Fifth Street Finance Corp. Announces Quarter Ended March 31, 2013 Financial Results

WHITE PLAINS, N.Y., May 8, 2013 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) ("Fifth Street" or "we") announces its financial results for the second fiscal quarter ended March 31, 2013.

Second Fiscal Quarter 2013 Financial Highlights
  • Net investment income for the quarter ended March 31, 2013 was $29.3 million or $0.28 per share, as compared to $22.8 million or $0.29 per share for the quarter ended March 31, 2012;  
  • Net asset value per share was $9.90 as of March 31, 2013, as compared to $9.88 as of December 31, 2012;  
  • Net unrealized appreciation for the quarter ended March 31, 2013 was $2.7 million (including $1.4 million of net reclassifications to realized gains) or $0.02 per share, as compared to net unrealized appreciation of $8.0 million (including $10.6 million of net reclassifications to realized losses) or $0.10 per share for the quarter ended March 31, 2012;  
  • Net realized losses for the quarter ended March 31, 2013 were $0.1 million or $0.00 per share, as compared to $10.8 million or $0.14 per share for the quarter ended March 31, 2012; and  
  • Net increase in net assets resulting from operations for the quarter ended March 31, 2013 was $31.8 million or $0.30 per share, as compared to $20.1 million or $0.25 per share for the quarter ended March 31, 2012.

Third and Fourth Fiscal Quarter 2013 Dividend Declarations

To date, our Board of Directors has declared monthly dividends for the third and fourth fiscal quarters of 2013 as follows:
  • $0.0958 per share, which was paid on April 30, 2013 to stockholders of record on April 15, 2013;
  • $0.0958 per share, payable on May 31, 2013 to stockholders of record on May 15, 2013;
  • $0.0958 per share, payable on June 28, 2013 to stockholders of record on June 14, 2013;
  • $0.0958 per share, payable on July 31, 2013 to stockholders of record on July 15, 2013; and
  • $0.0958 per share, payable on August 30, 2013 to stockholders of record on August 15, 2013.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at March 31, 2013 to be $1.75 billion, as compared to $1.29 billion at September 30, 2012. Total assets at March 31, 2013 were $1.82 billion, as compared to $1.39 billion at September 30, 2012.

During the quarter ended March 31, 2013, we closed $362.8 million of investments in 15 new and four existing portfolio companies, and funded $334.8 million across new and existing portfolio companies. This compares to closing $143.9 million in six new and four existing portfolio companies and funding $119.8 million during the quarter ended March 31, 2012.  During the quarter ended March 31, 2013, we also received $140.9 million in connection with the exits of seven of our debt investments, all of which were exited at par or above, and an additional $20.2 million in connection with partial sales of debt investments at an aggregate net price above par.

At March 31, 2013, our portfolio consisted of investments in 97 companies, 86 of which were completed in connection with investments by private equity sponsors and 11 of which were in private equity funds. At fair value, 96.4% of our portfolio consisted of debt investments (63.7% were first lien loans, 14.9% were second lien loans and the remainder were subordinated loans). Our average portfolio company debt investment size at fair value was $21.1 million at March 31, 2013, versus $19.7 million at September 30, 2012.

"On the heels of a record December quarter for gross originations, we are pleased to report solid March quarter results with gross originations of over $360 million, including two investments that were each over $100 million," stated our President, Bernard D. Berman, adding that "our sponsor relationships, underwriting expertise and larger balance sheet with diversified funding sources continue to differentiate us from other lenders in the middle market."

Our weighted average yield on debt investments at March 31, 2013 was 11.40%, and included a cash component of 10.52%.

