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Fifth Street Finance's CEO Discusses F3Q12 Results - Earnings Call Transcript

All of this uncertainty makes long-term planning difficult for investors and business owners. At Fifth Street, we are navigating this volatile environment by focusing where we have a competitive advantage. Our reputation, having the ability to offer a one-stop product, larger hold size and the ability to grow the platform companies to manage a premium in the market.

However, the abundant liquidity in the capital markets is increasing bank competition in first lien loans and leading to overall higher purchase multiples. As a result, we are seeing greater value at middle and upper-middle mezzanine loans and anticipates steering our portfolio mix slightly towards mezzanine with a new broader target range of 60% to 80% first lien loans, a change from our 70% to 80% previous target for first lien loans.

We will focus on using our currently unused $75 million of SBA debenture capacity to finance the mixed shift, which should drive an incremental EPS growth. On the right side of the balance sheet, we are constantly looking for ways to lower costs and improve the terms of our debt capital.

Over the long term, we expect regulations such as Basel III to reduce bank competitions for middle market loans as capital charges increase, bond rate of borrowers. This should lead to a relative funding advantage for BDCs with investment grade ratings in the long term. Fifth Street is investment grade rated in both Fitch and S&P with a stable outlook.

Middle market M&A volumes declined in the June quarter, but our broad platforms still generate $221 million of gross originations, while maintaining our pricing and underwriting standards, enabling us to increase our market share. We are one of the premier middle market leading platforms after several years of investing in our platform and growing and diversifying our balance sheet.

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