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Fifth Street Finance Corp. Announces Quarter Ended March 31, 2016 Financial Results

GREENWICH, CT, May 10, 2016 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("FSC" or "we") today announced its financial results for the second fiscal quarter ended March 31, 2016.

Second Fiscal Quarter 2016 Highlights

  • Adjusted net investment income (excluding non-recurring professional fees and related increase in incentive fees) of $26.5 million, or $0.18 per share, versus net investment income of $25.3 million, or $0.17 per share;

  • Net asset value per share of $8.33;

  • Closed $106.6 million of investments; and

  • Repurchased 3.1 million shares of FSC's common stock in the open market during the quarter ended March 31, 2016, and subsequently repurchased 1.9 million shares, for an aggregate cost of $25.1 million.

"FSC continues to focus on delivering strong returns to stockholders through a disciplined capital allocation strategy and reduced fee structure. We repurchased $15 million in FSC shares during the March quarter and subsequently repurchased an additional $10 million in FSC shares, bringing our total repurchases for the fiscal year to over $25 million. Additionally, the permanent reduction in our base management fee went into effect during the March quarter, which decreased base management fees by over 10% and should increase FSC's return on equity for the benefit of all stockholders," stated Todd G. Owens, Chief Executive Officer, adding, "As we previously discussed, during our second quarter we continued to incur an elevated level of professional fees related to pending litigation and the now-resolved proxy contest. Excluding these professional fees, our net investment income covered our dividend on a per-share basis for the fifth consecutive quarter, despite lower than normal origination volume, underscoring the Board's continued confidence in our current dividend level."

Portfolio and Investment Activity

FSC's Board of Directors determined the fair value of our investment portfolio at March 31, 2016 and September 30, 2015 to be $2.3 billion and $2.4 billion, respectively. Total assets at March 31, 2016 and September 30, 2015 were $2.4 billion and $2.6 billion, respectively.

During the quarter ended March 31, 2016, we closed $106.6 million of investments in four new and five existing portfolio companies and funded $73.9 million across new and existing portfolio companies. This compares to closing $147.5 million in five new and three existing portfolio companies and funding $197.3 million during the quarter ended March 31, 2015. During the quarter ended March 31, 2016, we received $49.9 million in connection with the full repayments of four of our debt investments, all of which were exited at or above par. We also received an additional $78.3 million in connection with paydowns, syndications and sales of debt investments.

At March 31, 2016, our portfolio consisted of investments in 127 companies, 109 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 17 of which were in private equity funds. At fair value, 92.8% of our portfolio consisted of debt investments and 79.9% of our portfolio consisted of senior secured loans. Our average portfolio company debt investment size at fair value was $20.3 million at March 31, 2016, versus $20.7 million at September 30, 2015, with only 1.8% of the portfolio's fair value invested in the energy sector.

At March 31, 2016, SLF JV I had $429.2 million in assets, including senior secured loans to 38 portfolio companies. The joint venture generated income of $4.1 million to FSC during the second fiscal quarter, which represented a 10.4% weighted average annualized return on investment.

Our weighted average yield on debt investments at March 31, 2016, including the return on SLF JV I, was 10.3% and included a cash component of 9.8%. At March 31, 2016 and September 30, 2015, $1.7 billion of our debt investments at fair value bore interest at floating rates, which represented 80.4% and 77.5%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended March 31, 2016 and March 31, 2015 was $59.6 million and $66.5 million, respectively. For the quarter ended March 31, 2016, the amount primarily consisted of $49.3 million of cash interest income from portfolio investments. For the quarter ended March 31, 2015, the amount primarily consisted of $55.3 million of cash interest income from portfolio investments. For the quarter ended March 31, 2016, payment-in-kind ("PIK") interest income net of PIK collected in cash represented only 4.5% of total investment income.

Net expenses for the quarters ended March 31, 2016 and March 31, 2015 were $34.2 million and $38.3 million, respectively. Net expenses decreased for the quarter ended March 31, 2016 as compared to the quarter ended March 31, 2015, due primarily to a $3.1 million decrease in base management fees, which was attributable to the permanent fee reduction that we agreed to with our investment adviser effective January 1, 2016, and a $2.8 million decrease in incentive fees, which was attributable to a 16.0% decrease in pre-incentive fee net investment income for the year-over-year period. The decrease in fees paid to our investment adviser was partially offset by a $3.5 million increase in professional fees.

Net realized and unrealized losses on our investment portfolio for the quarters ended March 31, 2016 and March 31, 2015 were $20.4 million and $2.4 million, respectively.

