Fifth Street Finance's CEO Discusses F3Q12 Results - Earnings Call Transcript

Fifth Street Finance Corporation (FSC)

F3Q12 Earnings Call

August 9, 2012 10:00 AM ET


Dean Choksi – SVP-Finance and Head, IR

Len Tannenbaum – CEO

Bernard Berman – President

Alex Frank – CFO


Greg Mason – Fifth Street Finance Corp

Stephen Laws – Deutsche Bank

Jonathan Bock – Wells Fargo

Robert Dodd – Raymond James

Jason Arnold – RBC Capital Markets



Good day, ladies and gentlemen, and welcome to the Q3 2012 Fifth Street Finance Corp. Earnings Conference Call. My name is Andrew and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder this call is being recorded for replay purposes. I would now like to turn the call over to Dean Choksi, Senior Vice-President of finance and Head of Investor relations. Please proceed, sir.

Dean Choksi

Good morning, and welcome to Fifth Street’s third quarter earnings call. My name is Dean Choksi and I’ve recently joined Fifth Street as a Senior Vice-President of Finance and Head of Investor Relations. In my first few weeks, I’ve been extremely impressed by the quality of the team and the platform and look forward to meeting our shareholders and analysts.

This conference call is to discuss Fifth Street Finance Corp.’s third fiscal quarter ended June 30, 2012. I’m joined this morning by Leonard Tannenbaum, Chief Executive Officer; Bernard Berman, President; 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 July 12, 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 in 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, 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. We’re excited to have Dean as our Senior Vice-President of Finance and Head of Investor Relations. Dean is our formal analyst at UBS, where he covered both BDCs and mortgage rates. I encourage you to reach after him, and learn about Fifth Street BDCs.

U.S. and European Union governments face an immense fiscal challenge. Its deficits continue to rise. A handful of EU governments are starting to cut spending after being required to do so, by bond markets and regulators. On the other hand, U.S. deficit spending is benefiting from record low interest rates courtesy of central bank’s quantitative easing and investor’s flight-to-quality assets. But how long will this last?

Polarized Congress, White House are avoiding the difficult positions on taxes and spending. The lack of compromise is creating a dysfunctional environment in Washington, with the Senate unable to pass a proper budget in over three years. But the markets will soon focus on the upcoming fiscal cliff, which we believe will not be addressed by Congress and the White House until 2013.

All of this uncertainty makes long-term planning difficult for investors and business owners. At Fifth Street, we are navigating this volatile environment by focusing where we have a competitive advantage. Our reputation, having the ability to offer a one-stop product, larger hold size and the ability to grow the platform companies to manage a premium in the market.

However, the abundant liquidity in the capital markets is increasing bank competition in first lien loans and leading to overall higher purchase multiples. As a result, we are seeing greater value at middle and upper-middle mezzanine loans and anticipates steering our portfolio mix slightly towards mezzanine with a new broader target range of 60% to 80% first lien loans, a change from our 70% to 80% previous target for first lien loans.

We will focus on using our currently unused $75 million of SBA debenture capacity to finance the mixed shift, which should drive an incremental EPS growth. On the right side of the balance sheet, we are constantly looking for ways to lower costs and improve the terms of our debt capital.

Over the long term, we expect regulations such as Basel III to reduce bank competitions for middle market loans as capital charges increase, bond rate of borrowers. This should lead to a relative funding advantage for BDCs with investment grade ratings in the long term. Fifth Street is investment grade rated in both Fitch and S&P with a stable outlook.

Middle market M&A volumes declined in the June quarter, but our broad platforms still generate $221 million of gross originations, while maintaining our pricing and underwriting standards, enabling us to increase our market share. We are one of the premier middle market leading platforms after several years of investing in our platform and growing and diversifying our balance sheet.

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