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Fifth Street Finance Corp. Announces Fourth Quarter and Fiscal Year Ended September 30, 2014 Financial Results

GREENWICH, CT, Dec. 1, 2014 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces its financial results for the fourth fiscal quarter and year ended September 30, 2014.

Fourth Fiscal Quarter 2014 Financial Highlights

  • Net investment income for the quarter ended September 30, 2014 was $37.5 million, or $0.25 per share;
  • Net asset value per share was $9.64 as of September 30, 2014;
  • We funded $274.9 million of investments during the quarter ended September 30, 2014; and
  • The weighted average yield on our debt investments, including the return on our investment in a joint venture senior loan fund vehicle, increased to 11.1% from the previous quarter of 10.8%.

Fiscal Year 2014 Financial Highlights

  • Net investment income for the year ended September 30, 2014 was $142.6 million, or $1.00 per share, as compared to $115.0 million, or $1.04 per share, for the year ended September 30, 2013;
  • Net realized and unrealized losses for the year ended September 30, 2014 were $30.0 million, or $0.21 per share, as compared to $13.1 million, or $0.12 per share, for the year ended September 30, 2013; and
  • Net increase in net assets resulting from operations for the year ended September 30, 2014 was $112.5 million, or $0.79 per share, as compared to $101.8 million, or $0.92 per share, for the year ended September 30, 2013.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our investment portfolio at September 30, 2014 to be $2.5 billion, as compared to $1.9 billion at September 30, 2013. Total assets at September 30, 2014 were $2.7 billion, as compared to $2.1 billion at September 30, 2013.

On September 9, 2014, FSC and certain of its affiliates received an exemptive order from the Securities and Exchange Commission that allows for participation in negotiated co-investment transactions with certain affiliates and other funds managed by our investment adviser, subject to certain conditions. FSC can now co-invest with Fifth Street Senior Floating Rate Corp. as well as the private funds managed by Fifth Street Management LLC, which provides the platform with greater scale, investment flexibility and the ability to hold up to $250 million per transaction.

During the quarter ended September 30, 2014, we closed $394.4 million of investments in nine new and five existing portfolio companies, and funded $274.9 million across new and existing portfolio companies. This compares to closing $307.4 million in 10 new and seven existing portfolio companies and funding $294.4 million during the quarter ended September 30, 2013. During the quarter ended September 30, 2014, we received $285.1 million in connection with the full repayments of 11 of our debt investments, all of which were exited at or above par, except for one which was exited at a 1% discount to par. We also received an additional $123.6 million in connection with syndications of debt investments and sales of debt investments in the open market.

At September 30, 2014, our portfolio consisted of investments in 124 companies, 104 of which were completed in connection with investments by private equity sponsors, one of which was in Senior Loan Fund JV I, LLC ("SLF JV I") and 19 of which were in private equity funds. At fair value, 94.0% of our portfolio consisted of debt investments (79.0% of our portfolio consisted of senior secured loans). Our average portfolio company debt investment size at fair value was $24.2 million at September 30, 2014, versus $22.1 million at September 30, 2013.

As of September 30, 2014, SLF JV I had $186.0 million in assets including senior secured loans to 18 portfolio companies. The joint venture generated income of $2.3 million to FSC during the September quarter, which represents a 17% weighted average annualized return on investment.

"Fifth Street's leading direct origination platform continues to generate investment opportunities with attractive risk-adjusted returns," stated our Chief Executive Officer, Leonard M. Tannenbaum, adding, "Our strong September quarter was highlighted by the funding of investments in and upsizing of Senior Loan Fund JV I, our joint venture with an affiliate of Kemper Corporation. In addition, Fifth Street received an exemptive order from the SEC allowing for co-investments across the platform, providing FSC with greater scalability and flexibility to deploy capital efficiently and effectively."

Our weighted average yield on debt investments at September 30, 2014, including the return on SLF JV I, was 11.1% and included a cash component of 9.9%. At September 30, 2014 and September 30, 2013, $1.6 billion and $1.2 billion, respectively, of our debt investments at fair value were at floating interest rates, which represented 70.0% and 67.4%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended September 30, 2014 and September 30, 2013 was $76.2 million and $57.1 million, respectively. For the quarter ended September 30, 2014, the amount primarily consisted of $58.8 million of interest income from portfolio investments. For the quarter ended September 30, 2013, the amount primarily consisted of $46.9 million of interest income from portfolio investments. For the quarter ended September 30, 2014, PIK interest income net of PIK collected in cash represented only 6.9% of total investment income.