At March 31, 2013 and September 30, 2012, $1.24 billion and $869.9 million, respectively, of our debt investments at fair value were at floating rates, which represented 73.7% and 70.1%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended March 31, 2013 and March 31, 2012 was $54.7 million and $42.1 million, respectively. For the quarter ended March 31, 2013, this amount primarily consisted of $41.7 million of interest income from portfolio investments (which included $4.0 million of PIK interest) and $11.9 million of fee income. For the quarter ended March 31, 2012, total investment income consisted of $32.0 million of interest income from portfolio investments (which included $2.9 million of PIK interest) and $10.1 million of fee income. For the quarter ended March 31, 2013, PIK interest income remained stable at 7.4% of total investment income and PIK interest received in cash exceeded PIK interest income accrued by $0.2 million.   

The increase in our total investment income for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012 was primarily attributable to a higher average level of outstanding debt investments, which was principally due to a net increase of 25 debt investments in our portfolio and fee income related to investment activity, partially offset by amortization repayments received and a decrease in the weighted average yield on our debt investments from 12.37% to 11.40% during the year-over-year period.

Expenses for the quarters ended March 31, 2013 and March 31, 2012 were $25.4 million and $19.3 million, respectively. Expenses increased for the quarter ended March 31, 2013 as compared to the quarter ended March 31, 2012, primarily due to increases in the base management fee, the incentive fee and interest expense.

Liquidity and Capital Resources

In March 2013, the SBA fixed the interest rate on our second SBIC subsidiary's $31.8 million of drawn leverage at an interest rate of 2.351% (excluding the SBA annual charge of 0.804%). As a result, the $181.8 million of SBA-guaranteed debentures held by our SBIC subsidiaries carry a weighted average interest rate of 3.355% as of March 31, 2013.

As of March 31, 2013, we had $38.2 million in cash and cash equivalents, portfolio investments (at fair value) of $1.75 billion, $10.6 million of interest and fees receivable, $181.8 million of SBA debentures payable, $373.5 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $75.0 million of unsecured notes payable and unfunded commitments of $125.9 million.

As of September 30, 2012, we had $74.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.29 billion, $7.7 million of interest and fees receivable, $150.0 million of SBA debentures payable, $201.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable and unfunded commitments of $102.5 million.

Fiscal Year 2013 Dividends

For the fiscal year ending September 30, 2013, our Board of Directors has declared monthly dividends to date as follows:
  • $0.0958 per share, which was paid on October 31, 2012 to stockholders of record on October 15, 2012;
  • $0.0958 per share, which was paid on November 30, 2012 to stockholders of record on November 15, 2012;
  • $0.0958 per share, which was paid on December 28, 2012 to stockholders of record on December 14, 2012;
  • $0.0958 per share, which was paid on January 31, 2013 to stockholders of record on January 15, 2013;
  • $0.0958 per share, which was paid on February 28, 2013 to stockholders of record on February 15, 2013;
  • $0.0958 per share, which was paid on March 29, 2013 to stockholders of record on March 15, 2013;
  • $0.0958 per share, which was paid on April 30, 2013 to stockholders of record on April 15, 2013;
  • $0.0958 per share, payable on May 31, 2013 to stockholders of record on May 15, 2013;
  • $0.0958 per share, payable on June 28, 2013 to stockholders of record on June 14, 2013;
  • $0.0958 per share, payable on July 31, 2013 to stockholders of record on July 15, 2013; and
  • $0.0958 per share, payable on August 30, 2013 to stockholders of record on August 15, 2013.

Dividends are paid primarily from distributable (taxable) income. Our Board of Directors determines dividends based on estimates of distributable (taxable) income, which differ from book income due to temporary and permanent differences in income and expense recognition and changes in unrealized appreciation and depreciation on investments.

Our amended dividend reinvestment plan ("DRIP") provides for reinvestment of dividends, unless a stockholder elects to receive cash. As a result, if our Board of Directors declares a cash dividend, our stockholders who have not "opted out" of our DRIP will have their cash dividends automatically reinvested in additional shares of our common stock, rather than receiving cash dividends. We provide a 5% discount on newly-issued shares purchased through the DRIP (provided that shares will not be issued at less than net asset value per share). If you are a stockholder and your shares of our common stock are held through a brokerage firm or other financial intermediary and you wish to participate in the DRIP, please contact your broker or other financial intermediary. 

