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Fifth Street Finance Corp. Announces Quarter Ended December 31, 2014 Financial Results

GREENWICH, CT, Feb. 9, 2015 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") announces its financial results for the first fiscal quarter ended December 31, 2014.

First Fiscal Quarter 2015 Financial Highlights

  • Net investment income for the quarter ended December 31, 2014 was $35.2 million, or $0.23 per share;
  • Net asset value per share was $9.17 as of December 31, 2014;
  • We closed $716.6 million of investments during the quarter ended December 31, 2014; and
  • Declared monthly distributions of $0.06 per share beginning in March 2015 through August 2015.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our investment portfolio at December 31, 2014 to be $2.7 billion, as compared to $2.5 billion at September 30, 2014. Total assets at December 31, 2014 were $2.9 billion, as compared to $2.7 billion at September 30, 2014.

During the quarter ended December 31, 2014, we closed $716.6 million of investments in 25 new and five existing portfolio companies, and funded $722.3 million across new and existing portfolio companies. This compares to closing $912.7 million in 23 new and eight existing portfolio companies and funding $650.1 million during the quarter ended December 31, 2013. During the quarter ended December 31, 2014, we received $222.6 million in connection with the full repayments of nine of our debt investments, all of which were exited at or above par. We also received an additional $178.7 million in connection with syndications of debt investments and sales of debt investments.

At December 31, 2014, our portfolio consisted of investments in 137 companies, 117 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, 94.3% of our portfolio consisted of debt investments (82.2% of our portfolio consisted of senior secured loans). Our average portfolio company debt investment size at fair value was $22.9 million at December 31, 2014, versus $24.2 million at September 30, 2014.

As of December 31, 2014, SLF JV I had $265.0 million in assets including senior secured loans to 21 portfolio companies. The joint venture generated income of $2.3 million to FSC during the December quarter, which represents a 17% weighted average annualized return on investment.

Our weighted average yield on debt investments at December 31, 2014, including the return on SLF JV I, was 10.4% and included a cash component of 9.7%. At December 31, 2014 and September 30, 2014, $1.9 billion and $1.6 billion, respectively, of our debt investments at fair value bore interest at floating rates, which represented 75.3% and 70.0%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended December 31, 2014 and December 31, 2013 was $76.3 million and $71.3 million, respectively. For the quarter ended December 31, 2014, the amount primarily consisted of $56.9 million of interest income from portfolio investments. For the quarter ended December 31, 2013, the amount primarily consisted of $54.1 million of interest income from portfolio investments. For the quarter ended December 31, 2014, PIK interest income net of PIK collected in cash represented only 4.9% of total investment income.

The increase in our total investment income for the quarter ended December 31, 2014, as compared to the quarter ended December 31, 2013, was primarily attributable to higher average levels of outstanding debt investments, which was principally due to a net increase of 25 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 December 31, 2014 and December 31, 2013 were $41.1 million and $35.1 million, respectively. Expenses increased for the quarter ended December 31, 2014 as compared to the quarter ended December 31, 2013, primarily due to increased interest expense.

"As part of the recent management transition, we are undergoing a strategic review of FSC's business, with the goal of implementing changes that we believe are in the best long-term interest of our shareholders," stated Todd G. Owens, Chief Executive Officer, adding, "One important initial step is moving to a more conservative dividend policy and setting distributions at a level that is covered by sustainable net investment income. We believe that our realigned monthly distribution of 6 cents should provide us flexibility around capital deployment and should allow for greater consistency around future distributions."

Liquidity and Capital Resources

As of December 31, 2014, we had $110.6 million in cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.7 billion, $15.2 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $617.5 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.1 million of unsecured notes payable, $22.2 million of secured borrowings and unfunded commitments of $350.8 million.

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, dividends 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.

Dividend Policy

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 December 31, 2014 and September 30, 2014, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:

December 31, 2014 September 30, 2014
Investment Ranking Fair Value % of Portfolio Leverage Ratio Fair Value % of Portfolio Leverage Ratio
1 $ 29,463 1.08% 0.81 $ 65,268 2.61% 1.94
2 2,625,449 96.47 4.71 2,424,290 97.14 4.84
3 66,683 2.45 9.39
4 6,356 0.25 NM (1)
Total $ 2,721,595 100.00% 4.77 $ 2,495,914 100.00% 4.75
(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 December 31, 2014, we had modified the payment terms of our investments in 15 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 December 31, 2014, there were four investments on which we had stopped accruing cash and/or PIK interest and OID income.

Recent Developments

Effective January 21, 2015, our Board of Directors promoted Todd G. Owens to Chief Executive Officer from his former role as President, and also promoted Ivelin M. Dimitrov to President. Leonard M. Tannenbaum, our former Chief Executive Officer, stepped down effective January 20, 2015. Mr. Tannenbaum will continue in his role as Chief Executive Officer of our investment adviser.

