GREENWICH, CT, Aug. 09, 2016 (GLOBE NEWSWIRE) — Fifth Street Finance Corp. (NASDAQ:FSC) (“FSC” or “we”) today announced its financial results for the third fiscal quarter ended June 30, 2016.

Third Fiscal Quarter 2016 Highlights

  • Net investment income of $29.1 million, or $0.20 per share;
     
  • Net asset value per share of $8.15;
     
  • Closed $276.6 million of new investments; and
     
  • Repurchased 1.9 million shares of common stock in the open market at an aggregate cost of $10.0 million.

“We benefited from an increase in origination volumes in the June quarter, resulting in higher new investment activity and a modest rebound in profitability, compared to the previous quarter.  We continued to execute on our strategic objectives and for the sixth consecutive quarter our net investment income, excluding incremental professional fees, covered our dividend,” stated Todd G. Owens, FSC’s Chief Executive Officer, adding, “We also continue to maintain a disciplined approach to capital allocation and repurchased $10 million in FSC shares during the quarter, bringing our total repurchases for the fiscal year to over $25 million.  Importantly, we are focused on bringing leverage levels back within our targeted range and remain committed to delivering strong returns to our stockholders.  Finally, as we announced last week, we are also pleased to have reached a settlement of the outstanding class action and related lawsuits.”

Portfolio and Investment Activity

FSC’s Board of Directors determined the fair value of our investment portfolio at June 30, 2016 to be $2.2 billion, as compared to $2.4 billion at September 30, 2015.  Total assets were $2.5 billion at June 30, 2016, as compared to $2.6 billion at September 30, 2015.

During the quarter ended June 30, 2016, we closed $276.6 million of investments in 11 new and five existing portfolio companies and funded $269.1 million across new and existing portfolio companies.  This compares to closing $227.4 million in seven new and five existing portfolio companies and funding $226.9 million during the quarter ended June 30, 2015.  During the quarter ended June 30, 2016, we received $63.2 million in connection with the full repayments of three of our debt investments, all of which were exited at or above par.  We also received an additional $183.8 million in connection with paydowns, syndications and sales of debt investments.

At June 30, 2016, our portfolio consisted of investments in 133 companies, 115 of which were completed in connection with investments by private equity sponsors, one of which was in Senior Loan Fund JV I, LLC (“SLF JV I”) and 17 of which were in private equity funds.  At fair value, 91.6% of our portfolio consisted of debt investments and 78.8% of our portfolio consisted of senior secured loans.  Our average portfolio company debt investment size at fair value was $19.1 million at June 30, 2016, versus $20.7 million at September 30, 2015, with only 1.2% of the portfolio’s fair value invested in the energy sector and no exposure to CLO equity.

At June 30, 2016, SLF JV I had $399.0 million in assets, including senior secured loans to 37 portfolio companies.  The joint venture generated income of $4.7 million to FSC during the third fiscal quarter, which represented an 11.6% weighted average annualized return on investment.

Our weighted average yield on debt investments at June 30, 2016, including the return on SLF JV I, was 10.6% and included a cash component of 9.9%.  At June 30, 2016 and September 30, 2015, $1.7 billion of our debt investments at fair value bore interest at floating rates, which represented 81.8% and 77.5%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended June 30, 2016 and June 30, 2015 was $64.0 million and $69.9 million, respectively.  For the quarter ended June 30, 2016, the amount primarily consisted of $49.6 million of cash interest income from portfolio investments.  For the quarter ended June 30, 2015, the amount primarily consisted of $54.7 million of cash interest income from portfolio investments.  For the quarter ended June 30, 2016, payment-in-kind (“PIK”) interest income net of PIK collected in cash represented 4.8% of total investment income.

Net expenses for the quarters ended June 30, 2016 and June 30, 2015 were $34.9 million and $37.6 million, respectively.  Net expenses decreased for the quarter ended June 30, 2016 as compared to the quarter ended June 30, 2015, due primarily to a $2.1 million decrease in base management fees, which was attributable to the permanent fee reduction that we agreed to with our investment adviser effective January 1, 2016, and a $1.0 million decrease in interest expense.  These expense reductions were partially offset by a $1.1 million increase in professional fees.

Net realized and unrealized losses on our investment portfolio for the quarters ended June 30, 2016 and June 30, 2015 were $34.3 million and $11.7 million, respectively.

Liquidity and Capital Resources

At June 30, 2016, we had $158.1 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.2 billion, $18.8 million of interest, dividends and fees receivable, $12.4 million of receivables from unsettled transactions, $14.6 million of amounts payable to our syndication partners, $225.0 million of U.S. Small Business Administration (“SBA”) debentures payable, $568.3 million of borrowings outstanding under our credit facilities, $410.5 million of unsecured notes payable, $18.6 million of secured borrowings and unfunded commitments of $234.4 million.  Our regulatory leverage ratio was 0.84x debt-to-equity, excluding the debentures issued by our small business investment company (“SBIC”) subsidiaries.

