Fifth Street Finance Corp. Announces Fourth Quarter and Fiscal Year Ended September 30, 2011 Financial Results


WHITE PLAINS, N.Y., Nov. 29, 2011 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) ("Fifth Street" or "we") announces its financial results for the fourth quarter and fiscal year ended September 30, 2011.

Fourth Quarter 2011 Financial Highlights

  • Net investment income for the quarter ended September 30, 2011 was $20.0 million or $0.28 per share, as compared to $11.4 million or $0.21 per share for the quarter ended September 30, 2010;
     
  • Net asset value per share was $10.07 as of September 30, 2011, as compared to $10.43 as of September 30, 2010;
     
  • Net unrealized depreciation for the quarter ended September 30, 2011 was $41.4 million (including $0.7 million of reclassifications to realized losses) or $0.57 per share, as compared to net unrealized appreciation of $9.9 million (including $16.0 million of reclassifications to realized losses) or $0.18 per share for the quarter ended September 30, 2010;
     
  • Net realized losses for the quarter ended September 30, 2011 were $2.3 million or $0.03 per share, as compared to $16.0 million or $0.29 per share for the quarter ended September 30, 2010; and
     
  • Net increase (decrease) in net assets resulting from operations for the quarter ended September 30, 2011 was ($23.7 million) or ($0.33) per share, as compared to $5.4 million or $0.10 per share for the quarter ended September 30, 2010.

Fiscal Year 2011 Financial Highlights

  • Net investment income for the year ended September 30, 2011 was $67.1 million or $1.05 per share, as compared to $43.0 million or $0.95 per share for the year ended September 30, 2010;
     
  • Net unrealized depreciation for the year ended September 30, 2011 was $6.5 million (including $25.6 million of reclassifications to realized losses) or $0.10 per share, as compared to net unrealized depreciation of $1.8 million (including $17.6 million of reclassifications to realized losses) or $0.04 per share for the year ended September 30, 2010;
     
  • Net realized losses on investments for the year ended September 30, 2011 were $30.4 million or $0.47 per share, as compared to $18.8 million or $0.42 per share for the year ended September 30, 2010; and
     
  • Net increase in net assets resulting from operations for the year ended September 30, 2011 was $30.2 million or $0.47 per share, as compared to $22.4 million or $0.49 per share for the year ended September 30, 2010.

First Quarter and Second Quarter 2012 Dividend Declarations

Our Board of Directors has declared monthly dividends for the first and second fiscal quarters of 2012 as follows:

  • $0.1066 per share, which was paid on October 31, 2011 to stockholders of record on October 14, 2011;
  • $0.1066 per share, payable on November 30, 2011 to stockholders of record on November 15, 2011;
  • $0.1066 per share, payable on December 23, 2011 to stockholders of record on December 13, 2011;
  • $0.0958 per share, payable on January 31, 2012 to stockholders of record on January 13, 2012;
  • $0.0958 per share, payable on February 29, 2012 to stockholders of record on February 15, 2012; and
  • $0.0958 per share, payable on March 30, 2012 to stockholders of record on March 15, 2012.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at September 30, 2011 to be $1.1 billion, as compared to $563.8 million at September 30, 2010.

During the quarter ended September 30, 2011, we closed $172.5 million of investments in eight new and five existing portfolio companies, and funded $166.4 million to new and existing portfolio companies. This compares to funding $91.8 million in four new and six existing portfolio companies during the quarter ended September 30, 2010. During the quarter ended September 30, 2011, we also received $45.5 million in connection with the exits of four of our portfolio companies, $45.4 million of which were exited at par.

At September 30, 2011, our portfolio consisted of investments in 65 companies, 59 of which were completed in connection with investments by private equity sponsors and six of which were in private equity funds. At fair value, 98.2% of our portfolio consisted of debt investments (78.1% were first lien loans, 12.8% were second lien loans and 7.3% were subordinated loans). Our average portfolio company investment size at fair value (excluding equity-only investments) was $20.4 million at September 30, 2011, versus $16.6 million at September 30, 2010.

"Despite the overall economic climate remaining volatile, we are pleased with Fifth Street's operating performance during the fiscal year. We remain confident that Fifth Street's conservative positioning both in having an asset mix of over 75% first lien loans and capacity to invest should allow us to take advantage of the rapidly changing economic cycles," stated our President, Bernard D. Berman.

