized losses of $1,985,074 (compared to a gain of $350,894 in Q3 2024). The company also incurred a $495,849 loss from the extinguishment of debt. Net asset value per Class A share decreased from $4.50 on June 30, 2025, to $4.14 on September 30, 2025. The fund transitioned from a Senior Secured Revolving Credit Facility with $45,500,000 outstanding to an OZK Credit Facility with $39,246,250 outstanding, incurring significant financing costs. Cash and cash equivalents increased to $23,103,480 from $16,499,200, primarily due to operating activities providing $14,356,236 in cash.

Why It Matters

This filing reveals a concerning decline in Prospect Floating Rate & Alternative Income Fund's performance, with net assets from operations swinging from a gain to a significant loss. For investors, the 8% drop in NAV per Class A share from $4.50 to $4.14 in a single quarter signals potential capital erosion and raises questions about portfolio valuation and risk management. The shift in credit facilities and the associated debt extinguishment loss could impact future financing costs and liquidity, potentially affecting the fund's ability to make new investments or sustain distributions. In a competitive alternative income market, sustained losses could deter new capital inflows and challenge the fund's long-term viability.

Risk Assessment

Risk Level: high — The fund experienced a net decrease in net assets from operations of $2,204,839 for the three months ended September 30, 2025, a sharp reversal from a $258,463 increase in the prior year. This is primarily driven by $1,985,074 in net change in unrealized losses on investments and $1,070,322 in net realized losses, indicating significant portfolio underperformance and potential asset quality issues.

Analyst Insight

Investors should consider liquidating their positions in Prospect Floating Rate & Alternative Income Fund given the substantial net decrease in net assets from operations and the significant unrealized losses. The declining NAV per share from $4.50 to $4.14 suggests ongoing capital erosion, making it a high-risk investment.

Financial Highlights

debt To Equity

1.55

revenue

$2,191,356

operating Margin

N/A

total Assets

$94,948,791

total Debt

$54,700,000

net Income

-$2,204,839

eps

N/A

gross Margin

N/A

cash Position

$23,103,480

revenue Growth

+0.28%

Revenue Breakdown

Key Numbers

• $2.2M — Net decrease in net assets from operations (For the three months ended September 30, 2025, a significant decline from a $0.26M increase in Q3 2024.)
• $1.98M — Net change in unrealized losses on investments (For Q3 2025, a reversal from a $0.35M gain in Q3 2024, indicating portfolio valuation challenges.)
• $1.07M — Net realized losses on investments (For Q3 2025, an increase from $0.73M in Q3 2024, reflecting actual losses on disposed assets.)
• $495.8K — Extinguishment of debt loss (Incurred during Q3 2025, contributing to the overall net asset decrease.)
• $4.14 — Net asset value per Class A share (As of September 30, 2025, down from $4.50 on June 30, 2025, representing an 8% quarterly decline.)
• $23.1M — Cash and cash equivalents (As of September 30, 2025, an increase from $16.5M on June 30, 2025, primarily due to operating cash flow.)
• $39.2M — OZK Credit Facility outstanding (As of September 30, 2025, replacing the previous Senior Secured Revolving Credit Facility.)
• 8% — Decrease in NAV per Class A share (From $4.50 to $4.14 between June 30, 2025, and September 30, 2025.)

Key Players & Entities

• Prospect Floating Rate & Alternative Income Fund, Inc. (company) — Registrant
• SEC (regulator) — Securities and Exchange Commission
• $2,204,839 (dollar_amount) — Net decrease in net assets from operations for Q3 2025
• $258,463 (dollar_amount) — Net increase in net assets from operations for Q3 2024
• $1,985,074 (dollar_amount) — Net change in unrealized losses on investments for Q3 2025
• $1,070,322 (dollar_amount) — Net realized losses on investments for Q3 2025
• $495,849 (dollar_amount) — Loss from extinguishment of debt for Q3 2025
• $4.14 (dollar_amount) — Net asset value per Class A share as of September 30, 2025
• $4.50 (dollar_amount) — Net asset value per Class A share as of June 30, 2025
• OZK Credit Facility (company) — New credit facility with $39,246,250 outstanding

FAQ

Risk Factors

• Increased Investment Losses [high — financial]: The fund experienced a substantial increase in net realized losses on investments to $1,070,322 in Q3 2025 from $726,757 in Q3 2024. Furthermore, there was a significant shift from a net gain of $350,894 in unrealized gains in Q3 2024 to a net loss of $1,985,074 in Q3 2025, indicating adverse market movements impacting portfolio valuations.
• Debt Extinguishment Costs [medium — financial]: The fund incurred a loss of $495,849 from the extinguishment of debt during Q3 2025. This loss, coupled with increased interest expenses, negatively impacted the fund's net assets.
• Leverage and Credit Facility Changes [medium — financial]: The fund transitioned from a Senior Secured Revolving Credit Facility with $45,500,000 outstanding to an OZK Credit Facility with $39,246,250 outstanding. While the total debt decreased, the transition and associated costs contributed to financial pressures.
• Portfolio Valuation Volatility [high — market]: The substantial net change in unrealized losses of $1,985,074 in Q3 2025, compared to a gain of $350,894 in Q3 2024, highlights the fund's sensitivity to market fluctuations and the inherent volatility in its investment portfolio.
• Declining Net Asset Value [high — operational]: The net asset value per Class A share decreased by 8% from $4.50 on June 30, 2025, to $4.14 on September 30, 2025. This decline is a direct result of the operational losses and market impacts detailed in the financial results.

