Fifth Street Finance CEO Discusses F1Q2011 Results - Earnings Call Transcript

Fifth Street Finance Corporation ( FSC)

F1Q2011 Earnings Call

March 2, 2011 10:00 AM ET

Executives

Stacey Thorne – Head, IR

Leonard Tannenbaum – Chairman and CEO

Bernard Berman – President, Chief Compliance Officer and Secretary

William Craig – CFO

Analysts

Casey Alexander – Gilford Securities

Dean Choksi – UBS

Ram Shankar – FBR Capital Markets

Bill [ph] – Morgan Keegan

Robert Dodd – Morgan Keegan

Presentation

Operator

Please standby. Good day everyone, and welcome to the Fifth Street Finance Corp first quarter 2011 earnings conference call. Today’s conference is being recorded. At this time, I would now like to turn the conference over to Ms. Stacey Thorne. Please go ahead, ma’am.

Stacey Thorne

Good morning and welcome everyone. My name is Stacey Thorne, and I am the Head of Investor Relations for Fifth Street Finance Corp. This call is to discuss Fifth Street Finance Corp’s first fiscal quarter 2011 ending December 31, 2010. I have with me this morning 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 February 2, 2011 press release and is posted on our website www.fifthstreetfinance.com. 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 call portion – before we go into our earnings portion of the call, I would like to call your attention to the customary Safe Harbor disclosure in our February 2, 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 could 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 website 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 each of our lending facilities, and Bill will summarize the financials, and then we will open the line for Q&A.

I will now turn the call over to our CEO, Len Tannenbaum.

Leonard Tannenbaum

Thank you Stacey. I appreciate all of your patience regarding this call which was somewhat delayed due to our very successful and oversubscribed equity offering. From an economic standpoint, we are witnessing a recovery. Although we have noticed that it’s not robust or rapid.

The growth in our earnings is due to both margin expansion and revenue growth. In addition, since September 30, 2010 we have additional refinancings totaling approximately $54 million. The refinancing of our second-lien position in (inaudible) retailer was with prepayment penalties and our first collection of a TICC [ph]. The transaction was executed apart. We also have continued to aggressively pursue remedies for our portfolio problem companies those rated three, four and five.

Turnover of investments is an important component of earnings for BDCs as refinancings typically raise short-term earnings for those companies like ours where amortize the origination points over the life of loan as we do. We expect this quarter to be another very strong quarter for originations. Quarter to-date, we’ve originated $123 million and expect more deals to close in the near future.

I believe we are seeing high growth in deal volume for several reasons. Private equity sponsor views as a top provider of one-stop middle market solutions. And we’ve gained significant momentum from our $273 million of investments during the first fiscal quarter of 2011. Our new Chicago office is starting to generate very positive results, and our relationships are spanned in the country. In addition, the ability to commit to an entire transaction and syndicate it down later provides us with some additional pricing power in this market.

We believe it is still the preference for private equity sponsors to partner with the trust of lender, rather than reliance on syndicate group complete transactions. I believe we have seen the turn in credit quality, as many of our problem assets have been restructured or sold. Category 3.5 securities now account for approximately 5% of the portfolio at fair value as of December 31, 2010. And with our proactive portfolio management approach, we expect that percentage to continue to decline over the next year.

Investing environment is changing as highlighted in our recent news letters. While our rates continued to get – while rates continue to get compressed with the $20 million plus EBITDA sponsor buyouts, premiums are still being paid for the one-stop approach in for our relationships. In addition, we primarily are still in the $10 million to $20 million EBITDA market, with an average deal size closer to the $10 million EBITDA number, allowing us premium in the mid to lower middle market versus the upper market.

We were fortunate that the vast majority of our portfolio took advantage of the high return environment, and we were one of the few BDCs that had ample capital to invest during the credit dislocation. We expect that our vintage 2008 and beyond credit portfolio will generate strong returns as the economy continues to recover, even though we’ve recognized ultimately that many of these investments which were generated at high premiums relative to today’s market may get refinanced over the coming years which will generate an income boost when that happens.

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