Portfolio Asset Quality

We utilize the following ranking system for our investment portfolio:
  • Investment Ranking 1 is used for investments that are performing above expectations and/or a capital gain is expected.  
  • Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risks at the time of the original investment. All new investments are initially ranked 2.   
  • Investment Ranking 3 is used for investments that are performing below our expectations and that require closer monitoring, but where we expect no loss of investment return (interest and/or dividends) or principal. Companies with a ranking of 3 may be out of compliance with financial covenants.  
  • Investment Ranking 4 is used for investments that are performing below our expectations and whose risks have increased materially since the original investment. We expect some loss of investment return, but no loss of principal.  
  • Investment Ranking 5 is used for investments that are performing substantially below our expectations and whose risks have increased substantially since the original investment. Investments with a ranking of 5 are those for which some loss of principal is expected.

At March 31, 2013 and September 30, 2012, the distribution of our investments on the 1 to 5 investment ranking scale at fair value was as follows:
  March 31, 2013 September 30, 2012
Investment Ranking Fair Value (thousands) % of Portfolio Leverage Ratio Fair Value (thousands) % of Portfolio Leverage Ratio
1 $ 225,180 12.88%  2.77  $ 68,685  5.33%  2.72
2 1,489,077 85.14  4.22  1,212,993 94.17  3.96
3 14,905 0.85  NM(1)  3,193 0.25   NM(1)
4  18,733  1.07   NM(1)   —  —   —
5  1,000  0.06   NM(1)   3,237  0.25   NM(1)
Total $ 1,748,895  100.00%  4.10  $ 1,288,108  100.00%  3.89
             
(1) Due to operating performance, this ratio is not measurable.

We may from time to time modify the payment terms of our investments, either in response to current economic conditions and their impact on certain of our portfolio companies or in accordance with tier pricing provisions in certain loan agreements. As of March 31, 2013, we had modified the payment terms of our investments in 16 portfolio companies. Such modified terms may include increased PIK interest provisions and reduced cash interest rates. These modifications, and any future modifications to our loan agreements, may limit the amount of interest income that we recognize from the modified investments, which may, in turn, limit our ability to make distributions to our stockholders.

As of March 31, 2013, we had stopped accruing cash and/or PIK interest on three investments, including two that had not paid all of their scheduled cash interest payments for the period ended March 31, 2013. As of March 31, 2012, we had stopped accruing cash and/or PIK interest and OID on four investments, including three that had not paid all of their scheduled cash interest payments for the period ended March 31, 2012.

Recent Developments

In April and May 2013, we issued $86.3 million in aggregate principal amount of our 6.125% unsecured notes due 2028 for net proceeds of $83.4 million after deducting underwriting commissions of $2.6 million and offering costs of $0.3 million. The proceeds included the underwriters' full exercise of their overallotment option. Interest on these notes is paid quarterly in arrears on January 30, April 30, July 30 and October 30, at a rate of 6.125% per year, beginning April 30, 2013. The notes mature on April 30, 2028 and may be redeemed in whole or in part at any time or from time to time at our option on or after April 30, 2018. The notes are listed on the NASDAQ Global Select Market under the trading symbol "FSCFL" with a par value of $25.00 per share. The notes were assigned an investment grade (BBB-) counterparty credit rating from Fitch Ratings and Standard & Poor's.

In April 2013, we completed a follow-on public offering of 14,435,253 shares of our common stock, which included the underwriters' partial exercise of their over-allotment option, at the public offering price of $10.85. The net proceeds totaled $151.5 million after deducting underwriting commissions of $4.7 million and offering costs of $0.3 million.

In April 2013, the existing lender group increased its commitment to our ING credit facility and our borrowing capacity increased to $445 million.

