Fifth Street Finance's CEO Presents At UBS Global Financial Services Conference (Transcript)

Fifth Street Finance Corp. (FSC)

UBS Global Financial Services Conference Call

May 9, 2012 2:20 am ET

Executives

Leonard M. Tannenbaum – Chairman and Chief Executive Officer

Alexander C. Frank – Chief Financial Officer

Analysts

Abu Ramin – UBS Securities LLC

Presentation

Abu Ramin – UBS Securities LLC

Good afternoon, everybody. Thank you for coming to our conference. My name is Abu Ramin, and I’m the Consumer and Specialty Finance team at UBS. I have the pleasure of introducing Fifth Street Finance Corp. Fifth Street Finance Corp. has been one of the fastest growing BDCs nearly doubling its investment portfolio in its fiscal 2011 year.

Here to present of behalf of Fifth Street is Len Tannenbaum, Chief Executive Officer and Chairman of the Board of Directors joined by Alex Frank, CFO.

Leonard M. Tannenbaum

Thank you, very much. I think – let me see if I can use those slides, roughly maybe that’s simple. Disclaimers, what a BDC is? For those of you who don’t know; quickly, a BDC is a vehicle where you can do passthrough without double taxation. And we can take 1:1 one leverage. We were created in 1980, allowing Small Business Act to invest in small businesses, and we are heavily regulated by the SEC. So we’re registered investment advisor.

I founded the firm in 1998, it’s just me, and we built the firm based upon a phenomenal track record. We had 30% compounded returns in the first fund, 20% compounded returns to the second fund. The first fund was to seven years before full realization, which allowed us to raise a third fund in 2007, eventually converting to the BDC going public in June of 2008.

Today, then we were a $200 million something market cap company with one credit line of $50 million. After numerous fund raises, almost all of them were accretive to book value, except for the one that generate our SBA license, which is a huge bearing for us. We’re sitting here today with $800 market cap, approximately $1.2 billion in assets with a right side of the balance sheet where the portfolio is diversified; we will talk about that later.

One thing that differentiates us against many of the other BDCs and companies that lend in our market, is we only work with private equity sponsored transactions. So private equity sponsors are clients, our shareholders of course are more important clients. And the private equity sponsors will come to us, and say we want to buy company x for $80 million, will you finance us for $40 million? We put in $30 million, and ask them to put in $10 million. That’s the typical transaction that we do.

So what does that lead us to? It leads us to a high quality portfolio, all private equity sponsored, that’s why it’s that important. When there’s a problem, you actually have a private equity sponsor with a committed fund to put more money in, to turn the company around, to manage the company. And that diversified portfolio, we received two BBB minus ratings; one recently from S&P, another fund rating a year old from Fitch. And our funding base is spread out over a syndicated facility with ING, a great $150 million line with Wells Fargo, $200 million LIBOR plus, 225 line with Sumitomo Bank. And most importantly, we’re an SBA lender.

If you’re only an SBA lender, your stock trades above 1.5 times book it seems. We are an SBA lender that trades at a discount to book for some reason. But the SBA is an amazing thing, it’s two times leverage that doesn’t count against the 1:1 ratio, because the government decides to exclude itself. The other really good thing about the SBA loan, it’s a ten-year non-recourse no covenants money with seven years cyclability. So this could be a very good revenue generator, it is okay revenue generator for us, the way we deployed it, we can talk about that a little bit later.

We pay monthly dividends, we pay dividends basically in line with earnings, our earnings projections, and we’ve just declared $0.0958 the next three months; or actually through July, August and September. To date we’ve declared almost $5 in dividends, since our IPO. I personally have bought all of my shares, I’m one of the largest shareholders, and I brought that all 2 million shares; there’s no such thing as a granted equity or options in a strongly managed BDC. There’s the right button.

So versus the SPY, versus the [Exelis] on a total return basis, we’ve done really well. But I will tell, we probably have underperformed our expectations. We’ve underperformed our expectations for a couple of reasons, one we haven’t efficiently used our capital structure, two our 2007 assets have been disastrous, and it took us a long time to clean that portfolio. And number three, we did do one equity raise below book value to fund the SBA because we were forced by them to put $75 million in bank to get our first license at a time where the market was in (inaudible) and that was a great way to destroy $1 of a NAV. So absent those three things, I think we would have done extremely well and probably had a much better return than you’re seeing on this chart.

However, we are one of the dominant lenders in our space. I would tell you we were top three in something called the one stop or unitranche transaction. This areas is there is ups in gallop, I think we’re ahead of gallop, gallop things are ahead of us. We see gallop down there but for not just from us though. They would like to show tranche towards ahead of us which is not really true.

Read the rest of this transcript for free on seekingalpha.com

More from Stocks

Jim Cramer on Foot Locker's Earnings: Nike Is a Buy

Jim Cramer on Foot Locker's Earnings: Nike Is a Buy

Stocks Trade Mixed, Energy Shares Fall on Sharp Drop in Oil Prices

Stocks Trade Mixed, Energy Shares Fall on Sharp Drop in Oil Prices

Video: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Video: Jim Cramer on the Markets, 10-Year Yield, Oil Prices and Foot Locker

Top U.S. Regulators May Be Sowing the Seeds of the Next Financial Crisis

Top U.S. Regulators May Be Sowing the Seeds of the Next Financial Crisis

Fiat Chrysler Recalls 4.8 Million Vehicles Over Cruise Control Issue

Fiat Chrysler Recalls 4.8 Million Vehicles Over Cruise Control Issue