Fifth Street Finance (FSC)

Q2 2010 Earnings Call

May 07, 2010 2:30 pm ET

Executives

Stacey Thorne - Executive Director and Head of Investor Relations

Bernard Berman - Partner, Executive Vice President, Chief Compliance Officer, and Secretary

William Craig - Chief Financial Officer and Principal Accounting Officer

Leonard Tannenbaum - Chairman and Chief Executive Officer

Analysts

Jason Arnold - RBC Capital Markets Corporation

Greg Mason - Stifel, Nicolaus & Co., Inc.

Arren Cyganovich - Ladenburg Thalmann

Christopher Harris - Wells Fargo Securities, LLC

Casey Alexander - Gilford Securities Inc.

David Chiaverini - BMO Capital Markets U.S.

James Ballan - Lazard Capital Markets LLC

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fifth Street Finance Corp. Second Quarter Earnings 2010 Call. [Operator Instructions] At this time, I would now like to turn conference over to your host, Ms. Stacey Thorne. You may begin.

Stacey Thorne

Thank you, Joe. Good afternoon and welcome everyone. My name is Stacey Thorne and I am the Head of Investor Relations. This is a conference call to discuss the results for Fifth Street Finance Corp. Second quarter ended March 31, 2010.

I have with me this afternoon Leonard Tannenbaum, CEO; Bernard Vernon, 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 May 5 Press Release and is posted on our Web site. 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 call your attention to the customary Safe Harbor disclosure in our May 5, 2010 Press Release regarding forward-looking information. Today’s conference call includes forward-looking statements and projections and we ask that you refer to our most recent filings with the SEC for important factors that would cause actual results to differ 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 Web site or call Investor Relations at 914-286-6811. The format for today’s call is as follows: Len will provide an overview; Bernie will provide an update on the SBA and other lending facilities; Bill will summarize the financials; and then we will open up the line for Q&A.

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

Leonard Tannenbaum

Thank you, Stacey. From an economic standpoint, we have moved from stable to increasing EBITDAs. These initial indicators of a rising economy are seen across several industry groups.

During the economic decline, many of our companies experienced stress, and we reacted quickly by marking down the portfolio to reflect the changing values. We also prudently lowered the investment ratings to categories three, four and five as the situation continued to worsen. This past quarter reflects a significant change upward in our portfolio.

Though we follow a policy of not marking up our debt investments significantly above par, we did experience a significant increase in our category one rated investments. While these securities are clearly improving, we do not see any near-term risk of refinancing in general due to substantial prepayment penalties and exit fees in many of them. Over time, however, this category should reflect investments with a higher likelihood of refinance risk which in the short term will accelerate our earnings growth.

We're also witnessing the fast ramp in mergers and acquisitions activity that we've forecasted in the past few months. As both strategic investors and private equity firms increase their activities, we expect loan demand in the middle market to accelerate. We believe that this will continue to grow throughout the year and will peak in the fourth quarter. Our plan is to have ample capacity for the wave of deal flow that is coming.

From a credit line perspective, we have successfully renegotiated our ING commitment, which Brian will discuss shortly. We also believe that our partners at Wells Fargo along with several additional credit partners will provide ample liquidity for Fifth Street to grow our portfolio through leverage in addition to our SBA facility. We hope to make several announcement in this regard in coming months.

Despite recent IPOs in the BBC sector, there continues to be a limited amount of our competitors that can complete a transaction for private equity sponsors without any syndication risk and with whole sizes of $30 million to $50 million. This provides us with some additional pricing power and the ability to continue to be a major lender in the middle and lower-middle markets. We firmly believe that it's still the preference for private equity sponsors to partner with a trusted lender rather than rely on a syndicate group to complete transactions.

Increased mergers and acquisitions activity coupled with the banks expanding the credit lending have allowed us to largely refinance out of CPAC. CPAC, one of our previously underperforming investments. The price received also continues to validate our valuations in the portfolio as CPAC was at one-time marked as low as $1 million with the most recent valuation at $4.5 million.

We received $5 million in cash and a $1 million note for CPAC, exceeding our most recent valuation. It has been proactive portfolio management and the partnership approach with our private equity firms that have allowed us to successfully navigate a very challenging environment. The addition of several team members have a enhanced our ability to monitor and manage the existing portfolio. I am pleased to report that categories three, four and five rated securities account for only approximately 5% of the portfolio.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

North Korea, Apple, GPDR and Gap - 5 Things You Must Know

North Korea, Apple, GPDR and Gap - 5 Things You Must Know

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Market Can't Handle the Wild Ride: Cramer's 'Mad Money' Recap (Thursday 5/24/18)

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Replay: Jim Cramer on North Korea, Oil Prices, Apple and Carnival Corporation

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Canopy Growth: First Cannabis Firm on the NYSE Fails to Generate Buzz

Video: This Startup Connects Buyers and Sellers of Legal Marijuana

Video: This Startup Connects Buyers and Sellers of Legal Marijuana