On May 6, 2013, our Board of Directors declared the following dividends:

  • $0.0958 per share, payable on June 28, 2013 to stockholders of record on June 14, 2013;
  • $0.0958 per share, payable on July 31, 2013 to stockholders of record on July 15, 2013; and
  • $0.0958 per share, payable on August 30, 2013 to stockholders of record on August 15, 2013.

On May 6, 2013, upon expiration of our existing stock repurchase program, our Board of Directors authorized a stock repurchase program to acquire up to $50 million of our outstanding common stock. Stock repurchases under this program would be made through the open market at times and in such amounts as our management deems appropriate, provided they are below the most recently published net asset value per share. Unless extended by our Board of Directors, the stock repurchase program will expire on May 7, 2014 and may be limited or terminated at any time without prior notice.

On May 6, 2013, our Board of Directors appointed David H. Harrison as Chief Compliance Officer. Bernard D. Berman, who previously served as Chief Compliance Officer, remains our President and Secretary.

On May 7, 2013, we entered into a definitive agreement to acquire Healthcare Finance Group, LLC ("HFG") as a portfolio company.  HFG is a specialty lender providing asset-based lending and term loan products to the healthcare industry.  To effect the acquisition, we anticipate investing approximately $110 million and intend to finance the purchase with available liquidity, including operating cash and borrowings under our existing credit facilities.  Customary closing conditions, including the expiration of the applicable waiting period under the Hart Scott Rodino Act, apply to the acquisition.
 
 
Fifth Street Finance Corp. Consolidated Statements of Assets and Liabilities (in thousands, except per share amounts) (unaudited)
     
  March 31, 2013 September 30,  2012
ASSETS    
Investments at fair value:    
Control investments (cost March 31, 2013: $58,360; cost September 30, 2012: $58,557) $ 56,514 $ 53,240
Affiliate investments (cost March 31, 2013: $30,236; cost September 30, 2012: $29,496) 31,864 31,187
Non-control/Non-affiliate investments (cost March 31, 2013: $1,647,340; cost September 30, 2012: $1,180,436) 1,660,517 1,203,681
     
Total investments at fair value (cost March 31, 2013: $1,735,936; cost September 30, 2012: $1,268,489) 1,748,895 1,288,108
     
Cash and cash equivalents 38,169 74,393
Interest and fees receivable 10,584 7,652
Due from portfolio company 855 3,292
Receivables from unsettled transactions 1,750
Deferred financing costs 17,108 13,751
Other assets 736 56
     
Total assets $ 1,816,347 $ 1,389,002
     
     
LIABILITIES AND NET ASSETS    
     
Liabilities:    
Accounts payable, accrued expenses and other liabilities $ 1,878 $ 978
Base management fee payable 7,591 6,573
Incentive fee payable 7,001 5,579
Due to FSC, Inc. 1,252 1,630
Interest payable 2,342 4,219
Payments received in advance from portfolio companies 24 40
Offering costs payable 162
Credit facilities payable 373,548 201,251
SBA debentures payable 181,750 150,000
Unsecured convertible notes payable 115,000 115,000
Unsecured notes payable 75,000
     
Total liabilities 765,386 485,432
     
Net assets:    
Common stock, $0.01 par value, 250,000 and 150,000 shares authorized at March 31, 2013 and September 30, 2012, respectively;  106,209 and 91,048 shares issued and outstanding at March 31, 2013 and September 30, 2012, respectively 1,062 910
Additional paid-in-capital 1,174,678 1,019,053
Net unrealized appreciation on investments 13,337 19,998
Net realized loss on investments and interest rate swap (127,584) (128,062)
Accumulated overdistributed net investment income (10,532) (8,329)
     
Total net assets (equivalent to $9.90 and $9.92 per common share at March 31, 2013 and September 30, 2012, respectively) 1,050,961 903,570
     
Total liabilities and net assets $ 1,816,347 $ 1,389,002
     
 
 
 
Fifth Street Finance Corp. Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited)
         
