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

Fifth Street Finance Corporation (FSC)

F2Q12 Earnings Call

May 9, 2012 9:30 AM ET


David Harrison – Director, Legal and Compliance

Len Tannenbaum – Chairman and CEO

Alex Frank – CFO


Jason Arnold – RBC Capital Markets

Jason John Bass – Wells Fargo

Troy Ward – Stifel Nicolaus

Robert Dodd – Raymond James



Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Fifth Street Finance Corporation Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will facilitate the question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. David Harrison, Director of Legal and Compliance. You may proceed.

David Harrison

Thank you, Francis. Good morning and welcome everyone. My name is David Harrison, and I am the Director of Legal and Compliance of Fifth Street Finance Corp. This conference call is to discuss Fifth Street Finance Corp’s second fiscal quarter ended March 31, 2012. I have with me this morning Len Mark Tannenbaum, Chief Executive Officer; and Alexander 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 April 10, 2012 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.

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 914-286-6855.

The format for today’s call is as follows. Len will provide an overview, and Alex will provide an update on our capital structure, and 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.

Len Tannenbaum

Thank you, David and good morning everyone. Let me quickly restate our outlook from our last earnings call. We believe taxes will increase next year, unless Republicans win (inaudible) office and secure majorities in both the house and state. While the election notes consistently evolve through the year, we anticipate election results, one of the material impact on our M&A activity.

The tax increases that are anticipated to come to path next year as the Bush tax cuts expire together with the extra tax from ObamaCare is encouraging business owners to pull forward in to 2012, any sales plans they had originally laid out in the next few years.

We are also noticing the initial starting to battle three coming into play as the big U.S. banks start to ease-off on lending and advance the new standards taking effect.

Finally, we believe the immense deleveraging of Europe in the need to amass hundreds of billions of dollars in equity to sharp its delicate banking system, will also contribute to the dream on global liquidity.

As noted during our last earnings call, we believe to counter balance of these Quantitative easing. QE is latest craze with everyone in the freight. It’s difficult to predict how this might offset and drive capital clause, but we have Fifth Street financial control however is how we optimized our shareholder value.

So we are closely monitoring the actions of our lending partners, trends in the market, and in years past, and showing we have the capacity and deal flow to predict strategically among the changing capital flow cycles. We have ongoing flexibility to capitalize on what should be a building year for new deals, thanks to an equity raise of just over $100 million earlier this year, executed at a net price above book value.

Rather than ask for permission from our shareholders in sell below book value, as many of our peers have done, we issued stock above book value despite the volatile market climate. It is our sustained belief that selling stock below book value is rarely justified.

Our initial outlook for 2012 is not substantially changed, as we consolidate our Sumitomo facility, we are actively steering the portfolio towards a range of 70% to 80% first lien loans. At the end of year, we are targeting leverage of 0.6 times on average, excluding our 10-year effects on non-recourse SBA debentures.

For the quarter, we delivered $0.29 per share of NII, which is consistent with our quarterly dividend rate. We anticipate that repayments will continues as the portfolio matures; this should favorably impact on our earnings, thanks to the recognition of exit fees, prepayment penalties and on occasion, equity realizations, not to mention uptick in up-front fees.

It is our expectation, the origination volume through the year will continue in the range of $100 million to $300 million per quarter with deals flow increasing as the year progresses. Given that the previously mentioned tax changes for the calendar quarter with seven new Fifth Street origination record.

Compared to last quarter, the pace of activity thus far for the quarter ending June 30 has improved. Net investment income of $0.29 per share for us in the second fiscal quarter represents a strong quarter that outperforms the consensus.

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