On February 3, 2015, our Board of Directors declared the following dividends:

  • $0.06 per share, payable on March 31, 2015 to stockholders of record on March 16, 2015;
  • $0.06 per share, payable on April 30, 2015 to stockholders of record on April 15, 2015;
  • $0.06 per share, payable on May 29, 2015 to stockholders of record on May 15, 2015;
  • $0.06 per share, payable on June 30, 2015 to stockholders of record on June 15, 2015;
  • $0.06 per share, payable on July 31, 2015 to stockholders of record on July 15, 2015; and
  • $0.06 per share, payable on August 31, 2015 to stockholders of record on August 14, 2015.

Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
December 31,
2014
September 30,
2014
ASSETS
Investments at fair value:
Control investments (cost December 31, 2014: $381,275; cost September 30, 2014: $387,625) $ 378,053 $ 394,872
Affiliate investments (cost December 31, 2014: $37,518; cost September 30, 2014: $37,757) 40,390 40,764
Non-control/Non-affiliate investments (cost December 31, 2014: $2,350,146; cost September 30, 2014: $2,069,301) 2,303,152 2,060,278
Total investments at fair value (cost December 31, 2014: $2,768,939; cost September 30, 2014: $2,494,683) 2,721,595 2,495,914
Cash and cash equivalents 64,259 86,731
Restricted cash 46,294 22,315
Interest, dividends and fees receivable 15,195 15,224
Due from portfolio companies 27,225 22,950
Receivables from unsettled transactions 55,853 4,750
Deferred financing costs 18,985 20,334
Other assets 94
Total assets $ 2,949,500 $ 2,668,218
LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable, accrued expenses and other liabilities $ 3,866 $ 3,908
Base management fee payable 14,044 12,372
Part I incentive fee payable 8,715 9,309
Due to FSC CT 3,552 2,464
Interest payable 11,655 5,797
Amounts payable to syndication partners 61 3,817
Payables from unsettled transactions 112,114
Credit facilities payable 617,495 317,395
SBA debentures payable 225,000 225,000
Unsecured convertible notes payable 115,000 115,000
Unsecured notes payable 410,121 409,878
Secured borrowings at fair value (proceeds of $22,525 and $84,750 at December 31, 2014 and September 30, 2014, respectively) 22,246 84,803
Total liabilities 1,543,869 1,189,743
Commitments and contingencies
Net assets:
Common stock, $0.01 par value, 250,000 shares authorized; 153,340 shares issued and outstanding at December 31, 2014 and September 30, 2014 1,533 1,533
Additional paid-in-capital 1,649,086 1,649,086
Net unrealized appreciation (depreciation) on investments and secured borrowings (47,065) 1,178
Net realized loss on investments, secured borrowings and interest rate swap (170,004) (152,416)
Accumulated overdistributed net investment income (27,919) (20,906)
Total net assets (equivalent to $9.17 and $9.64 per common share at December 31, 2014 and September 30, 2014, respectively) 1,405,631 1,478,475
Total liabilities and net assets $ 2,949,500 $ 2,668,218
Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months
ended
December 31, 2014
Three months
ended
December 31, 2013
Interest income:
Control investments $ 6,264 $ 2,419
Affiliate investments 1,097 766
Non-control/Non-affiliate investments 45,170 45,296
Interest on cash and cash equivalents 10 3
Total interest income 52,541 48,484
PIK interest income:
Control investments 1,765 2,408
Affiliate investments 215 335
Non-control/Non-affiliate investments 2,424 2,870
Total PIK interest income 4,404 5,613
Fee income:
Control investments 623 567
Affiliate investments 12 170
Non-control/Non-affiliate investments 17,267 16,401
Total fee income 17,902 17,138
Dividend and other income:
Control investments 1,138
Non-control/Non-affiliate investments 307 96
Total dividend and other income 1,445 96
Total investment income 76,292 71,331
Expenses:
Base management fee 14,155 12,059
Part I incentive fee 8,715 9,054
Professional fees 1,164 1,025
Board of Directors fees 180 155
Interest expense 13,992 10,213
Administrator expense 1,247 853
General and administrative expenses 1,780 1,754
Total expenses 41,233 35,113
Base management fee waived (111)
Net expenses 41,122 35,113
Net investment income 35,170 36,218
Unrealized appreciation (depreciation) on investments:
Control investments (10,469) 420
Affiliate investments (135) 783
Non-control/Non-affiliate investments (37,971) (6,921)
Net unrealized depreciation on investments (48,575) (5,718)
Net unrealized appreciation on secured borrowings 332
Realized gain (loss) on investments and secured borrowings:
Affiliate investments 43
Non-control/Non-affiliate investments (17,631) 3,206
Net realized gain (loss) on investments and secured borrowings (17,588) 3,206
Net increase (decrease) in net assets resulting from operations $ (30,661) $ 33,706
Net investment income per common share — basic $ 0.23 $ 0.26
Earnings (loss) per common share — basic $ (0.20) $ 0.24
Weighted average common shares outstanding — basic 153,340 139,126
Net investment income per common share — diluted $ 0.23 $ 0.26
Earnings (loss) per common share — diluted $ (0.20) $ 0.24
Weighted average common shares outstanding — diluted 161,130 149,916
Distributions per common share $ 0.28 $ 0.24

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 growing credit-focused asset manager with over $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 of 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.