Prospect Capital Corporation announced that it has entered into a definitive agreement to provide debt and equity for the acquisition of the businesses of First Tower Corp., a multiline specialty finance company based in Flowood, MS with over 150 branch offices.

Prospect is acquiring 80.1% of First Tower for $110.2 million of cash and 14.5 million shares of Prospect common stock. Prospect has the option, at Prospect’s sole discretion, to substitute up to 100% cash in lieu of such 14.5 million Prospect shares at a price per share based on average trading prices prior to the closing date. First Tower will be an independently managed, non-consolidated Prospect portfolio company capitalized partially and conservatively with third-party debt non-recourse to Prospect.

Based on the Prospect share price of $10.76 at market close on March 19, 2012, Prospect would be acquiring 80.1% of First Tower for approximately $266 million, thereby valuing 100% of the First Tower equity at approximately $333 million. In addition, Prospect intends to use a conservative level of approximately $245 million of third-party debt financing at the First Tower operating level, representing approximately 42% of total capitalization at First Tower’s operating entities. Prospect believes that this operating leverage level is lower than industry peers and consistent with First Tower’s historical prudent debt levels.

Several financial institutions that have served as long-standing lenders to First Tower are participating in First Tower’s new three-year $350 million revolving credit facility at a cost of LIBOR plus 2.75% with a LIBOR floor of 1%. These lenders include Bank of America as administrative agent, as well as BMO Harris Bank and Wells Fargo.

Prospect expects First Tower to pay out substantially all of its income to Prospect and other management shareholders on an ongoing basis. If 100% of trailing 12 month pre-tax income were to be achieved and distributed during the next 12 months after closing, Prospect and other management shareholders would realize a current yield of 21% on their equity. As a result, Prospect expects First Tower to generate significant income to Prospect and to represent an accretive acquisition. In addition, Prospect expects to generate $8 million in structuring fee income at closing.

Prospect is structuring the primary operating finance and holding businesses of First Tower as tax-efficient limited liability companies. Prospect will invest in the First Tower operating entities via a pass through holding company structure. As consideration for Prospect’s investment of $266 million, the holding company will issue approximately $226 million of holding company debt and approximately $40 million of holding company equity to Prospect. Pro forma for the transaction, the holding company will in turn own 80.1% of the First Tower operating company equity alongside management’s 19.9% ownership stake.

The acquisition is expected to close within 60 to 120 days and is subject to federal and state regulatory approvals. If Prospect chooses to issue all 14.5 million shares at closing, the First Tower shareholders would own approximately 11% of Prospect’s outstanding shares of common stock.

Established more than 70 years ago, First Tower is a branch-based specialty finance company that makes secured loans in the Southeastern and Midwestern United States with more than 150 offices and more than 550 employees. Led by Francis C. Lee, president and CEO, the senior management team at First Tower has worked together for more than a decade, and is expected to continue managing the company. The managers of First Tower are investing their personal capital to purchase 19.9% of the equity of First Tower alongside Prospect, thereby providing a significant alignment of incentives.

“With its significant borrower diversity, prudent third-party leverage, secured lending orientation, long history, consistent financial performance, steady growth, tax efficiency, and attractive yields, First Tower represents a compelling portfolio company investment opportunity,” said M. Grier Eliasek, president of Prospect.

“We are pleased to be partnering with Francis Lee and the First Tower management team,” said Richard T. Carratu, a managing director of Prospect Capital Management. “The team has delivered impressive financial results over many years, and Prospect intends to fully support the team’s efforts going forward.”

BMO Capital Markets and RBC Capital Markets served as financial advisors to Prospect in connection with the transaction, and Skadden, Arps, Slate, Meagher & Flom served as Prospect’s primary legal counsel in connection with the transaction and related matters.

Goldman, Sachs & Co. served as financial advisor to First Tower in connection with the transaction, and Milbank, Tweed, Hadley & McCloy served as First Tower’s primary legal counsel in connection with the transaction and related matters.

Prospect is a closed-end investment company that lends to and invests in private and microcap public businesses.