Fifth Street Finance Corp (FSC)

F4Q2011 Earnings Conference Call

November 30, 2011 10:00 AM ET


Stacey Thorne – Executive Director Investor Relations

Leonard Tannenbaum – Chief Executive Officer

Bernard Berman – President

Alex Frank – Chief Financial Officer


Greg Mason – Stifel Nicolaus

Dean Choksi – UBS

Jason Arnold – RBC Capital Markets

Casey Alexander – Gilford Securities

Joel Houck – Wells Fargo

Robert Dodd – Morgan Keegan

Mickey Schleien – Ladenburg



Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Fifth Street Finance Corp. Earnings Conference Call. My name is Ann and I will be your coordinator for today’s call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Stacey Thorne. Please proceed.

Stacey Thorne

Good morning, and welcome everyone. My name is Stacey Thorne and I’m the Head of Investor Relations from Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s fourth quarter and fiscal year ending September 30, 2011. I have with me this morning Leonard Tannenbaum, CEO; Bernard Berman, President; and Alex Frank, Chief Financial Officer.

Before I begin, I would like to point out that this call is being recorded. Replay information is included in our October 12, 2011 press release and is posted on our website 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 our customary Safe Harbor disclosure in our October 12, 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 Alex will summarize the financials, and then we will open the line for Q&A.

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

Leonard Tannenbaum

Thank you, Stacey. This has been a year of rapidly changing debt markets. Pricing has fluctuated quickly from frappe to normal and back again during the entire year as elevated levels of market volatility have become the new normal operating environment. So far, we have been premature on our view of interest rates as the Federal Reserve seems determined to keep interest rates near zero.

However, we do remain well position to realize an earnings benefit when interest rates eventually begin to rise. I will point out that having about 67% floating rate securities in our portfolio has had a temporary negative effect on our earnings per share as interest rates have not risen. Our investment grade rating and expanded lending capacity are beginning to pay dividends both in terms of our relationships with lenders, as well as the private equity community. Our rating of BBB minus allows us to lower our cost of capital still further and latter-out 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 stop, second lien mezzanine and equity co-investments. We are proud to announce this quarter our partnership with Sumitomo Bank, Japan’s second largest bank by assets and one of the world’s largest and healthiest financial institutions. Sumitomo was originally investor in our second fund at January of 2005 and has served on the advisory board of that fund since then.

We expect to continue to grow this valuable relationship overtime. LIBOR plus 225 seven year money now allows us to cost effectively originate senior middle market assets. Our fourth quarter, net investment income of $0.28 per share was in the middle of the range of previously issued guidance. Going forward, we expect our earnings power to be better realized. As we have increased velocity in the portfolio, are starting to realize some of our equity investments and are collecting pre-payment penalties and exit fees on occasion, we have a much more efficient capital structure.

We also anticipate that part of the additional earnings will come from better matching our targeted leverage of 0.6 times debt-to-equity excluding the debt of the SBA, part will come from better utilization of our credit lines and part will come from re-allocating our 78% first lien, 22% second lien assets towards the more efficient capital lines for those securities whether it be our SBA, Sumitomo, Wells Fargo or ING led facilities. We continue to move into larger securities, which we believe are inherently safer with the typical investment having EBITDA between $10 million and $30 million. We believe that our high first lien exposure, coupled with investing in larger and more stable portfolio companies and our robust diligence in portfolio management process will result in greater portfolio stability should the economy pull back again.

At the same time, we feel comfortable that the decline in our weighted average yield to 12.35% at September 30, 2011 will stabilize now that we have reached our targeted portfolio mix. Alex Frank has been a great addition to our team this past quarter. His 22 years experience at Morgan Stanley culminating the role of Head of Global Operations gives Fifth Street assistance in three important areas; risk management, institutionalization operational growth and investor engagement.

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