At September 30, 2015, we had $143.5 million of cash and cash equivalents (including restricted cash), portfolio investments (at fair value) of $2.4 billion, $15.7 million of interest, dividends and fees receivable, $225.0 million of SBA debentures payable, $427.3 million of borrowings outstanding under our credit facilities, $115.0 million of unsecured convertible notes payable, $410.3 million of unsecured notes payable, $21.2 million of secured borrowings and unfunded commitments of $305.3 million.  Our regulatory leverage ratio was 0.72x debt-to-equity, excluding the debentures issued by our SBIC subsidiaries.

On April 1, 2016, we repaid in full the $115.0 million of outstanding unsecured convertible notes on their maturity date.  The convertible notes bore interest at a rate of 5.375% per annum and were repaid using cash on hand and borrowings under our ING revolving credit facility.

Dividend Declaration

In addition to our previously declared dividend of $0.06 per share, which is payable on August 31, 2016 to stockholders of record on August 15, 2016, our Board of Directors met on August 3, 2016 and declared the following distributions:

  • $0.06 per share, payable on September 30, 2016 to stockholders of record on September 15, 2016; 
  • $0.06 per share, payable on October 31, 2016 to stockholders of record on October 14, 2016; and
  • $0.06 per share, payable on November 30, 2016 to stockholders of record on November 15, 2016.

Dividends are paid primarily from distributable (taxable) income. To the extent our taxable earnings for a fiscal taxable year fall below the total amount of our dividend distributions for that fiscal year, a portion of those distributions may be deemed a return of capital to our stockholders. 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.

Stock Repurchase Program

On November 30, 2015, our Board of Directors authorized a common stock repurchase program to acquire up to $100 million of the outstanding shares of our common stock through November 30, 2016.  Common stock repurchases under this program are to be made through the open market, privately negotiated transactions or otherwise at times, and in such amounts, as our management deems appropriate, subject to various factors, including company performance, capital availability, general economic and market conditions, regulatory requirements and other corporate considerations, as determined by management.  The repurchase program may be suspended or discontinued at any time, and we expect to finance the stock repurchases with existing cash balances or by incurring leverage.  We repurchased 5.0 million shares of our common stock during February, March and April 2016 under the program for an aggregate cost of $25.1 million.

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 June 30, 2016 and September 30, 2015, the distribution of our investments on the 1 to 4 investment ranking scale at fair value was as follows (dollars in thousands):

Investment Ranking   June 30, 2016       September 30, 2015  
Fair Value   % of Portfolio   Leverage Ratio       Fair Value   % of Portfolio   Leverage Ratio  
1   $ 89,942     4.00 %   2.00         $ 215,095     8.95 %   1.85    
2   2,124,864     94.55     4.88         2,040,006     84.91     4.94    
3   2,967     0.13     5.35         122,128     5.08     5.54    
4   29,682     1.32     NM       (1 )   25,266     1.06     NM     (1 )
Total   $ 2,247,455     100.00 %   5.12         $ 2,402,495     100.00 %   4.60    

_____________
(1) Due to operating performance this ratio is not measurable and, as a result, is excluded from the total portfolio calculation.

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 June 30, 2016, we had modified the payment terms of our investments in 17 portfolio companies.  Such modified terms may include increased PIK interest rates 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 June 30, 2016, there were five investments on which we had stopped accruing cash and/or PIK interest or original issue discount (“OID”) income that represented 0.76% of our debt portfolio at fair value in the aggregate.

Recent Developments

We have entered into agreements to settle previously disclosed legal proceedings, including consolidated securities class actions filed on behalf of our shareholders and shareholder derivative actions filed on behalf of us. Each of the proposed settlements is subject both to the plaintiffs’ completion of additional discovery and to approval by the applicable court.

The proposed settlement of the securities class actions calls for a payment of $14.1 million to the settlement class, with approximately 99% of the settlement amount covered by insurance. The proposed settlement of the shareholder derivative actions provides for Fifth Street Management LLC’s waiver of fees charged to us in the amount of $1.0 million for each of ten consecutive quarters starting in January 2018 and maintenance of the previously announced decrease in the base management fee from 2% to a maximum of 1.75% for at least four years. The proposed settlement also calls for us to adopt certain governance and oversight enhancements. We further agreed not to oppose plaintiffs’ request for an award of $5.1 million in attorneys’ fees and expenses, which will be covered entirely by insurance.