Our weighted average yield on debt investments at September 30, 2011 was 12.4%, and included a cash component of 11.1%.

At September 30, 2011 and September 30, 2010, $739.8 million and $183.0 million, respectively, of our portfolio of debt investments at fair value were at floating rates, which represented 67.3% and 32.8%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended September 30, 2011 and September 30, 2010 was $37.7 million and $20.0 million, respectively. For the quarter ended September 30, 2011, this amount primarily consisted of $32.6 million of interest income from portfolio investments (which included $3.5 million of PIK interest) and $5.0 million of fee income. For the quarter ended September 30, 2010, total investment income primarily consisted of $18.0 million of interest income from portfolio investments (which included $3.3 million of PIK interest) and $2.0 million of fee income.

Total investment income for the years ended September 30, 2011 and September 30, 2010 was $125.2 million and $70.5 million, respectively. For the year ended September 30, 2011, this amount primarily consisted of $108.3 million of interest income from portfolio investments (which included $13.7 million of PIK interest) and $16.7 million of fee income. For the year ended September 30, 2010, this amount primarily consisted of $63.9 million of interest income from portfolio investments (which included $10.0 million of PIK interest) and $6.0 million of fee income.

The increase in our total investment income for the quarter and fiscal year ended September 30, 2011 as compared to the quarter and fiscal year ended September 30, 2010 was primarily attributable to higher average levels of outstanding debt investments, which were principally due to a net increase of 21 debt investments in our portfolio, partially offset by scheduled amortization repayments received and other debt payoffs and a decrease in the weighted average yield on our debt investments during the year-over-year period.

Expenses for the quarters ended September 30, 2011 and September 30, 2010 were $19.2 million and $8.6 million, respectively. Expenses for the years ended September 30, 2011 and September 30, 2010 were $59.5 million and $27.5 million, respectively. Expenses increased for both periods primarily due to increases in the base management fee, the incentive fee and interest expense.

During the quarter ended September 30, 2011, we repurchased $17.0 million of our convertible senior notes in the open market and surrendered them to the trustee for cancellation. The aggregate purchase price of these notes was $15.1 million and we recorded a gain, net of unamortized debt issuance costs, of $1.5 million.

Liquidity and Capital Resources

As of September 30, 2011, we had $67.6 million in cash and cash equivalents, portfolio investments (at fair value) of $1.1 billion, $6.8 million of interest and fees receivable, $150.0 million of SBA debentures payable, $178.0 million of borrowings outstanding under our credit facilities, $135.0 million of convertible senior notes payable and unfunded commitments of $108.8 million.

As of September 30, 2010, we had $76.8 million in cash and cash equivalents, portfolio investments (at fair value) of $563.8 million, $3.8 million of interest and fees receivable, $73.0 million of SBA debentures payable and unfunded commitments of $49.5 million.

Fiscal Year 2011 Dividends

For the fiscal year ended September 30, 2011, our Board of Directors declared monthly dividends as follows:

  • $0.10 per share, which was paid on October 27, 2010 to stockholders of record on October 6, 2010;
  • $0.11 per share, which was paid on November 24, 2010 to stockholders of record on November 3, 2010;
  • $0.11 per share, which was paid on December 29, 2010 to stockholders of record on December 1, 2010;
  • $0.1066 per share, which was paid on January 31, 2011 to stockholders of record on January 4, 2011;
  • $0.1066 per share, which was paid on February 28, 2011 to stockholders of record on February 1, 2011;
  • $0.1066 per share, which was paid on March 31, 2011 to stockholders of record on March 1, 2011;
  • $0.1066 per share, which was paid on April 29, 2011 to stockholders of record on April 1, 2011;
  • $0.1066 per share, which was paid on May 31, 2011 to stockholders of record on May 2, 2011;
  • $0.1066 per share, which was paid on June 30, 2011 to stockholders of record on June 1, 2011;
  • $0.1066 per share, which was paid on July 29, 2011 to stockholders of record on July 1, 2011;
  • $0.1066 per share, which was paid on August 31, 2011 to stockholders of record on August 1, 2011; and
  • $0.1066 per share, which was paid on September 30, 2011 to stockholders of record on September 1, 2011.

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 dividend policy is based upon the additional key principles:

  • Pay dividends consistent with our current and future earnings potential;
  • Set dividend rates that are projected to be stable and growing over time reflecting confidence in our future financial performance; and
  • Provide clarity that we intend to cover our dividend payout level with net investment income.