  Three months Three months Six months Six months
  ended March 31, ended March 31, ended March 31, ended March 31,
   2013  2012  2013  2012
Interest income:        
Control investments $ 876 $ 211 $ 1,758 $ 432
Affiliate investments 725 690 1,309 1,394
Non-control/Non-affiliate investments 36,019 28,183 69,473 57,309
Interest on cash and cash equivalents 5 14 8 18
Total interest income 37,625 29,098 72,548 59,153
PIK interest income:        
Control investments 108 216 38
Affiliate investments 308 155 765 310
Non-control/Non-affiliate investments 3,631 2,737 6,786 5,959
Total PIK interest income 4,047 2,892 7,767 6,307
Fee income:        
Control investments 114 213
Affiliate investments 12 146 24 254
Non-control/Non-affiliate investments 11,800 9,905 24,483 15,790
Total fee income 11,926 10,051 24,720 16,044
Dividend and other income:        
Non-control/Non-affiliate investments 1,089 39 1,435 72
Total dividend and other income 1,089 39 1,435 72
Total investment income 54,687 42,080 106,470 81,576
Expenses:        
Base management fee 8,891 5,391 16,937 11,132
Incentive fee 7,001 5,698 13,640 10,945
Professional fees 784 600 1,972 1,691
Board of Directors fees 122 70 251 126
Interest expense 7,761 5,602 14,917 11,326
Administrator expense 670 708 1,600 1,524
General and administrative expenses 1,455 1,256 2,594 2,394
Total expenses 26,684 19,325 51,911 39,138
Base management fee waived (1,300) (1,300)
Net expenses 25,384 19,325 50,611 39,138
Gain on extinguishment of unsecured convertible notes 36 1,341
Net investment income 29,303 22,791 55,859 43,779
Unrealized appreciation (depreciation) on investments:        
Control investments 4,693 (25) 3,471 1,089
Affiliate investments 93 10,610 (63) 9,327
Non-control/Non-affiliate investments (2,106) (2,538) (10,067) 3,465
Net unrealized appreciation (depreciation) on investments 2,680 8,047 (6,659) 13,881
         
Realized gain (loss) on investments:        
Control investments
Affiliate investments (10,693)  (10,620)
Non-control/Non-affiliate investments (149) (89) 478 (16,800)
Net realized gain (loss) on investments (149) (10,782) 478 (27,420)
Net increase in net assets resulting from operations $ 31,834 $ 20,056 $ 49,678 $ 30,240
         
Net investment income per common share — basic $ 0.28 $ 0.29 $ 0.56 $ 0.58
Earnings per common share — basic $ 0.30 $ 0.25 $ 0.49 $ 0.40
Weighted average common shares outstanding — basic 106,022 79,534 100,394 75,935
Net investment income per common share — diluted $ 0.27 $ 0.28 $ 0.54 $ 0.54
Earnings per common share — diluted $ 0.29 $ 0.24 $ 0.48 $ 0.38
Weighted average common shares outstanding — diluted 113,812 87,943 108,266 84,084

About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a specialty finance company that lends to and invests in small and mid-sized companies, primarily in connection with investments by private equity sponsors. Fifth Street Finance Corp.'s investment objective is to maximize its portfolio's total return by generating current income from its debt investments and capital appreciation from its equity investments.

Forward-Looking Statements

This press release may contain certain forward-looking statements, including statements with regard to the future performance of Fifth Street Finance Corp. Words such as "believes," "expects," "projects," "anticipates," and "future" or similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ materially from those projected in these forward-looking statements, and these factors are identified from time to time in Fifth Street Finance Corp.'s filings with the Securities and Exchange Commission. Fifth Street Finance Corp. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
CONTACT: Investor Contact:         Dean Choksi, Senior VP of Finance & Head of Investor Relations         Fifth Street Finance Corp.         (914) 286-6855         ir@fifthstreetfinance.com                  Media Contact:         Steve Bodakowski         Prosek Partners         (203) 254-1300 ext. 141         pro-fifthstreet@prosek.com

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