WHITE PLAINS, N.Y., Sept. 24, 2012 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) released its September newsletter today.
Pipeline Building as M&A Volumes Rise
The cooler fall air is reinvigorating the M&A market. In the last several weeks, we began seeing a significant increase in middle market companies going to auction after a lackluster first half of calendar 2012. The increasing deal flow is driven by several sources: (1) sponsors' desire to close deals by the end of the year to show returns to their investors; (2) insufficient capacity from new CLOs, due to lower leverage levels, to refinance maturing loans from pre-credit crisis CLOs; (3) strategic buyers with large cash balances earning negligible returns; and (4) uncertainty over the election, economy, capital markets and tax policy. We expect Fifth Street will have strong originations in the December quarter as our pipeline continues to grow.Financial Markets Awash in Liquidity The U.S. economic recovery is proceeding at a modest pace. However, financial assets seem to be benefiting more from the trillions of dollars of liquidity pumped into the financial system from central banks than improving fundamentals. The credit trends in Fifth Street's portfolio remain favorable largely due to a shift that began in late 2009 to higher credit quality loans that are more senior in the capital structure and are with larger borrowers. As a result, we expect a substantial reduction in non-accruing assets when we report our September quarter and fiscal 2012 results later this year after exiting several legacy loans from the 2007 vintage. Investors' intense focus on the latest speeches by Ben Bernanke, Chairman of the Federal Reserve, and Mario Draghi, President of the European Central Bank, are further evidence of a financial system dependent on liquidity from global central banks. In credit markets, we are seeing the effects of trillions of dollars in asset purchases with record low high-yield bond yields, bank loan funds reaching into the middle market for yield and strong first lien middle market loan demand from regional banks. Strategic buyers are also more active as they acquire companies to improve stagnant top line growth and deploy high cash balances earning minimal returns. In this environment, even marginal deals are accretive to earnings for strategic buyers. As a consequence, we are seeing strategic buyers push up purchase multiples and outbid private equity sponsors.