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Fifth Street Finance Corp. Announces Quarter Ended December 31, 2012 Financial Results

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 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 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 a capital gain is expected.  
  • Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risk at the time of the original investment. All new investments are initially ranked 2.  
  • Investment Ranking 3 is used for investments that are performing below our expectations and that require closer monitoring, but where we expect no loss of investment return (interest and/or dividends) or principal. Companies with a ranking of 3 may be out of compliance with financial covenants.  
  • Investment Ranking 4 is used for investments that are performing below our expectations and for which risk has increased materially since the original investment. We expect some loss of investment return, but no loss of principal.  
  • Investment Ranking 5 is used for investments that are performing substantially below our expectations and whose risks have increased substantially since the original investment. Investments with a ranking of 5 are those for which some loss of principal is expected.

At December 31, 2012 and September 30, 2012, the distribution of our investments on the 1 to 5 investment ranking scale at fair value was as follows:
  December 31, 2012 September 30, 2012
Investment Ranking Fair Value (thousands) % of Portfolio Leverage Ratio Fair Value (thousands) % of Portfolio Leverage Ratio
1 $ 196,930 12.46% 2.72 $ 68,685 5.33% 2.72
2 1,345,195 85.11 4.18 1,212,993 94.17 3.96
3 37,251 2.36 NM(1)  3,193 0.25 NM(1) 
5 1,072 0.07 NM(1)  3,237 0.25 NM(1) 
Total $ 1,580,448 100.00% 4.05 $ 1,288,108 100.00% 3.89
(1)     Due to operating performance, this ratio is not measurable.            

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, 2012, we had modified the payment terms of our investments in 14 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.

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