Industry Context

The floating rate and alternative income fund sector typically seeks to provide investors with income streams that are less sensitive to interest rate changes compared to traditional fixed-rate investments. However, these funds often carry higher credit risk and are subject to market volatility, especially those investing in alternative assets. Recent market conditions have presented challenges, with increased realized and unrealized losses impacting fund performance.

Regulatory Implications

As a registered investment company, Prospect Floating Rate & Alternative Income Fund, Inc. is subject to regulations by the SEC, including disclosure requirements and rules governing leverage and asset management. Changes in credit facilities and significant investment losses may attract regulatory scrutiny regarding risk management practices.

What Investors Should Do

1. Review the specific composition of the investment portfolio
2. Analyze the terms and costs associated with the new OZK Credit Facility
3. Monitor the trend in Net Asset Value per share
4. Assess the fund's strategy for managing market volatility

Key Dates

• 2025-09-30: End of Q3 2025 — Reported a net decrease in net assets of $2,204,839 and a decline in NAV per Class A share to $4.14.
• 2025-09-30: OZK Credit Facility Outstanding — The fund had $39,246,250 outstanding on its new credit facility, replacing the previous one.
• 2025-06-30: End of Q2 2025 — NAV per Class A share was $4.50, and the Senior Secured Revolving Credit Facility had $45,500,000 outstanding.

Glossary

PIK interest income

Paid-In-Kind interest income, where interest is paid in the form of additional debt or equity rather than cash. (A decrease in this type of income was noted, impacting total investment income.)

Net realized losses on investments

Actual losses incurred when investments are sold for less than their purchase price. (These losses increased significantly in Q3 2025, contributing to the overall decrease in net assets.)

Net change in unrealized losses

The change in the market value of investments that are still held by the fund, reflecting gains or losses due to market fluctuations. (A substantial unrealized loss in Q3 2025 reversed a prior period gain, indicating portfolio value decline.)

Extinguishment of debt

The process of retiring or paying off debt, which can sometimes involve costs or losses. (The fund incurred a specific loss related to debt extinguishment in the current quarter.)

Net asset value (NAV) per share

The value of each share of a fund, calculated by dividing the total net assets by the number of outstanding shares. (The NAV per Class A share decreased by 8% in the quarter, a key indicator of performance.)

Senior Secured Revolving Credit Facility

A type of loan that allows a company to borrow, repay, and re-borrow funds up to a certain limit, secured by assets. (This was the fund's previous primary source of debt financing.)

OZK Credit Facility

A specific credit facility provided by OZK Bank, used by the fund in the current period. (This facility replaced the previous credit line and has a different outstanding balance.)

Year-Over-Year Comparison

Compared to the prior period (likely Q2 2025 audited financials), the fund has seen a significant deterioration in performance. Total investment income saw a marginal increase of 0.28% to $2,191,356, but this was overshadowed by a substantial net decrease in net assets from operations of $2,204,839, a stark contrast to the prior period's net increase. Key negative shifts include a large increase in net realized losses ($1,070,322 vs. $726,757) and a reversal from unrealized gains to significant unrealized losses ($1,985,074 loss vs. $350,894 gain). The fund also incurred a $495,849 loss from debt extinguishment and transitioned its credit facility, leading to a decrease in NAV per Class A share by 8%.

Key Financial Figures

• $0.001 — A and Class I Common Stock outstanding, $0.001 par value per share, respectively. As o

Filing Documents

• pfloat-20250930.htm (10-Q) — 3039KB
• pfloat10q-q12026ex311.htm (EX-31.1) — 9KB
• pfloat10q-q12026ex312.htm (EX-31.2) — 9KB
• pfloat10q-q12026ex321.htm (EX-32.1) — 5KB
• pfloat10q-q12026ex322.htm (EX-32.2) — 5KB
• 0001521945-25-000094.txt ( ) — 14791KB
• pfloat-20250930.xsd (EX-101.SCH) — 72KB
• pfloat-20250930_cal.xml (EX-101.CAL) — 69KB
• pfloat-20250930_def.xml (EX-101.DEF) — 451KB
• pfloat-20250930_lab.xml (EX-101.LAB) — 741KB
• pfloat-20250930_pre.xml (EX-101.PRE) — 573KB
• pfloat-20250930_htm.xml (XML) — 3242KB

Forward-Looking Statements

Forward-Looking Statements 1 PART I Ite m 1. Con solidated Financial Statements 3 Consolidated Statements of Assets and Liabilities as of September 30, 2025 (Unaudited) and June 30, 20 25 3 Consolidated Statements of Operations for the three months ended September 30, 202 5 and 202 4 (Unaudited) 3 Consolidated Statements of Changes in Net Assets for the three months ended September 30, 202 5 and 202 4 (Unaudited ) 5 Consolidated Statements of Cash Flows for the three months ended September 30, 202 5 and 202 4 (Unaudited) 6 Consolidated Schedules of Investments as of September 30, 2025 (Unaudited) and June 30, 2025 7 Notes to Consolidated Financial Statement s (Unaudited) 20 It e m 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations 50 Ite m 3.