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 investment rating system for our investment portfolio:

  • Investment Rating 1 is used for investments that are performing above expectations and/or a capital gain is expected.
     
  • Investment Rating 2 is used for investments that are performing substantially within our expectations, and whose risks remain neutral or favorable compared to the potential risk at the time of the original investment. All new investments are initially rated 2.
     
  • Investment Rating 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 rating of 3 may be out of compliance with financial covenants.
     
  • Investment Rating 4 is used for investments that are performing below our expectations and for which risk has increased materially since the original investment. We expect some loss of investment return, but no loss of principal.
     
  • Investment Rating 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 rating of 5 are those for which some loss of principal is expected.

At September 30, 2011 and September 30, 2010, the distribution of our investments on the 1 to 5 investment rating scale at fair value was as follows:

  September 30, 2011   September 30, 2010  
Investment
Rating
Fair Value
(thousands)
% of Portfolio Leverage Ratio   Fair Value
(thousands)
% of Portfolio Leverage Ratio  
                 
1 $ 81,335 7.26% 3.16   $ 89,150 15.81% 2.97  
2 1,021,990 91.26% 3.87   424,495 75.29% 4.31  
3 8,660 0.77% NM (1)  18,056 3.20% 13.25  
4 0.00%   23,823 4.23% 8.13  
5 7,852 0.71% NM (1)  8,297 1.47% NM (1)
                 
Total $ 1,119,837 100.00% 3.82   $ 563,821 100.00% 4.53  
                 
(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 September 30, 2011, we had modified the payment terms of our investments in seven portfolio companies. Such modified terms 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 September 30, 2011, we had stopped accruing cash interest, PIK interest and OID on four investments that had not paid all of their scheduled cash interest payments for the period ended September 30, 2011. As of September 30, 2010, we had stopped accruing cash interest, PIK interest and OID on five investments that had not paid all of their scheduled cash interest payments for the period ended September 30, 2010.

Recent Developments

In October 2011, we repurchased $10.5 million principal of our convertible senior notes in the open market for an aggregate purchase price of $8.9 million and surrendered the notes to the trustee for cancellation.

On November 10, 2011, our Board of Directors declared the following dividends:

  • $0.0958 per share, payable on January 31, 2012 to stockholders of record on January 13, 2012;
  • $0.0958 per share, payable on February 29, 2012 to stockholders of record on February 15, 2012; and
  • $0.0958 per share, payable on March 30, 2012 to stockholders of record on March 15, 2012.

On November 14, 2011, we received a cash payment of $21.6 million from IZI Medical Products, Inc. in full satisfaction of all obligations under the loan agreement. The debt investment was exited at par, and the amount received included an exit fee of $0.8 million and a prepayment fee of $0.6 million. We also received a cash payment of $1.1 million in return for our 453,755 preferred units of IZI Holdings, LLC, which were granted to us as part of the original investment funding on March 31, 2009.

On November 28, 2011, we transferred the listing of our common stock from the New York Stock Exchange to the NASDAQ Global Select Market, where it continues to trade under the symbol "FSC."

Fifth Street Finance Corp.
Consolidated Statements of Assets and Liabilities
(in thousands, except per share data)
     
  September 30,
2011
September 30,
2010
     
ASSETS    
Investments at Fair Value:    
Control investments (cost September 30, 2011: $13,726; cost September 30, 2010: $12,195) $ 14,500 $ 3,700
Affiliate investments (cost September 30, 2011: $34,182; cost September 30, 2010: $50,134) 25,897 47,222
Non-control/Non-affiliate investments (cost September 30, 2011: $1,108,174; cost September 30, 2010: $530,168) 1,079,440 512,899
     
Total Investments at Fair Value (cost September 30, 2011: $1,156,082; cost September 30, 2010: $592,497) 1,119,837 563,821
Cash and cash equivalents 67,644 76,765
Interest and fees receivable 6,752 3,814
Due from portfolio company 552 103
Deferred financing costs 14,668 5,466
Collateral posted to bank and other assets 264 1,957
Total Assets $ 1,209,717 $ 651,926
     
