Fifth Street Finance Corp. Announces Quarter Ended December 31, 2011 Financial Results

WHITE PLAINS, N.Y., Feb. 8, 2012 (GLOBE NEWSWIRE) -- Fifth Street Finance Corp. (Nasdaq:FSC) ("Fifth Street" or "we") announces its financial results for the first fiscal quarter ended December 31, 2011.

First Quarter 2012 Financial Highlights

• Net investment income for the quarter ended December 31, 2011 was $21.0 million or $0.29 per share, as compared to $14.1 million or $0.26 per share for the quarter ended December 31, 2010;

• Net asset value per share was $9.89 as of December 31, 2011, as compared to $10.07 as of September 30, 2011;

• Net unrealized appreciation for the quarter ended December 31, 2011 was $5.8 million (including $17.1 million of reclassifications to realized losses) or $0.08 per share, as compared to $16.8 million (including $10.3 million of reclassifications to realized losses) or $0.31 per share for the quarter ended December 31, 2010;

• Net realized losses for the quarter ended December 31, 2011 were $16.6 million or $0.23 per share, as compared to $13.5 million or $0.25 per share for the quarter ended December 31, 2010; and

• Net increase in net assets resulting from operations for the quarter ended December 31, 2011 was $10.2 million or $0.14 per share, as compared to $17.4 million or $0.32 per share for the quarter ended December 31, 2010.

Second and Third Quarter 2012 Dividend Declarations

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

• $0.0958 per share, which was paid 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;
• $0.0958 per share, payable on March 30, 2012 to stockholders of record on March 15, 2012;
• $0.0958 per share, payable on April 30, 2012 to stockholders of record on April 13, 2012;
• $0.0958 per share, payable on May 31, 2012 to stockholders of record on May 15, 2012; and
• $0.0958 per share, payable on June 29, 2012 to stockholders of record on June 15, 2012.

Portfolio and Investment Activity

Our Board of Directors determined the fair value of our portfolio at December 31, 2011 to be $1.1 billion, which was essentially flat as compared to September 30, 2011.

During the quarter ended December 31, 2011, we closed $95.3 million of investments in seven new and one existing portfolio company, and funded $84.5 million across new and existing portfolio companies. This compares to funding $234.7 million during the quarter ended December 31, 2010. During the quarter ended December 31, 2011, we also received $52.4 million in connection with the exits of three of our portfolio companies, all of which were exited at or above par, and proceeds of $2.0 million in connection with the sales of our equity interests in two portfolio companies, resulting in realized gains of approximately $1.3 million.

At December 31, 2011, our portfolio consisted of investments in 67 companies, 60 of which were completed in connection with investments by private equity sponsors and seven of which were in private equity funds. At fair value, 98.0% of our portfolio consisted of debt investments (74.5% were first lien loans, 12.5% were second lien loans and the remainder were subordinated loans). Our average portfolio company investment size at fair value (excluding equity-only investments) was $19.6 million at December 31, 2011, versus $20.4 million at September 30, 2011.

"Our expanded platform has allowed us to diversify our portfolio, with our largest single investment representing 4.4% and our average investment representing 1.8% of the overall portfolio," stated our President, Bernard D. Berman, adding that, "Fifth Street continues to perform well in a rapidly changing market, posting another strong quarter."

Our weighted average yield on debt investments at December 31, 2011 was 12.27%, and included a cash component of 11.19%.

At December 31, 2011 and September 30, 2011, $756.5 million and $739.8 million, respectively, of our portfolio of debt investments at fair value were at floating rates, which represented 68.9% and 67.3%, respectively, of our total portfolio of debt investments at fair value.

Results of Operations

Total investment income for the quarters ended December 31, 2011 and December 31, 2010 was $39.5 million and $25.3 million, respectively. For the quarter ended December 31, 2011, this amount primarily consisted of $33.5 million of interest income from portfolio investments (which included $3.4 million of PIK interest) and $6.0 million of fee income. For the quarter ended December 31, 2010, total investment income primarily consisted of $20.8 million of interest income from portfolio investments (which included $3.1 million of PIK interest) and $4.5 million of fee income.

The increase in our total investment income for the quarter ended December 31, 2011 as compared to the quarter ended December 31, 2010 was primarily attributable to a higher average level of outstanding debt investments, which was principally due to a net increase of 19 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 from 13.16% to 12.27% during the year-over-year period.

Expenses for the quarters ended December 31, 2011 and December 31, 2010 were $19.8 million and $11.3 million, respectively. Expenses increased during the quarter ended December 31, 2011 as compared to the quarter ended December 31, 2010 primarily due to increases in the base management fee, the incentive fee and interest expense.

During the quarter ended December 31, 2011, we repurchased $10.5 million of our convertible senior notes in the open market and surrendered them to our trustee for cancellation. The aggregate purchase price of these notes was $8.9 million and we recorded a gain, net of unamortized debt issuance costs, of $1.3 million.

Liquidity and Capital Resources

As of December 31, 2011, we had $70.3 million in cash and cash equivalents, portfolio investments (at fair value) of $1.1 billion, $6.9 million of interest and fees receivable, $6.0 million of receivables from unsettled transactions, $150.0 million of SBA debentures payable, $209.3 million of borrowings outstanding under our credit facilities, $124.5 million of convertible senior notes payable and unfunded commitments of $101.1 million.

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.

Fiscal Year 2012 Dividends

For the fiscal year ending September 30, 2012, our Board of Directors has declared monthly dividends 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, which was paid on November 30, 2011 to stockholders of record on November 15, 2011;
• $0.1066 per share, which was paid on December 23, 2011 to stockholders of record on December 13, 2011;
• $0.0958 per share, which was paid 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;
• $0.0958 per share, payable on March 30, 2012 to stockholders of record on March 15, 2012;
• $0.0958 per share, payable on April 30, 2012 to stockholders of record on April 13, 2012;
• $0.0958 per share, payable on May 31, 2012 to stockholders of record on May 15, 2012; and
• $0.0958 per share, payable on June 29, 2012 to stockholders of record on June 15, 2012.

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 following 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 December 31, 2011 and September 30, 2011, the distribution of our investments on the 1 to 5 investment rating scale at fair value was as follows:

(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 December 31, 2011, we had modified the payment terms of our investments in ten 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 December 31, 2011, we had stopped accruing cash and/or PIK interest and OID on four investments, three of which had not paid all of their scheduled cash interest payments for the period ended December 31, 2011. As of December 31, 2010, we had stopped accruing cash interest, PIK interest and OID on three investments that had not paid all of their scheduled cash interest payments for the period ended December 31, 2010.

Recent Developments

On January 26, 2012, we completed a follow-on public offering of 10,000,000 shares of our common stock at a net offering price of $10.07 per share. The proceeds totaled $100.7 million.

On February 7, 2012, our Board of Directors declared the following dividends:

• $0.0958 per share, payable on April 30, 2012 to stockholders of record on April 13, 2012;
• $0.0958 per share, payable on May 31, 2012 to stockholders of record on May 15, 2012; and
• $0.0958 per share, payable on June 29, 2012 to stockholders of record on June 15, 2012.

Fifth Street Finance Corp.

Consolidated Statements of Assets and Liabilities

(in thousands, except per share data)

(unaudited)

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.