Exhibit A. Reconciliation of Net Investment Income to Adjusted Net Investment Income

The following table presents a reconciliation of net investment income to adjusted net investment income (excluding non-recurring professional fees and related increase in incentive fees), which is a non-GAAP measure, for the three and six months ended March 31, 2016 and March 31, 2015 (in thousands, except per share amounts):

Three months
ended
March 31, 2016
Three months
ended
March 31, 2015
Six months
ended
March 31, 2016
Six months
ended
March 31, 2015
Net investment income $25,343 $28,124 $51,925 $54,530
Adjustment for non-recurring professional fees 3,551 9,221
Adjustment for increase in incentive fee (2,424) (5,935)
Adjusted net investment income $26,470 $28,124 $55,211 $54,530
Weighted average common shares outstanding - basic 149,207 153,340 149,738 153,340
Adjusted net investment income per share $0.18 $0.18 $0.37 $0.36

Liquidity and Capital Resources

At March 31, 2016, we had $134.5 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.3 billion, $14.0 million of interest, dividends and fees receivable, $225.0 million of U.S. Small Business Administration ("SBA") debentures payable, $397.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.5 million of unsecured notes payable, $18.5 million of secured borrowings and unfunded commitments of $262.2 million. Our regulatory leverage ratio was 0.77x debt-to-equity, excluding the debentures issued by our small business investment company ("SBIC") subsidiaries.

At September 30, 2015, we had $143.5 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.4 billion, $15.7 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $427.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable, $21.2 million of secured borrowings and unfunded commitments of $305.3 million. Our regulatory leverage ratio was 0.72x debt-to-equity, excluding the debentures issued by our SBIC subsidiaries.

Dividend Declaration

In addition to our previously declared dividend of $0.06 per share, which is payable on May 31, 2016 to stockholders of record on May 13, 2016, our Board of Directors met on May 5, 2016 and declared the following distributions:

  • $0.06 per share, payable on June 30, 2016 to stockholders of record on June 15, 2016;
  • $0.06 per share, payable on July 29, 2016 to stockholders of record on July 15, 2016; and
  • $0.06 per share, payable on August 31, 2016 to stockholders of record on August 15, 2016.

Dividends are paid primarily from distributable (taxable) income. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. 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.

Stock Repurchase Program

On November 30, 2015, our Board of Directors authorized a common stock repurchase program to acquire up to $100 million of the outstanding shares of our common stock through November 30, 2016. Common stock repurchases under this program are to be made through the open market, privately negotiated transactions or otherwise at times, and in such amounts, as our management deems appropriate, subject to various factors, including company performance, capital availability, general economic and market conditions, regulatory requirements and other corporate considerations, as determined by management. The repurchase program may be suspended or discontinued at any time, and we expect to finance the stock repurchases with existing cash balances or by incurring leverage. We repurchased 5.0 million shares of our common stock during February, March and April 2016 under the program for an aggregate cost of $25.1 million.
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 March 31, 2016 and September 30, 2015, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows (dollars in thousands):

Investment Ranking March 31, 2016 September 30, 2015
Fair Value % of Portfolio Leverage Ratio Fair Value % of Portfolio Leverage Ratio
1 $85,034 3.77% 0.75 $215,095 8.95% 1.85
2 2,064,521 91.55 5.05 2,040,006 84.91 4.94
3 29,916 1.33 8.12 122,128 5.08 5.54
4 75,662 3.35 NM (1) 25,266 1.06 NM (1)
Total $2,255,133 100.00% 4.93 $2,402,495 100.00% 4.60
(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 March 31, 2016, we had modified the payment terms of our investments in 18 portfolio companies. Such modified terms may include increased PIK interest rates 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 March 31, 2016, there were five investments on which we had stopped accruing cash and/or PIK interest or original issue discount ("OID") income that represented 3.96% of our debt portfolio at fair value in the aggregate. One of the securities on non-accrual status, Ameritox Ltd., which represented 2.92% of the debt portfolio fair value, was restructured subsequent to quarter end.

Recent Developments

On April 1, 2016, we repaid in full the $115.0 million of outstanding unsecured convertible notes on their maturity date. The convertible notes bore interest at a rate of 5.375% per annum and were repaid using cash on hand and borrowings under our ING revolving credit facility.

On April 11, 2016, we restructured our debt investment in Ameritox Ltd. As a part of the restructuring, we exchanged our debt securities for debt and equity securities in the restructured entity. The fair value of our debt securities exchanged on the restructuring date approximated their fair value as of March 31, 2016.

During April 2016, we repurchased 1.9 million shares of our common stock in the open market under our common stock repurchase program for an aggregate cost of $10.0 million.

Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
March 31,
2016
September 30,
2015
ASSETS
Investments at fair value:
Control investments (cost March 31, 2016: $369,462; cost September 30, 2015: $333,520)$335,988 $318,893
Affiliate investments (cost March 31, 2016: $35,524; cost September 30, 2015: $36,637)39,158 40,606
Non-control/Non-affiliate investments (cost March 31, 2016: $2,005,627; cost September 30, 2015: $2,102,781)1,879,987 2,042,996
Total investments at fair value (cost March 31, 2016: $2,410,613; cost September 30, 2015: $2,472,938)2,255,133 2,402,495
Cash and cash equivalents122,270 138,377
Restricted cash12,224 5,107
Interest, dividends and fees receivable13,980 15,687
Due from portfolio companies3,243 2,641
Receivables from unsettled transactions 5,168
Deferred financing costs13,472 16,051
Other assets1,306 131
Total assets$2,421,628 $2,585,657
LIABILITIES AND NET ASSETS
Liabilities:
Accounts payable, accrued expenses and other liabilities$5,210 $5,006
Base management fee and Part I incentive fee payable14,098 16,531
Due to FSC CT LLC2,129 2,965
Interest payable7,894 4,300
Amounts payable to syndication partners54 1,316
Payables from unsettled transactions 3,648
Credit facilities payable397,295 427,295
SBA debentures payable225,000 225,000
Unsecured convertible notes payable115,000 115,000
Unsecured notes payable410,453 410,320
Secured borrowings at fair value (proceeds March 31, 2016: $19,632; proceeds September 30, 2015: $21,787)18,521 21,182
Total liabilities1,195,654 1,232,563
Commitments and contingencies
Net assets:
Common stock, $0.01 par value, 250,000 shares authorized; 147,184 and 150,668 shares issued and outstanding at March 31, 2016 and September 30, 2015, respectively1,472 1,507
Additional paid-in-capital1,613,928 1,631,523
Treasury stock, 423 shares at September 30, 2015 (2,538)
Net unrealized depreciation on investments and secured borrowings(154,369) (69,838)
Net realized loss on investments and secured borrowings(206,244) (180,945)
Accumulated overdistributed net investment income(28,813) (26,615)
Total net assets (equivalent to $8.33 and $9.00 per common share at March 31, 2016 and September 30, 2015, respectively)1,225,974 1,353,094
Total liabilities and net assets$2,421,628 $2,585,657


Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
Three months ended
March 31, 2016
Three months ended
March 31, 2015
Six months ended
March 31, 2016
Six months ended
March 31, 2015
Interest income:
Control investments $4,000 $4,189 $7,655 $7,883
Affiliate investments 1,026 1,072 2,076 2,169
Non-control/Non-affiliate investments 44,217 49,983 90,615 99,194
Interest on cash and cash equivalents 88 10 151 20
Total interest income 49,331 55,254 100,497 109,266
PIK interest income:
Control investments 1,080 1,365 2,060 2,739
Affiliate investments 205 212 415 427
Non-control/Non-affiliate investments 1,847 1,669 3,952 4,093
Total PIK interest income 3,132 3,246 6,427 7,259
Fee income:
Control investments 376 384 1,219 1,008
Affiliate investments 263 12 271 24
Non-control/Non-affiliate investments 4,548 4,189 12,509 8,170
Total fee income 5,187 4,585 13,999 9,202
Dividend and other income:
Control investments 1,692 3,210 4,118 5,598
Non-control/Non-affiliate investments 221 173 (356) 480
Total dividend and other income 1,913 3,383 3,762 6,078
Total investment income 59,563 66,468 124,685 131,805
Expenses:
Base management fee 10,006 13,064 21,799 27,219
Part I incentive fee 4,173 7,003 7,824 13,526
Professional fees 4,455 982 11,424 2,146
Board of Directors fees 243 189 599 369
Interest expense 13,838 14,812 27,885 28,804
Administrator expense 514 748 1,114 1,995
General and administrative expenses 1,072 1,657 2,292 3,438
Total expenses 34,301 38,455 72,937 77,497
Base management fee waived (81) (111) (177) (222)
Net expenses 34,220 38,344 72,760 77,275
Net investment income 25,343 28,124 51,925 54,530
Unrealized appreciation (depreciation) on investments:
Control investments (4,203) (6,520) (18,847) (15,279)
Affiliate investments (793) 333 (335) 198
Non-control/Non-affiliate investments 11,005 5,925 (65,855) (24,034)
Net unrealized appreciation (depreciation) on investments 6,009 (262) (85,037) (39,115)
Net unrealized (appreciation) depreciation on secured borrowings 294 (227) 506 105
Realized gain (loss) on investments and secured borrowings:
Control investments (8,148) (8,148)
Affiliate investments 29 72
Non-control/Non-affiliate investments (18,518) (1,921) (17,151) (18,319)
Net realized loss on investments and secured borrowings (26,666) (1,892) (25,299) (18,247)
Net increase (decrease) in net assets resulting from operations $4,980 $25,743 $(57,905) $(2,727)
Net investment income per common share — basic $0.17 $0.18 $0.35 $0.36
Earnings (loss) per common share — basic $0.03 $0.17 $(0.39) $(0.02)
Weighted average common shares outstanding — basic 149,207 153,340 149,738 153,340
Net investment income per common share — diluted $0.16 $0.18 $0.33 $0.36
Earnings (loss) per common share — diluted $0.03 $0.17 $(0.39) $(0.02)
Weighted average common shares outstanding — diluted 156,997 161,130 157,528 161,130
Distributions per common share $0.18 $0.15 $0.36 $0.43

