Fifth Street Finance Corp. ( FSC)

F2Q 2011 Earnings Call

May 5, 2011 11:30 AM ET

Executives

Stacey Thorne – IR

Leonard Tannenbaum – Chief Executive Officer

Bernard Berman – President

William Craig – Chief Financial Officer

Analysts

Joel Houck – Wells Fargo

Troy Ward – Stifel, Nicolaus & Company

Robert Dodd with Morgan Keegan

Dean Choksi – UBS

Ram Shankar – FBR

J.T Rogers – Janney Montgomery Scott

Presentation

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2011 Fifth Street Finance Corp Earnings Conference call. My name is Lacey and I’ll be your coordinator for today. (Operator Instructions). I would now like to turn the presentation over to your host for today’s call, Ms. Stacey Thorne, Executive Director of Investor Relations, please proceed.

Stacey Thorne

Good morning and welcome everyone. My name is Stacey Thorne. I am the Head of Investor Relations for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s second fiscal quarter ending March 31, 2011. 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 April 8, 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 earnings portion of the call, I would like to call your attention to the customary Safe Harbor disclosure in our April 8, 2011 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 our capital structure, and Bill will summarize the financial, 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. The wall of liquidity engineered by virtually zero interest rates and the implementation of QE2 is clearly heading the economy. Though the Federal Reserve is indicating that inflation in tempered, don’t be misled. Companies are raising prices in order to pass along higher input costs. Wages are generally rising, and the underlying economy is starting to get back on track. The easy monetary stance of Federal Reserve will create a great deal of inflation that eventually will have to be addressed. We believe our approach to fix our liabilities and float our investments will bear fruit when the fed plays catchup later this year.

We’ve enhanced our disclosure in the 10-Q with the amount of floating rate loans and the floors they are subject to, as well as the pro forma income increases we expect to see at various interest rate levels. As you’ll see, we realized an immediate benefit to our earnings as rates begin to rise.

The highlight since our last earnings call was Fifth Street receiving an investment grade rating. This rating enabled us to lower our cost-to-capital further and ladder out our liability structure. Our recent convertible note offering, which is five-year unsecured, fixed rate debt at 5.375% allows us to enhance the security to our senior debt providers and prepare for an inevitable upward move in rates.

The $150 million five year fixed rate convert, coupled with approximately $138 million of fixed rate ten year SBA debt, and currently undrawn three year credit lines, give us a long-term fixed rate, low cost liability structure.

While we have only experienced $13.6 million in refinancings and paydowns in this quarter ended – the quarter ended March 31, 2011, we believe the level would increase as the year progresses. This should generate an income boost later in the year due to the prepayment penalties and the additional income from the points we received at the time of origination. Turnover of investments is an important point component of earnings for BDCs as refinancings typically raise short-term earnings for those companies who take the conservative approach of amortizing the origination points over the life of loan as we do. While we expect the quarter ended June 30, 2011 to be weaker for originations, than the previous two quarters, our pipeline in both number of deals and dollars is very robust. Because we originate almost all of our securities, it takes 120 days on average to convert a deal from when it enters the pipeline to closure.

All of indicators point towards stronger levels of M&A activity as the year progresses. We are very pleased to have a second consecutive quarter of over $200 million of originations during the quarter just ended March 31.

I believe we are seeing high growth in deal volume for several reasons. Private equity sponsors view us as a top provider of one-stop middle market solutions. We’ve gained significant momentum from our recent hires and expansion of the Chicago market. And we are able to offer a full suite of products including senior-only, one-stop, and mezzanine. In addition, the ability to commit to an entire transaction and syndicate it down later provides us with some additional pricing power.

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