Fifth Street Finance Corp. ( FSC)

F3Q 2011 Earnings Call

August 4, 2011 1:00 pm ET

Executives

Stacey L. Thorne – Executive Director, Investor Relations

Leonard M. Tannenbaum – Chief Executive Officer

Bernard D. Berman – President

William H. Craig – Chief Financial Officer

Analysts

Ram Shankar – FBR

Joel Houck – Wells Fargo

Casey Alexander – Gilford Securities

Dean Choksi – UBS Investment Bank

Greg Mason – Stifel Nicolaus & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fiscal Third Quarter 2011 Fifth Street Finance Earnings Conference call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded for replay purposes.

And I would now like to turn the conference over to your host for today Ms. Stacey Thorne, Executive Director of Investor Relations. Please proceed, ma’am.

Stacey L. Thorne

Thank you, Keith. Good morning, and welcome everyone. My name is Stacey Thorne. I’m the Head of Investor Relations for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s third fiscal quarter ending June 30, 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 July 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 in 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 July 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 financials, and then we will open the line for Q&A.

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

Leonard M. Tannenbaum

Thank you, Stacey. This has been a year of changing debt markets. Pricing has fluctuated quickly from floppy to normal and back again during the entire first half of the year. So far, we have been premature on our view of interest rates as the Federal Reserve seems determine to keep interest rates near zero. However, we are well position to realize an immediate earnings benefit when interest rates eventually begin to rise.

Our investment grade rating and expanded leading capacity are beginning to pay dividends both in terms of our relationships with lenders, as well as the private equity community. Our newly earned rating enables us to lower our cost of capital so further and later add our liability structure. The increased size and flexibility in our financing vehicles also enables us to offer more complete solutions for our clients, and senior only, one step, secondly in mezzanine and equity call investments.

As we alluded to in the past two monthly news about us, we are also continuing to work on an enhanced solution to the senior only product with a low cost of capital from an overseas deep-pocketed lending partner. We continue to make significant progress that I have nothing final to announce as the yet.

Our earnings were in the middle range of previously issued guidance. Well, I’m personally disappointed that we are still shy of the $0.32 dividend for the quarter. I’m hopeful that we’ll be able to close the gap substantially in the second half of the calendar year. We anticipate that part of the additional earnings will come from better matching our targeted leverage of 0.6 times debt-to-equity, a part will come from better utilization of our credit lines and part of it will come from more closely matching our 75% first lien and 25% second lien targets.

We continue to move into larger securities, which we believe are inherently safer, with a typical deal, having EBITDA of $10 to $30 million. We believe that our high first lien exposure coupled with investing in larger and more stable portfolio of companies and a robust diligence and portfolio management process will result in lower losses should the economy pull back again. While we’ve added substantially to our team this year, we recently lost our Co-CIO Chad Blakeman. I’d like to thank Chad for helping to lead several institution initiatives at Fifth Street. I wish him continued success.

And I also want to congratulate Ivelin, on his appointment of Chief Investment Officer. Ivelin has been with Fifth Street since 2005, he is one of the three partners of the investment adviser. Ivelin truly represents the discipline, work ethics and passion that drives us to succeed on behalf of our shareholders.

Our expectation is to continue to add many strong experienced institutional credit and operating members through the balance of the year. And I’m so far pleased with the response caliber of the individuals attracted to our organization. To service our clients, we continue to build a broad institutional platform both in terms of technology and team members.

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