Fifth Street Finance Corp. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

Fifth Street Finance Corp. F3Q10 (Qtr End 06/30/10) Earnings Call Transcript
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Fifth Street Finance Corp. (FSC)

F3Q10 (Qtr End 06/30/10) Earnings Call Transcript

August 2, 2010 1:00 pm ET

Executives

Stacey Thorne – Head, IR

Leonard Tannenbaum – CEO

Bernard Berman – President

Bill Craig – CFO

Analysts

Troy Ward – Stifel Nicolaus

Casey Alexander – Gilford Securities

Jasper Birch – Macquarie

Robert Dodd – Morgan Keegan

Jim Ballan – Lazard Capital Markets

Keith Rosenbloom – CareCapital Group

Presentation

Operator

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Good day, ladies and gentlemen. Welcome to the Fifth Street Finance Corp. third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to turn the conference over to Stacey Thorne. You may begin.

Stacey Thorne

Good afternoon, and welcome, everyone. My name is Stacey Thorne and I am the Head of Investor Relations for Fifth Street. This is a conference call to discuss the results for Fifth Street Finance Corp. third quarter ended June 30, 2010. I have with me this afternoon Leonard Tannenbaum, CEO; Bernard Berman, President; and William Craig, Chief Financial Officer.

Before I begin, I would like to point out that this call is being recorded. Replay information is included in our July 15th press release and is posted on our website. Please note that this call is the property of Fifth Street Finance Corp. Any unauthorized rebroadcast of this call of any form is strictly prohibited.

Before we go into our earnings, I’d like to you call your attention to the customer Safe Harbor disclosure in our July 15, 2010 press release regarding forward-looking information.

Today's conference call includes forward-looking statements and projections and we ask you refer to our most recent filings with the SEC for important factors that would cause actual results to defer materially from these forward-looking statements and projections. We do not undertake to update our forward-looking statements unless required by law. To obtain copies of our latest SEC filings, please visit our website or call Investor Relations at 914-386-6811.

The format for today's call is as follows. Len will provide an overview. Bernie will provide an update on each of our lending facilities. Bill will summarize the financials, and then we will open the line for Q&A.

I'm now going to turn it over to our CEO, Leonard Tannenbaum.

Leonard Tannenbaum

Thank you, Stacey. As many of know, I believe in transparency and straightforward communication with our shareholders. If our communication will perceived otherwise, I feel it is important during this call to shed further clarity around the Boards dividend declaration and our dividend policy going forward.

So before I begin my prepared remarks, I want immediately clear out enormous inception. We reduced the dividend to the September 30th to $0.10 and paid out the low end of 90% to 100% distributable income range for the fiscal year. We switched to a monthly dividend starting in October with the new fiscal year.

Our Board of Directors for the first fiscal quarter of 2011 declared a $0.32 dividend, meaning the dividend unchanged from the June 30th quarter due to the Board’s confidence that the lower than expected earnings and distributable income that we experienced is only a one quarter issues, and now to my prepared remarks.

From an economic standpoint, we’ve continued to experienced stable to slightly increasing EBITDA, especially in our 2008 and beyond vintage portfolio. The growth and earnings is due both to margin expansion and revenue growth, each indicators raising economy have seen across several industry groups.

In addition, we are beginning to be told by some private equity sponsors of their intention to refinance some of our assets in the next 12 months. This is another signal of the lending markets reopening. Turnover of investments is an important component of earnings for BDCs, as refinancing typically raise short-term earnings and allowed for the redeployment of capital.

We also beginning to witness the increase ramp in mergers and acquisitions equity that we have forecasted earlier this year. At both strategic investors and private equity firms increased their activity. We expect loan demand in the middle market to accelerate. We continue to believe that this will increase through the year and will peak in the fourth quarter. Our pipeline, a good three to six months indication of deal closings is at the record high as companies look to sale before the end of the year.

Following our plan to have ample capacity for the increase in deal flow that we anticipate we raise over $100 million dollar in June. At the time, we had over $130 million of signed term sheets, as we’ve talked about in our July month newsletter a rare event occurred. All of the deals were either postponed or cancelled following the outcomes of our robust diligence process.

Historically, over 80% of term sheets that are signed have ultimately resulted in close deals. The good news is that we discover these problems in the investments before we finance them. This will ultimately deliver much better long-term outcome for our shareholders. Just to remind our investors we do not take any management fees on cash or cash equivalence.

Our 2007 vintage portfolio, which now represents about 18% of our total portfolio at fair value, continues to contain most of our underperforming assets. These investments in general are smaller, have weaker sponsors as partners, and are primarily second name.

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