Non-GAAP Financial Measures and Operating Metrics

Certain of the terms used in this press release, including adjusted net investment income, may not be comparable to similarly titled measures used by other companies. Further, adjusted net investment income is not a performance measure calculated in accordance with accounting principles generally accepted in the United States ("GAAP"). Such measure has been included in this press release to adjust for certain non-recurring professional fees resulting from pending litigation and the now-resolved proxy contest, and the related increase in incentive fees. We use adjusted net investment income as a measure of our operating performance, not as a measure of liquidity. We believe that presenting adjusted net investment income provides investors with a meaningful indication of our core operating performance, and adjusted net investment income is evaluated regularly by our management as a decision tool for deployment of resources. We believe that reporting adjusted net investment income is helpful in understanding our business and that investors should review the same supplemental non-GAAP financial measures that our management uses to analyze our performance. Adjusted net investment income has limitations as an analytical tool and should not be considered in isolation or as a substitute for analyzing our results prepared in accordance with GAAP. The use of such measure without consideration of related GAAP measures is not adequate due to the adjustments described herein. Net investment income is the GAAP financial measure most comparable to adjusted net investment income. Please refer to Exhibit A for a reconciliation of net investment income to adjusted net investment income.

Conference Call Information

We will hold a conference call at 10:00 a.m. (Eastern Time) on Tuesday, May 10, 2016, to discuss our quarterly financial results. All interested parties are welcome to participate. Domestic callers can access the conference call by dialing (877) 290-1655. International callers can access the conference call by dialing +1 (531) 289-2889. All callers will need to enter the Conference ID Number 92658816 and reference "Fifth Street Finance Corp." after being connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected. An archived replay of the call will be available approximately four hours after the end of the conference call and will be available through May 17, 2016 to domestic callers by dialing (855) 859-2056 and to international callers by dialing +1 (404) 537-3406. For all replays, please reference Conference ID Number 92658816. An archived replay will also be available online on the "Investor Relations" section of our website under the "News & Events - Calendar of Events" section.

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 nationally recognized credit-focused asset manager with over $5 billion in assets under management across multiple public and private vehicles. With a track record of over 18 years, Fifth Street's platform has the ability to hold loans up to $250 million and structure and syndicate transactions up to $500 million. Fifth Street received the 2015 ACG New York Champion's Award for "Lender Firm of the Year," and other previously received accolades include the ACG New York Champion's Award for "Senior Lender Firm of the Year," "Lender Firm of the Year" by The M&A Advisor and "Lender of the Year" by Mergers & Acquisitions. FSC's website can be accessed at fsc.fifthstreetfinance.com.

Forward-Looking Statements

Some of the statements in this press release constitute forward-looking statements, because they relate to future events or our future performance or financial condition. Forward-looking statements may include statements as to the future operating results, dividends and business prospects of FSC. Words such as "believes," "expects," "seeks," "plans," "should," "estimates," "project," and "intend" indicate forward-looking statements, although not all forward-looking statements include these words. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those implied or expressed in these forward-looking statements for any reason. Such factors are identified from time to time in FSC's filings with the Securities and Exchange Commission and include changes in the economy and the financial markets and future changes in laws or regulations and conditions in the company's operating areas. FSC undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


CONTACT: Investor Contact: Robyn Friedman, Executive Director, Head of Investor Relations (203) 681-3720 ir@fifthstreetfinance.com Media Contact: James Golden / Andrew Squire Joele Frank Wilkinson Brimmer Katcher (212) 355-4449

Source: Fifth Street Finance Corp