 
Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share amounts)
(unaudited)
 
  June 30,
 2016
  September 30,
 2015
  ASSETS      
Investments at fair value:      
Control investments (cost June 30, 2016: $453,520; cost September 30, 2015: $333,520) $ 396,022     $ 318,893  
Affiliate investments (cost June 30, 2016: $35,240; cost September 30, 2015: $36,637) 40,110     40,606  
Non-control/Non-affiliate investments (cost June 30, 2016: $1,903,313; cost September 30, 2015: $2,102,781) 1,811,323     2,042,996  
Total investments at fair value (cost June 30, 2016: $2,392,073; cost September 30, 2015: $2,472,938) 2,247,455     2,402,495  
Cash and cash equivalents 138,111     138,377  
Restricted cash 19,975     5,107  
Interest, dividends and fees receivable 18,797     15,687  
Due from portfolio companies 4,994     2,641  
Receivables from unsettled transactions 12,395     5,168  
Deferred financing costs 12,345     16,051  
Insurance recoveries receivable 19,079      
Other assets 877     131  
Total assets $ 2,474,028     $ 2,585,657  
       
  LIABILITIES AND NET ASSETS      
Liabilities:      
Accounts payable, accrued expenses and other liabilities $ 4,029     $ 5,006  
Base management fee and Part I incentive fee payable 17,832     16,531  
Due to FSC CT LLC 1,906     2,965  
Interest payable 9,762     4,300  
Amounts payable to syndication partners 14,608     1,316  
Payables from unsettled transactions     3,648  
Legal settlements payable 19,150      
Credit facilities payable 568,295     427,295  
SBA debentures payable 225,000     225,000  
Unsecured convertible notes payable     115,000  
Unsecured notes payable 410,519     410,320  
Secured borrowings at fair value (proceeds June 30, 2016: $19,289; proceeds September 30, 2015: $21,787) 18,551     21,182  
Total liabilities 1,289,652     1,232,563  
Commitments and contingencies      
Net assets:      
Common stock, $0.01 par value, 250,000 shares authorized; 145,304 and 150,668 shares issued and outstanding at June 30, 2016 and September 30, 2015, respectively 1,453     1,507  
Additional paid-in-capital 1,603,947     1,631,523  
Treasury stock, 423 shares at September 30, 2015     (2,538 )
Net unrealized depreciation on investments and secured borrowings (143,880 )   (69,838 )
Net realized loss on investments and secured borrowings (251,058 )   (180,945 )
Accumulated overdistributed net investment income (26,086 )   (26,615 )
Total net assets (equivalent to $8.15 and $9.00 per common share at June 30, 2016 and September 30, 2015, respectively) 1,184,376     1,353,094  
Total liabilities and net assets $ 2,474,028     $ 2,585,657  
       

Fifth Street Finance Corp.
Consolidated Statements of Operations
(in thousands, except per share amounts)
(unaudited)
 