Total investment income for the years ended September 30, 2014 and September 30, 2013 was $294.0 million and $221.6 million, respectively. For the year ended September 30, 2014, the amount primarily consisted of $236.8 million of interest income from portfolio investments. For the year ended September 30, 2013, the amount primarily consisted of $173.7 million of interest income from portfolio investments.

The increase in our total investment income for the quarter and year ended September 30, 2014, as compared to the quarter and year ended September 30, 2013, was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 15 debt investments in our portfolio and fees related to investment activity, partially offset by amortization payments received on our debt investments.

Expenses for the quarters ended September 30, 2014 and September 30, 2013 were $38.8 million and $28.4 million, respectively. Expenses for the years ended September 30, 2014 and September 30, 2013 were $151.4 million and $106.7 million, respectively. Expenses increased for both periods primarily due to increases in the base management fee, the Part I incentive fee and interest expense.

Liquidity and Capital Resources

As of September 30, 2014, we had $109.0 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.5 billion, $15.2 million of interest and fees receivable, $225.0 million of SBA debentures payable, $317.4 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $409.9 million of unsecured notes payable, $84.8 million of secured borrowings and unfunded commitments of $325.0 million. Our leverage ratio at September 30, 2014 was 0.63x, excluding SBA debentures. Our leverage ratio was at the low end of our target leverage range of 0.6x to 0.8x.

As of September 30, 2013, we had $147.4 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $1.9 billion, $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188.0 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million.

Calendar Year 2014 Dividends

Our Board of Directors has declared monthly dividends for calendar year 2014 to date as follows:

  • $0.0833 per share, which was paid on January 31, 2014 to stockholders of record on January 15, 2014;
  • $0.0833 per share, which was paid on February 28, 2014 to stockholders of record on February 14, 2014;
  • $0.0833 per share, which was paid on March 31, 2014 to stockholders of record on March 14, 2014;
  • $0.0833 per share, which was paid on April 30, 2014 to stockholders of record on April 15, 2014;
  • $0.0833 per share, which was paid on May 30, 2014 to stockholders of record on May 15, 2014;
  • $0.0833 per share, which was paid on June 30, 2014 to stockholders of record on June 16, 2014;
  • $0.0833 per share, which was paid on July 31, 2014 to stockholders of record on July 15, 2014;
  • $0.0833 per share, which was paid on August 29, 2014 to stockholders of record on August 15, 2014;
  • $0.0917 per share, which was paid on September 30, 2014 to stockholders of record on September 15, 2014;
  • $0.0917 per share, which was paid on October 31, 2014 to stockholders of record on October 15, 2014;
  • $0.0917 per share, which was paid on November 28, 2014 to stockholders of record on November 14, 2014; and
  • $0.0917 per share, payable on December 30, 2014 to stockholders of record on December 15, 2014.

Dividends are paid primarily from distributable (taxable) income. Our Board of Directors determines dividends based on estimates of distributable (taxable) income, which differ from book income due to temporary and permanent differences in income and expense recognition and changes in unrealized appreciation and depreciation on investments.

Our amended dividend reinvestment plan ("DRIP") provides for reinvestment of dividends, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash dividend, our stockholders whose shares are registered in their name and who have not "opted out" of our DRIP will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving cash dividends. We provide up to a 5% discount on newly-issued shares purchased through the DRIP (provided that shares will not be issued at less than net asset value per share). If you are a stockholder and your shares of our common stock are held through a brokerage firm or other financial intermediary and you wish to participate in the DRIP, please contact your broker or other financial intermediary.

Portfolio Asset Quality

We utilize the following investment ranking system for our investment portfolio:

  • Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.
  • Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
  • Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
  • Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.

