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

WHITE PLAINS, NY, Feb. 6, 2014 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (NASDAQ:FSC) ("Fifth Street" or "we") announces its financial results for the first fiscal quarter ended December 31, 2013.

First Fiscal Quarter 2014 Financial Highlights
  • Net investment income for the quarter ended December 31, 2013 was $36.2 million or $0.26 per share, as compared to $28.7 million or $0.24 per share for the quarter ended September 30, 2013;
  • Net asset value per share was $9.85 as of December 31, 2013, unchanged from September 30, 2013;
  • Net realized and unrealized losses for the quarter ended December 31, 2013 were $2.5 million or $0.02 per share, as compared to $2.6 million or $0.02 per share for the quarter ended September 30, 2013;
  • We closed a record $912.7 million of new investments, $645.5 million of which were funded at close; and
  • No investments were on non-accrual status as of December 31, 2013.

Calendar Year 2014 Dividend Declarations

To date, our Board of Directors has declared monthly dividends, which reflect a $1.00 per share annual run rate, for calendar year 2014 as follows:
  • $0.0833 per share, which was paid on January 31, 2014 to stockholders of record on January 15, 2014;
  • $0.0833 per share, payable on February 28, 2014 to stockholders of record on February 14, 2014;
  • $0.0833 per share, payable on March 31, 2014 to stockholders of record on March 14, 2014;
  • $0.0833 per share, payable on April 30, 2014 to stockholders of record on April 15, 2014; and
  • $0.0833 per share, payable on May 30, 2014 to stockholders of record on May 15, 2014.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at December 31, 2013 to be $2.4 billion, as compared to $1.9 billion at September 30, 2013. Total assets at December 31, 2013 were $2.5 billion, as compared to $2.1 billion at September 30, 2013.

During the quarter ended December 31, 2013, we closed $912.7 million of investments in 23 new and eight existing portfolio companies, and funded $650.1 million across new and existing portfolio companies. This compares to closing $422.1 million in 20 new and eight existing portfolio companies and funding $398.8 million during the quarter ended December 31, 2012. During the quarter ended December 31, 2013, we also received $45.8 million in connection with the exits of five of our debt investments, all of which were exited at par or above, and an additional $108.9 million in connection with partial sales of debt investments at an aggregate net price above par.

At December 31, 2013, our portfolio consisted of investments in 111 companies, 95 of which were completed in connection with investments by private equity sponsors and 16 of which were in private equity funds. At fair value, 95.2% of our portfolio consisted of debt investments (81.1% were senior secured loans). Our average portfolio company debt investment size at fair value was $24.9 million at December 31, 2013, versus $22.1 million at September 30, 2013.

"Our successful December quarter reflected the strength of our origination platform and an increase in leverage to within our target range. Solid earnings exceeded our current dividend level for the quarter. We continue to make progress on multiple strategic initiatives which we expect to drive future earnings and enable us to meet or exceed our dividend going forward," stated our Chief Executive Officer, Leonard M. Tannenbaum.

Our weighted average yield on debt investments at December 31, 2013 was 10.9%, and included a cash component of 9.9%. At December 31, 2013 and September 30, 2013, $1.6 billion and $1.2 billion, respectively, of our debt investments at fair value were at floating rates, which represented 72.2% and 67.4%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended December 31, 2013 and December 31, 2012 was $71.3 million and $51.8 million, respectively. For the quarter ended December 31, 2013, this amount primarily consisted of $54.1 million of interest income from portfolio investments (which included $5.6 million of PIK interest). For the quarter ended December 31, 2012, this amount primarily consisted of $38.6 million of interest income from portfolio investments (which included $3.7 million of PIK interest). For the quarter ended December 31, 2013, PIK interest income net of PIK collected in cash represented 1.9% of total investment income.

The increase in our total investment income for the quarter ended December 31, 2013 as compared to the quarter ended December 31, 2012 was primarily attributable to a higher average level of outstanding debt investments, which was principally due to a net increase of 15 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 12.0% to 10.9% during the year-over-year period.

Expenses for the quarters ended December 31, 2013 and December 31, 2012 were $35.1 million and $25.2 million, respectively. Expenses increased for the quarter ended December 31, 2013 as compared to the quarter ended December 31, 2012, primarily due to increases in the base management fee, the incentive fee and interest expense.