Quantitative and Qualitative Disclosures About Market Risk

Quantitative and Qualitative Disclosures About Market Risk 68 Ite m 4.

Controls and Procedures

Controls and Procedures 69 PART II Item 1 .

Legal Proceedings

Legal Proceedings 69 Item 1A.

Risk Factors

Risk Factors 69 Item 2 . Unregistered Sales of Equity Securities and Use of Proceeds 69 Item 3 . Default Upon Senior Securities 70 Item 4. Mine Safety Disclosures 70 Item 5. Other Information 70 Item 6 . Exhibits 70

Forward-Looking Statements

Forward-Looking Statements Some of the statements in this quarterly report on Form 10-Q (the "Quarterly Report") constitute forward-looking statements, which relate to future events or our performance or financial condition. The forward-looking statements contained in this Quarterly Report involve risks, uncertainties and other factors, some of which are beyond our control, including, but not limited to, statements as to: our, or our portfolio companies', future operating results; our business prospects and the prospects of our portfolio companies; the return or impact of current or future investments that we expect to make; our contractual arrangements and relationships with third parties; the willingness of our investment adviser to waive fees; the dependence of our future success on the general economy and its impact on the industries in which we invest; the impact of global events outside of our control, including the consequences of the ongoing conflict between Russia and Ukraine and in the Middle East, on our and our portfolio companies' businesses and the global economy; the impact of alternative reference rates on our business and certain of our investments; uncertainty surrounding inflation and the financial stability of the United States, Europe, and China; trade negotiations and related government actions may create regulatory uncertainty for our portfolio companies and our investment strategies and adversely affect the profitability of our portfolio companies; the financial condition and ability of our current and prospective portfolio companies to achieve their objectives; difficulty in obtaining financing or raising capital, especially in the current credit and equity environment, and the impact of a protracted decline in the liquidity of credit markets on our and our portfolio companies' business; the level, duration and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets; t

Consolidated Financial Statements

Item 1. Consolidated Financial Statements Assets September 30, 2025 June 30, 2025 (Unaudited) (Audited) Investments at fair value: Non-control/non-affiliate investments (amortized cost of $ 74,841,274 and $ 88,404,806 , respectively) (Notes 7 and 8) $ 69,467,990 $ 85,016,596 Cash and cash equivalents (restricted cash of $ 376,218 and $ — , respectively) 23,103,480 16,499,200 Deferred financing costs (Note 10) 1,061,694 530,441 Interest receivable 753,926 564,755 Due from Adviser (Note 4) 298,995 — Receivable for repayments of portfolio investments 134,802 74,284 Prepaid expenses and other assets 83,752 133,985 Deferred offering costs 44,152 106,129 Total Assets 94,948,791 102,925,390 Liabilities Senior Secured Revolving Credit Facility (Note 10) — 45,500,000 OZK Credit Facility (Note 10) 39,246,250 — Payable for open trades 15,452,231 14,988,042 Due to Administrator (Note 4) 2,015,442 2,015,442 Accrued legal fees 449,247 49,068 Distributions payable 310,487 152,652 Interest payable 121,956 29,810 Accrued expenses 73,793 68,489 Accrued audit fees 53,593 133,750 Total Liabilities 57,722,999 62,937,253 Commitments and Contingencies (Note 9) Net Assets $ 37,225,792 $ 39,988,137 Components of Net Assets Common Stock, par value $ 0.001 per share ( 75,000,000 shares authorized; 8,994,719 and 8,895,933 Class A and Class I shares issued and outstanding, respectively) (Note 3) $ 8,996 $ 8,897 Paid-in capital in excess of par (Note 3 and Note 6) 54,121,473 53,680,378 Distributions in excess of earnings (Note 6) ( 16,904,677 ) ( 13,701,138 ) Net Assets $ 37,225,792 $ 39,988,137 3 PROSPECT FLOATING RATE AND ALTERNATIVE INCOME FUND, INC. CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES NET ASSET VALUE PER SHARE September 30, 2025 June 30, 2025 (Unaudited) (Audited) Class A Shares: Net assets $ 37,216,536 $ 39,978,083 Common Shares outstanding ($ 0.001 par value, 37,500,000 authorized) 8,992,482 8,893,696 Net asset value per share

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