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WHITE PLAINS, N.Y., June 20, 2013 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) released its June 2013 newsletter today.
Positioning for Higher Interest Rates while Building the Platform
Stock and bond markets have had a mixed reaction to potentially lower levels of quantitative easing and improving economic data in the U.S. Bonds have sold off while the reaction of stocks has been more muted due to potential headwinds for economic growth from higher interest rates. This dynamic has caused Business Development Companies (BDCs) and other stocks with relatively high dividend yields to generally underperform the broader stock market indices in recent weeks.
Although BDC stocks may have sold off due to investor concern over higher interest rates, the impact should not be uniform across the sector. Several BDCs, including Fifth Street, have taken steps to prepare their balance sheets for higher interest rates by investing in floating rate assets and issuing fixed rate debt. As of March 31, 2013, 74% of our debt investments were floating rate and over 90% of our capital was not directly sensitive to interest rates, taking into account our equity and unsecured notes offerings in April and May.
We expect our portfolio to be incrementally more profitable as short-term interest rates rise because the interest rates on our floating rate loans should reset higher while a portion of our borrowing costs remain at fixed rates. Incremental interest income increases more as interest rates rise because some of our loans have minimum base rates or floors. As interest rates increase above the floors, the level of incremental interest income increases dramatically. For example, a 200 basis point increase in the base rate would generate an annualized $8.4 million increase in interest income offset by an annualized $7.5 million increase in interest expense for a net change of $0.9 million based on our balance sheet as of March 31, 2013. However, if interest rates increase 300 basis points, interest income would increase by an annualized $20.1 million offset by an annualized $11.2 million increase in interest expense for a net change of $8.9 million based on our balance sheet as of March 31, 2013.