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Prospect BDC Issues Going Concern Warning

Prospect Floating Rate and Alternative Income Fund Inc. (formerly known as Prospect Sustainable Income Fund Inc., and previously as Prospect Flexible Income Fund Inc.), advised in its most recent quarterly report filed with the U.S. Securities and Exchange Commission that “there is substantial doubt about the [c]ompany’s ability to continue as a going concern” for at least one year after Feb. 13, 2023 (the date of its most recent quarterly filing).

According to Prospect, because many of the costs of operating the company are not proportional to the size of its investment portfolio, including accounting/auditing, legal, insurance and administrative costs (which includes the reimbursement of the compensation of the chief financial officer, chief compliance officer, treasurer, secretary and other administrative personnel of its administrator), it must raise sufficient capital in order to build a portfolio that generates sufficient revenue to cover the company’s expenses.

As of Dec. 31, 2022, the company says it has failed to raise sufficient capital to build a large enough portfolio to generate sufficient revenue to cover its operating expenses and has only been able to fund distributions to shareholders and pay a portion of its expenses through the expense limitation agreement from its adviser, which, after December 31, 2022, is no longer required to waive fees.

Additionally, on July 6, 2022, the end date of a “ramp period” provision within its credit facility was further extended from Aug. 25, 2022 to August 25, 2023. Without a further extension of the ramp period on the credit facility or a refinancing of the credit facility, the company warns that it may fail to comply with a covenant which may result in an event of default.

Prospect advises that it is undertaking a “number of actions” in order to improve its financial position by seeking additional equity and refinancing the credit facility, but that it currently has sufficient collateral to repay the amounts due. However, in order to meet these obligations, it would be required to sell a “significant number of investments” and that it may not be successful in doing so.

As of Dec. 31, 2022, the Prospect Floating Rate and Alternative Income Fund investment portfolio had a total fair value of $32.2 million comprised of interests in 21 portfolio companies and 24 structured subordinated notes.

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