Liquidity and Capital Resources

As of December 31, 2013, we had $42.6 million in cash and cash equivalents, portfolio investments (at fair value) of $2.4 billion, $11.8 million of interest and fees receivable, $210.8 million of SBA debentures payable, $564.2 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $239.9 million.

As of September 30, 2013, we had $147.4 million in cash and cash equivalents, portfolio investments (at fair value) of $1.9 billion, $10.4 million of interest and fees receivable, $181.8 million of SBA debentures payable, $188.0 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $161.3 million of unsecured notes payable and unfunded commitments of $149.5 million.

Calendar Year 2014 Dividends

To date, our Board of Directors has declared monthly dividends for the second and third fiscal quarters of 2014 as follows:
  • $0.0833 per share, which was paid on January 31, 2014 to stockholders of record on January 15, 2014;
  • $0.0833 per share, payable on February 28, 2014 to stockholders of record on February 14, 2014;
  • $0.0833 per share, payable on March 31, 2014 to stockholders of record on March 14, 2014;
  • $0.0833 per share, payable on April 30, 2014 to stockholders of record on April 15, 2014; and
  • $0.0833 per share, payable on May 30, 2014 to stockholders of record on May 15, 2014.

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 whose shares are registered in their name and 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 up to 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 investment ranking system for our investment portfolio:
  • Investment Ranking 1 is used for investments that are performing above expectations and/or capital gains are expected.
  • Investment Ranking 2 is used for investments that are performing substantially within our expectations, and whose risks remain materially consistent with the potential risks at the time of the original or restructured investment. All new investments are initially ranked 2.
  • Investment Ranking 3 is used for investments that are performing below our expectations and for which risk has materially increased since the original or restructured investment. The portfolio company may be out of compliance with debt covenants and may require closer monitoring. To the extent that the underlying agreement has a PIK interest provision, investments with a ranking of 3 are generally those on which we are not accruing PIK interest.
  • Investment Ranking 4 is used for investments that are performing substantially below our expectations and for which risk has increased substantially since the original or restructured investment. Investments with a ranking of 4 are those for which some loss of principal is expected and are generally those on which we are not accruing cash interest.

At December 31, 2013 and September 30, 2013, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows:
             
  December 31, 2013 September 30, 2013
Investment Ranking Fair Value % of Portfolio Leverage Ratio Fair Value % of Portfolio Leverage Ratio
1 $ 118,070 4.97% 2.65 $ 122,769 6.49% 2.67
2 2,258,642 95.03 4.86 1,770,277 93.51 4.70
3
4
Total $ 2,376,712 100.00% 4.75 $ 1,893,046 100.00% 4.57
             

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 December 31, 2013, we had modified the payment terms of our investments in 17 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 December 31, 2013, there were no investments on which we had stopped accruing cash interest, PIK interest or OID income. As of December 31, 2012, we had stopped accruing PIK interest on two investments.

Recent Developments

On January 30, 2014, we increased the borrowing capacity under our ING-led credit facility to $620 million from $605 million.
     
Fifth Street Finance Corp.
 
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
     
  December 31, September 30,
  2013 2013
ASSETS    
Investments at fair value:    
Control investments (cost December 31, 2013: $231,291; cost September 30, 2013: $207,518) $ 239,695 $ 215,502
Affiliate investments (cost December 31, 2013: $38,803; cost September 30, 2013: $29,807) 41,712 31,932
Non-control/Non-affiliate investments (cost December 31, 2013: $2,078,941; cost September 30, 2013: $1,622,326) 2,095,305 1,645,612
Total investments at fair value (cost December 31, 2013: $2,349,035; cost September 30, 2013: $1,859,651) 2,376,712 1,893,046
Cash and cash equivalents 42,600 147,359
Interest and fees receivable 11,782 10,379
Due from portfolio company 3,094 1,814
Deferred financing costs 19,575 19,548
Other assets 720 187
Total assets $ 2,454,483 $ 2,072,333
     