    Three months
ended
June 30, 2016
  Three months
ended
June 30, 2015
  Nine months
ended
June 30, 2016
  Nine months
ended
June 30, 2015
Interest income:                
Control investments   $ 4,863     $ 4,190     $ 12,518     $ 12,073  
Affiliate investments   1,016     1,085     3,092     3,254  
Non-control/Non-affiliate investments   43,650     49,388     134,265     148,583  
Interest on cash and cash equivalents   111     16     262     35  
Total interest income   49,640     54,679     150,137     163,945  
PIK interest income:                
Control investments   1,517     1,340     3,577     4,079  
Affiliate investments   203     216     618     643  
Non-control/Non-affiliate investments   1,820     1,582     5,772     5,675  
Total PIK interest income   3,540     3,138     9,967     10,397  
Fee income:                
Control investments   1,183     561     2,402     1,569  
Affiliate investments   37     12     308     36  
Non-control/Non-affiliate investments   2,220     7,500     14,730     15,670  
Total fee income   3,440     8,073     17,440     17,275  
Dividend and other income:                
Control investments   2,255     3,581     6,373     9,179  
Non-control/Non-affiliate investments   5,151     429     4,795     909  
Total dividend and other income   7,406     4,010     11,168     10,088  
Total investment income   64,026     69,900     188,712     201,705  
Expenses:                
Base management fee   10,049     12,145     31,847     39,364  
Part I incentive fee   7,864     8,035     15,689     21,562  
Professional fees   1,971     849     13,395     2,995  
Board of Directors fees   176     175     775     544  
Interest expense   13,149     14,191     41,034     42,995  
Administrator expense   488     611     1,602     2,606  
General and administrative expenses   1,233     1,822     3,525     5,259  
Loss on legal settlements   19,150         19,150      
Total expenses   54,080     37,828     127,017     115,325  
Base management fee waived   (81 )   (179 )   (258 )   (401 )
Insurance recoveries   (19,079 )       (19,079 )    
Net expenses   34,920     37,649     107,680     114,924  
Net investment income   29,106     32,251     81,032     86,781  
Unrealized appreciation (depreciation) on investments:                
Control investments   (24,024 )   (1,271 )   (42,872 )   (16,552 )
Affiliate investments   1,237     1,184     901     1,381  
Non-control/Non-affiliate investments   33,651     (1,480 )   (32,204 )   (25,512 )
Net unrealized appreciation (depreciation) on investments   10,864     (1,567 )   (74,175 )   (40,683 )
Net unrealized (appreciation) depreciation on secured borrowings   (374 )   79     133     184  
Realized gain (loss) on investments and secured borrowings:                
Control investments       (4,384 )   (8,148 )   (4,384 )
Affiliate investments   3         3     72  
Non-control/Non-affiliate investments   (44,817 )   (5,868 )   (61,968 )   (24,186 )
Net realized loss on investments and secured borrowings   (44,814 )   (10,252 )   (70,113 )   (28,498 )
Net increase (decrease) in net assets resulting from operations   $ (5,218 )   $ 20,511     $ (63,123 )   $ 17,784  
Net investment income per common share — basic   $ 0.20     $ 0.21     $ 0.55     $ 0.57  
Earnings (loss) per common share — basic   $ (0.04 )   $ 0.13     $ (0.43 )   $ 0.12  
Weighted average common shares outstanding — basic   145,569     153,340     148,354     153,340  
Net investment income per common share — diluted   $ 0.20     $ 0.21     $ 0.53     $ 0.56  
Earnings (loss) per common share — diluted   $ (0.04 )   $ 0.13     $ (0.43 )   $ 0.12  
Weighted average common shares outstanding — diluted   145,569     161,130     153,585     161,130  
Distributions per common share   $ 0.18     $ 0.18     $ 0.54     $ 0.61  

Conference Call Information

We will hold a conference call at 10:00 a.m. (Eastern Time) on Tuesday, August 9, 2016, to discuss our quarterly financial results. All interested parties are welcome to participate. Domestic callers can access the conference call by dialing (877) 290-1655. International callers can access the conference call by dialing +1 (531) 289-2889. All callers will need to enter the Conference ID Number 48919350 and reference “Fifth Street Finance Corp.” after being connected with the operator. All callers are asked to dial in 10-15 minutes prior to the call so that name and company information can be collected.  An archived replay of the call will be available approximately four hours after the end of the conference call and will be available through August 16, 2016 to domestic callers by dialing (855) 859-2056 and to international callers by dialing +1 (404) 537-3406. For all replays, please reference Conference ID Number 48919350. An archived replay will also be available online on the “Investor Relations” section of our website under the “News & Events – Calendar of Events” section.

About Fifth Street Finance Corp.

Fifth Street Finance Corp. is a leading 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.  FSC’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 a subsidiary of Fifth Street Asset Management Inc. (NASDAQ:FSAM), a nationally recognized credit-focused asset manager with over $5 billion in assets under management across multiple public and private vehicles. With a track record of over 18 years, Fifth Street’s platform has the ability to hold loans up to $250 million and structure and syndicate transactions up to $500 million. Fifth Street received the 2015 ACG New York Champion’s Award for “Lender Firm of the Year,” and other previously received accolades include the ACG New York Champion’s Award for “Senior Lender Firm of the Year,” “Lender Firm of the Year” by The M&A Advisor and “Lender of the Year” by Mergers & Acquisitions. FSC’s website can be found at fsc.fifthstreetfinance.com.

Forward-Looking Statements

Some of the statements in this press release constitute forward-looking statements, because they relate to future events or our future performance or financial condition. Forward-looking statements may include statements as to the future operating results, dividends and business prospects of FSC. Words such as “believes,” “expects,” “seeks,” “plans,” “should,” “estimates,” “project,” and “intend” indicate forward-looking statements, although not all forward-looking statements include these words. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those implied or expressed in these forward-looking statements for any reason. Such factors are identified from time to time in FSC’s filings with the Securities and Exchange Commission and include changes in the economy and the financial markets and future changes in laws or regulations and conditions in the Company’s operating areas. FSC undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. 

CONTACT: CONTACT:           
Investor Contact:
Robyn Friedman, Executive Director, Head of Investor Relations
(203) 681-3720
[email protected]

Media Contact:
James Golden / Andrew Squire
Joele Frank Wilkinson Brimmer Katcher
(212) 355-4449