At September 30, 2014 and September 30, 2013, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:

September 30, 2014 September 30, 2013
Investment Ranking Fair Value % of Portfolio Leverage Ratio Fair Value % of Portfolio Leverage Ratio
1 $65,268 2.61% 1.94 $122,769 6.49% 2.67
2 2,424,290 97.14 4.84 1,770,277 93.51 4.70
3
4 6,356 0.25 NM (1)
Total $2,495,914 100.00% 4.75 $1,893,046 100.00% 4.57
(1) Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.

We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of September 30, 2014, we had modified the payment terms of our investments in 19 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.

As of September 30, 2014, there was one investment on which we had stopped accruing cash interest. As of September 30, 2013, there were no investments on which we had stopped accruing cash and/or PIK interest and OID income.

Recent Developments

On November 20, 2014, our Board of Directors declared the following dividends:

  • $0.0917 per share, payable on December 30, 2014 to stockholders of record on December 15, 2014; and
  • $0.0917 per share, payable on January 30, 2015 to stockholders of record on January 15, 2015.

On November 20, 2014, our Board of Directors terminated our previous $100 million stock repurchase program and approved a new $100 million stock repurchase plan through November 20, 2015. Any stock repurchases under the new $100 million stock repurchase program would be made through the open market at times, and in such amounts, as management deems appropriate. This program may be limited or terminated at any time without prior notice.

Effective November 26, 2014, our Board of Directors increased its size to nine members and appointed Todd G. Owens, our President, to the Board to serve until our 2016 Annual Meeting of Stockholders.

Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(audited)
September 30,
2014
September 30,
2013
ASSETS
Investments at fair value:
Control investments (cost September 30, 2014: $387,625; cost September 30, 2013: $207,518) $394,872 $215,502
Affiliate investments (cost September 30, 2014: $37,757; cost September 30, 2013: $29,807) 40,764 31,932
Non-control/Non-affiliate investments (cost September 30, 2014: $2,069,301; cost September 30, 2013: $1,622,326) 2,060,278 1,645,612
Total investments at fair value (cost September 30, 2014: $2,494,683; cost September 30, 2013: $1,859,651) 2,495,914 1,893,046
Cash and cash equivalents 86,731 143,289
Restricted cash 22,315 4,070
Interest, dividends and fees receivable 15,224 10,379
Due from portfolio companies 22,950 1,814
Receivables from unsettled transactions 4,750
Deferred financing costs 20,334 19,548
Other assets 187
Total assets $2,668,218 $2,072,333
LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable, accrued expenses and other liabilities $3,908 $1,166
Base management fee payable 12,372 9,625
Part I incentive fee payable 9,309 7,175
Due to FSC CT 2,464 840
Interest payable 5,797 2,939
Amounts payable to syndication partners 3,817
Payables from unsettled transactions 35,716
Credit facilities payable 317,395 188,000
SBA debentures payable 225,000 181,750
Unsecured convertible notes payable 115,000 115,000
Unsecured notes payable 409,878 161,250
Secured borrowings at fair value (proceeds of $84,750 and $0 at September 30, 2014 and September 30, 2013, respectively) 84,803
Total liabilities 1,189,743 703,461
Commitments and contingencies
Net assets:
Common stock, $0.01 par value, 250,000 shares authorized, at September 30, 2014 and September 30, 2013; 153,340 and 139,041 shares issued and outstanding at September 30, 2014 and September 30, 2013, respectively 1,533 1,390
Additional paid-in-capital 1,649,086 1,509,546
Net unrealized appreciation on investments and net unrealized appreciation on secured borrowings 1,178 33,395
Net realized loss on investments and interest rate swap (152,416) (154,591)
Accumulated overdistributed net investment income (20,906) (20,868)
Total net assets (equivalent to $9.64 and $9.85 per common share at September 30, 2014 and September 30, 2013, respectively) 1,478,475 1,368,872
Total liabilities and net assets $2,668,218 $2,072,333

Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(audited)
Three Months
ended September
30, 2014
Three Months
ended September
30, 2013
Year ended
September 30,
2014
Year ended
September 30,
2013
Interest income:
Control investments $5,485 $2,577 $14,839 $5,614
Affiliate investments 1,112 743 4,084 2,792
Non-control/Non-affiliate investments 45,476 38,638 193,720 148,467
Interest on cash and cash equivalents 9 8 17 23
Total interest income 52,082 41,966 212,660 156,896
PIK interest income:
Control investments 2,102 1,827 9,615 2,764
Affiliate investments 214 323 966 1,404
Non-control/Non-affiliate investments 4,445 2,824 13,560 12,619
Total PIK interest income 6,761 4,974 24,141 16,787
Fee income:
Control investments 3,140 679 7,211 4,271
Affiliate investments 37 12 230 48
Non-control/Non-affiliate investments 10,338 9,413 45,382 41,551
Total fee income 13,515 10,104 52,823 45,870
Dividend and other income:
Control investments 3,312 3,313
Non-control/Non-affiliate investments 547 48 1,017 2,059
Total dividend and other income 3,859 48 4,330 2,059
Total investment income 76,217 57,092 293,954 221,612
Expenses:
Base management fee 12,596 9,625 51,735 35,748
Part I incentive fee 9,309 7,175 35,472 28,158
Professional fees 1,173 1,251 3,948 4,182
Board of Directors fees 166 153 598 576
Interest expense 13,682 9,398 51,465 33,470
Administrator expense 705 (369) 2,810 1,925
General and administrative expenses 1,352 1,160 6,039 4,921
Total expenses 38,983 28,393 152,067 108,980
Base management fee waived (224) 0 (687) (2,321)
Net expenses 38,759 28,393 151,380 106,659
Net investment income 37,458 28,699 142,574 114,953
Unrealized appreciation (depreciation) on investments:
Control investments (5,247) (849) (737) 13,302
Affiliate investments 230 340 882 434
Non-control/Non-affiliate investments (5,160) 7,504 (32,309) (339)
Net unrealized appreciation (depreciation) on investments (10,177) 6,995 (32,164) 13,397
Net unrealized (appreciation) depreciation on secured borrowings 2 (53)
Realized gain (loss) on investments:
Control investments (299) (11,224)
Non-control/Non-affiliate investments 1,156 (9,557) 2,474 (15,305)
Net realized gain (loss) on investments 1,156 (9,557) 2,175 (26,529)
Net increase in net assets resulting from operations $28,439 $26,137 $112,532 $101,821
Net investment income per common share — basic $0.25 $0.24 $1.00 $1.04
Earnings per common share — basic $0.19 $0.21 $0.79 $0.92
Weighted average common shares outstanding — basic 150,472 121,895 141,992 110,270
Net investment income per common share — diluted $0.25 $0.23 $0.99 $1.01
Earnings per common share — diluted $0.19 $0.21 $0.79 $0.90
Weighted average common shares outstanding — diluted 158,263 129,686 149,783 118,061

About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a leading specialty finance company that provides custom-tailored financing solutions to small and mid-sized companies, primarily in connection with investments by private equity sponsors. The company originates and invests in one-stop financings, first lien, second lien, mezzanine debt and equity co-investments. FSC's investment objective is to maximize its portfolio's total return by generating current income from its debt investments and capital appreciation from its equity investments. The company has elected to be regulated as a business development company and is externally managed by a subsidiary of Fifth Street Asset Management Inc. (NASDAQ:FSAM), a rapidly growing credit-focused asset manager with nearly $6 billion in assets under management across multiple public and private vehicles. With a track record of more than 16 years, Fifth Street's nationally recognized platform has the ability to hold loans up to $250 million and structure and syndicate transactions up to $500 million. Fifth Street received the 2014 ACG New York Champion's Award for "Senior Lender Firm of the Year" and was named both 2013 "Lender Firm of the Year" by The M&A Advisor and "Lender of the Year" by Mergers & Acquisitions. FSC's website can be found at fsc.fifthstreetfinance.com.

Forward-Looking Statements

This press release may contain certain forward-looking statements, including statements with regard to the future performance of the company. Words such as "believes," "expects," "estimates," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and these factors are identified from time to time in the company's filings with the Securities and Exchange Commission. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

CONTACT: Investor Contact: Robyn Friedman, Vice President, Investor Relations (203) 681-3720 ir@fifthstreetfinance.com Media Contact: Nick Rust Prosek Partners (212) 279-3115 ext. 252 pro-fifthstreet@prosek.com

Source:Fifth Street Finance Corp.