LIABILITIES AND NET ASSETS    
Liabilities:    
Accounts payable, accrued expenses and other liabilities $ 3,030 $ 1,166
Base management fee payable 12,059 9,625
Incentive fee payable 9,054 7,175
Due to FSC, Inc. 2,133 840
Interest payable 7,011 2,939
Payables from unsettled transactions 35,716
Credit facilities payable 564,228 188,000
SBA debentures payable 210,750 181,750
Unsecured convertible notes payable 115,000 115,000
Unsecured notes payable 161,250 161,250
Total liabilities 1,084,515 703,461
Commitments and contingencies    
Net assets:    
Common stock, $0.01 par value, 250,000 shares authorized; 139,138 and 139,041 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively 1,391 1,390
Additional paid-in-capital 1,510,548 1,509,546
Net unrealized appreciation on investments 27,677 33,395
Net realized loss on investments and interest rate swap (151,385) (154,591)
Accumulated overdistributed net investment income (18,263) (20,868)
Total net assets (equivalent to $9.85 per common share at December 31, 2013 and September 30, 2013) 1,369,968 1,368,872
Total liabilities and net assets $ 2,454,483 $ 2,072,333
     
     
Fifth Street Finance Corp.
 
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
     
  Three months Three months
  ended December 31, 2013 ended December 31, 2012
Interest income:    
Control investments $ 2,419 $ 882
Affiliate investments 766 584
Non-control/Non-affiliate investments 45,296 33,454
Interest on cash and cash equivalents 3 3
Total interest income 48,484 34,923
PIK interest income:    
Control investments 2,408 108
Affiliate investments 335 456
Non-control/Non-affiliate investments 2,870 3,156
Total PIK interest income 5,613 3,720
Fee income:    
Control investments 567 99
Affiliate investments 170 12
Non-control/Non-affiliate investments 16,401 12,683
Total fee income 17,138 12,794
Dividend and other income:    
Non-control/Non-affiliate investments 96 346
Total dividend and other income 96 346
Total investment income 71,331 51,783
Expenses:    
Base management fee 12,059 8,046
Incentive fee 9,054 6,639
Professional fees 1,025 1,188
Board of Directors fees 155 129
Interest expense 10,213 7,156
Administrator expense 853 930
General and administrative expenses 1,754 1,139
Total expenses 35,113 25,227
Net investment income 36,218 26,556
Unrealized appreciation (depreciation) on investments:    
Control investments 420 (1,222)
Affiliate investments 783 (156)
Non-control/Non-affiliate investments (6,921) (7,961)
Net unrealized depreciation on investments (5,718) (9,339)
Realized gain (loss) on investments:    
Non-control/Non-affiliate investments 3,206 626
Net realized gain on investments 3,206 626
Net increase in net assets resulting from operations $ 33,706 $ 17,843
Net investment income per common share — basic $ 0.26 $ 0.28
Earnings per common share — basic $ 0.24 $ 0.19
Weighted average common shares outstanding — basic 139,126 94,889
Net investment income per common share — diluted $ 0.26 $ 0.27
Earnings per common share — diluted $ 0.24 $ 0.19
Weighted average common shares outstanding — diluted 146,916 102,679
     

About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a specialty finance company that provides custom-tailored financing solutions to small and mid-sized companies, primarily in connection with investments by private equity sponsors. The company originates and invests in one-stop financings, first lien, second lien, mezzanine debt and equity co-investments. The company'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.   The company has elected to be regulated as a business development company and is externally managed by Fifth Street Management LLC. Named 2013 "Lender Firm of the Year" by The M&A Advisor, Fifth Street Management LLC is an SEC-registered investment adviser and leading alternative asset manager with over $3 billion in assets under management. With a track record of more than 15 years, Fifth Street's nationally recognized platform has the ability to hold loans up to $150 million, commit up to $250 million and structure and syndicate transactions up to $500 million. The company's website can be found at fsc.fifthstreetfinance.com.

Forward-Looking Statements

This press release may contain certain forward-looking statements, including statements with regard to the future performance of the company. Words such as "believes," "expects," "estimates," "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 the company's filings with the Securities and Exchange Commission. The company 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, Executive Director of Finance &         Head of Investor Relations         (914) 286-6855         dchoksi@fifthstreetfinance.com                  Media Contact:         Nick Rust         Prosek Partners         (212) 279-3115 ext. 252         pro-fifthstreet@prosek.com

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