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
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