LIABILITIES AND NET ASSETS    
Liabilities:    
Accounts payable, accrued expenses and other liabilities $ 1,175 $ 1,322
Base management fee payable 5,710 2,876
Incentive fee payable 4,997 2,859
Due to FSC, Inc.  1,480 1,083
Interest payable 4,669 283
Payments received in advance from portfolio companies 35 1,331
Credit facilities payable 178,024
SBA debentures payable 150,000 73,000
Convertible senior notes payable 135,000
     
Total Liabilities 481,090 82,754
     
Net Assets:    
Common stock, $0.01 par value, 150,000 shares authorized, 72,376 and 54,550 shares issued and outstanding at September 30, 2011 and September 30, 2010 724 546
Additional paid-in-capital 829,620 619,760
Net unrealized depreciation on investments and interest rate swap (35,976) (29,449)
Net realized loss on investments and interest rate swap (63,485) (33,091)
Accumulated undistributed (overdistributed) net investment income (2,256) 11,406
Total Net Assets 728,627 569,172
     
Total Liabilities and Net Assets $ 1,209,717 $ 651,926
         
Fifth Street Finance Corp.        
Consolidated Statements of Operations        
(in thousands, except per share data)        
         
  Three Months
Ended
September 30,
2011
Three Months
Ended
September 30,
2010
Year Ended
September 30,
2011
Year Ended
September 30,
2010
Interest income:        
Control investments $ 35 $ — $ 89 $ 183
Affiliate investments 849 1,353 4,265 7,619
Non-control/Non-affiliate investments 28,261 13,341 90,224 46,090
Interest on cash and cash equivalents 2 29 19 237
         
Total interest income 29,147 14,723 94,597 54,129
         
PIK interest income:        
Control investments 108 347
Affiliate investments 154 279 989 1,227
Non-control/Non-affiliate investments 3,236 3,047 12,339 8,777
         
Total PIK interest income 3,498 3,326 13,675 10,004
         
Fee income:        
Control investments 127
Affiliate investments 117 217 667 1,433
Non-control/Non-affiliate investments 4,888 1,741 15,888 4,538
         
Total fee income 5,005 1,958 16,682 5,971
         
Dividend and other income:        
Non-control/Non-affiliate investments 36 26 211 434
Other income
         
Total dividend and other income 36 26 211 434
         
Total investment income 37,686 20,033 125,165 70,538
         
Expenses:        
Base management fee 5,710 2,876 19,656 10,002
Incentive fee 4,997 2,859 16,782 10,756
Professional fees 1,055 544 2,709 1,349
Board of Directors fees 321 167 452 278
Interest expense 5,497 1,084 15,137 1,929
Administrator expense 558 394 1,699 1,322
General and administrative expenses 1,039 672 3,083 2,605
         
Total expenses 19,177 8,596 59,518 28,241
Base management fee waived (727)
         
Net expenses 19,177 8,596 59,518 27,514
         
Gain on extinguishment of convertible senior notes 1,480 1,480
Net investment income 19,989 11,437 67,127 43,024
Unrealized appreciation (depreciation) on interest rate swap 722 (773) 773 (773)
         
Realized loss on interest rate swap (1,335) (1,335)
Unrealized appreciation (depreciation) on investments:        
Control investments (3,101) (450) 9,437 (2,141)
Affiliate investments (9,134) 1,989 (5,374) 3,294
Non-control/Non-affiliate investments (29,935) 9,151 (11,362) (2,207)
         
Net unrealized depreciation on investments (42,170) 10,690 (7,299) (1,054)
         
Realized loss on investments:        
Control investments (7,806)
Affiliate investments (4,029) (14,146) (6,937)
Non-control/Non-affiliate investments (950) (11,950) (7,107) (11,844)
         
Total realized loss on investments (950) (15,979) (29,059) (18,781)
         
Net increase (decrease) in net assets resulting from operations $ (23,744) $ 5,375 $ 30,207 $ 22,416
         
Net Investment Income per common share — basic $ 0.28 $ 0.21 $ 1.05 $ 0.95
         
Earnings per common share — basic $ (0.33) $ 0.10 $ 0.47 $ 0.49
         
Weighted average common shares — basic 72,376 54,525 64,057 45,441
         
Net Investment Income per common share – diluted $ 0.25 $ 0.21 $ 1.01 $ 0.95
Earnings per common share – diluted $ (0.33) $ 0.10 $ 0.47 $ 0.49
Weighted average common shares – diluted 82,018 54,525 68,716 45,441

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.

The Fifth Street Finance Corp. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=5525

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.



            

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