Fifth Street Finance's CEO Discusses F1Q12 Results - Earnings Call Transcript

Fifth Street Finance Corp. ( FSC)

F1Q12 Earnings Call

February 9, 2012 10:00 AM ET

Executives

Stacey Thorne – IR

Len Tannenbaum – CEO

Bernie Berman – President

Alex Frank – CFO

Analysts

Joel Houck – Wells Fargo

Mickey Schleien – Ladenburg

Robert Dodd – Morgan Keegan

Greg Mason – Stifel, Nicolaus

Casey Alexander – Gilford Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Fifth Street Finance Corp. Earnings Conference Call. My name is Carol and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) As a reminder ladies and gentlemen this conference is being recorded for replay purposes.

I would now like to turn the presentation over to Ms. Stacey Thorne, Director of Investor Relations. Ma’am?

Stacey Thorne

Good morning, and welcome everyone. My name is Stacey Thorne and I’m the Head of Investor Relations for Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s first fiscal quarter ended December 31, 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 January 4, 2012 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 going into our earnings portion of the call, I would like to call your attention to the customary Safe Harbor disclosure in our January 4, 2012 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’ll open the line for Q&A.

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

Len Tannenbaum

Thank you, Stacey. Welcome to the 2012 lending environment. Unless Republicans win the Presidency and control both chambers of Congress, we believe the taxes will increase next year. As the odds change on the outcome of the election during the year, we expected to have a substantial effect on M&A activity. As the tax increase that will occur next year from the expiration of the Bush tax cuts coupled with the extra tax from ObamaCare may incentivize owners of businesses to accelerate any sales plans they have in the next few years for 2012.

The supply and demand equations will be further complicated by the exploration of the reinvestment period on many middle market CLOs and the refinancing wall of CLOs that is approaching. We are also seeing the beginnings of BASEL III taking effect as the Big’s U.S. banks begin to reduce lending in cooperation for the adherence to the these standards.

Lastly we believe the massive deleveraging of Europe and the need to raise hundreds of billions of dollars in equity to support the fragile banking system there will also contribute to the reduction in worldwide liquidity. So what is the offset to these amounts, quantitative easing of course. QE is the new fad as we even saw this morning as Europe increased their QE by $50 billion this morning.

And we expect that everyone may participate in the party. How this offsets and drives capital flows however is very hard to predict. What we can do at Fifth Street is to optimize the results for our shareholders is to pay very close attention to what our lending partners are doing, what we’re seeing in the market and like in the years past make sure that we have the capacity and deal flow to quickly adjust to the change in capital flow cycles.

Our latest equity rates of $100.7 million accomplished at a net price above book value allows us the continued flexibility to take advantage what should be a building year for new deals while staying close to our leverage targets for 2012. Despite the volatile market environment we issued stock above book value and unlike many of our peers we did not ask for permission from our shareholders to sell below book value.

We continue to believe that selling stock below book value is rarely justified. Reiterating some of our guidance for 2012, we currently expect the portfolio to remain in a range of 70% to 80% first lien loans with our Sumitomo facility being consolidated. And we expect to be on average leveraged about 0.6 times excluding our 10 year fixed non-recourse SBA debentures. We are exploring ways to de-consolidate the Sumitomo facility in a way that should be accretive to earnings and allow the facility to expand more rapidly.

Our fiscal year earnings guidance remains at about $1.15 per share which fully covers our dividend with net investment income. As the portfolio continues to mature, we believe that we will experience more repayments, which will drive earnings due to the acceleration of our upfront fees in addition to the recognition of exit fees, payment penalties and occasionally equity realizations.

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